Some Sunday thoughts

Market Analysis,Economy,Housing Crisis,Nikkei

First a reply to a comment from Dave…

The chart of the World Index is meant to show underlying weakness, not as a tool for deciding to buy or sell. You mentioned that the bull market has been strong, on the contrary, all of the technical indicators and market breadth charts have shown that while the markets have advanced the supporting indicators have been softening. This is what is called a divergence and it is important to keep them in mind going forward. The new highs and new lows index chart clearly shows that while the market has been advancing over the past year the new highs has been falling. There is no argument or discussion with regard to what that means. It is a clear indication that the markets have been advancing on fewer and fewer stocks rising. This is visible on the advance / decline charts as well. Just how long do you think the broad markets will keep going on Apple, Google, Solar stocks, and some shippers? Sorry, but a handful of momentum stocks will not support our entire stock market.

We will continue to look for long positions as well as short positions to trade. But we NEVER lose sight of the big picture. For it is the big picture that tells us where we are likely to be headed.

Some news items over the weekend:

• Japanese newspapers are reporting that the Bank of Japan may cut Japan’s GDP yet again, the article reports that Japan may cut the GDP to 1.3%, down from 1.8%. Recall the chart I showed of the Nikkei Average. I am concerned about the Japanese market going into a long down trend.
• The Financial Times reported this weekend that over the last 6 months commercial and investment banks in the United States have had to raise $83 Billion dollars in liquidity. This is an all time record. Now think about this for a minute if you will, never in history until now have banks had to raise so much mi9ney in such a short period of time in order to have enough capital to operate. That does not give me a great deal of confidence in our financial markets health.
• A famous and well respected economist, Robert Shiller from Yale University in an interview with the London Times said yesterday that the losses resulting from the housing crisis will likely triple over the coming years. And goes on to say that the current losses which can be attributed to the housing crisis have already hit $1 Trillion Dollars.

Trading, time frames, attitudes

I’ve written before about the importance of understanding your time frame when choosing a trade.  You don’t pick a momo stock for a long term investment, and you don’t pick a very slow mover to daytrade.  When choosing a stock for investment purposes, you take a long look at their balance sheet and their growth prospects, taking into account the economic and sector outlook.  For swing trades, you want to be aware of the economy and sector strength, picking your entry and exit based on technical analysis.  With daytrades, knowing what sectors are moving and having real-time news feeds are important.  These trades are quickly affected by news, rumors, press conferences, etc.  Of course, technical analysis and proper money management apply to all time frames.

 I’m bringing up this topic again, because the volatility, the uncertainty, in the markets makes trading more difficult.  Being more clear on your time frames when trading a particular stock can ease the pain a little bit.

The financial problems affecting the market have been brewing for some time.  The volatility we’ve seen lately is only the beginning of the consequences of massive credit expansion, not the end.  What may be ending is the ability to continue to patch the hull of a sinking ship.  This may indeed be the time that quite a few will have to suffer the financial consequences of their decisions.  It is only then that we can rebuild a stronger ship.  What does this mean to you, the trader/investor?  It may mean you will want to change the time frame for your stock trades.  It may not be the best time to buy a particular stock for long term investing, but it could be a good swing or daytrade.  Or vice versa.  There is no way to tell how long this volatility will last, but it will eventually calm down.  That doesn’t mean everything will be fine in the financial world, but it may make trading a bit less manic. 

Our reason for writing this blog and starting our service was to help people hang on to their money.  Yes, we want to help people, through education, increase their profits.  But, Chuck and I have seen traders who chase stocks all over the street, only to end up right back where they started.  Or worse, they have eaten into their capital.  Emotions are always a part of trading, and right now those emotions are running very high.  We had no idea that only two months after the inception of this blog, that the credit market would seize up.  For us, that meant helping people make sense of what was happening even more important, as this is no ordinary event.   To ignore what is happening, to try to put a positive spin on it, is a disservice to any thinking, rational human being.  We do not believe the world is coming to an end, even though the financial upheaval will make trading more difficult, it is not impossible. It may seem to some that we are “missing the run-ups” by being so bearish.  I actively trade every day, but we do not have an interactive site yet, and I will not make daytrading recommendations until then.  As for swing trades, some active traders have been a bit critical that we have not been taking more positions.  Some traders are willing to accept more risk than others.  We won’t criticize those traders for taking the risks, that’s their choice.  We have chosen to be more prudent, as preservation of capital is paramount, and we don’t take money management lightly.  We take our business seriously and do not assume (as some other sites seem to) that our readers simply have money to burn.  I always bristle when I hear someone say that a trader should never invest more than they can afford to lose.  If you are gambling at a casino, then that saying may be true. Whether one can lose some money and still survive is not the question.  But we’re not gambling here. The question, for me, is WHO in the world would go into trading with the idea of possibly losing all of your capital???  Lose your capital? Why would you do that?  This is why money management is so important. 

I know what it’s like to live under various financial conditions.  I know what it feels like to wonder where your next meal is coming from, as well as the comfortable security of earning a living and being able to pay my own way in life.  That’s what money is all about, isn’t it?  Having enough to be able to pay for your needs, anything more than that is gravy, right?  I know very few people who don’t have at least a little worry about having enough money in the future to take care of their needs.  I’ve also come to learn that those who don’t need to worry, NEVER had a cavalier attitude about money, either.

Pre Market - October 24th 2007

Wow, did you catch those Merril (MER) numbers? Merril reported negative $2.85 vs the expected negative $0.45, and the real kicker is they are doing a write off of $7.9 Billion (yes, with a ‘B’).  There is another concern that the problems have not stopped at Merril and Q4 will also suffer. The CEO said this morning “we expect market conditions for sub-prime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions”. Sounds to me as if they are trying to find ways of unloading other holdings that they can’t market.

The financial sector will be, once again,  likely to be bad today. Futures are down across the board. After the news from Merril the talk of another rate cut is ramping up again for the FOMC to do something next week. The more the FOMC cuts rates the more they risk pushing this country into a recession. The markets have to be careful in what they wish for.

The day that was..

Good evening fellow Rebels..

Today started out with the futures down and that is how we started out the trading. I said this morning that I expected some buying to come in on the theory that some large money movers would step in on the decline and start buying up some things at a big discount. Not that their action means the market became safe again, but instead was a signal that many have positioned themselves for the chance that the market had bottomed in this recent turbulent period.

If you look at the DOW chart from today you will see that the index bounced right at the bottom of the trading range that I had identified last week. This is why some of the large money holders placed their bets today. They were keying in on the trading range support and that would be as a good of a spot as any right now to take a position on the chance the market will recover from here. The question still remains of course and that is will this recovery be short lived or not. Will the markets test their support ranges again or not? On Thursday the FOMC will release their statement following their two day meeting. A lot of where the markets go from here will rest on what they say.

Even with the news this morning from the CEO of Toll Brothers (housing sector) that he did not see a recovery until next year did not seem to keep the large money from making a stab on some very oversold stocks.

At lunchtime I was observing the trading on Big Lots (BIG) and we had good up volume following a few days of churning at the trend line support area. I like the play in BIG because the support is strong and the potential is good for about a 15% gain. In other words this play has a good risk/reward ratio. The only thing is that the broad market we are in has been nothing but risky. So that is why I decided to take an entry on BIG with only 1/3 of my normal swing trade funds. This way I got in on the bottom bounce and will add more when the next technical confirmation takes place (which will be on a move up past $30.50). But in the event something else happens in the markets and BIG fails then I am only in with a 1/3 of my normal trade size so if I get stopped out then my loss will be very minimal. But this is a good trade with good potential. Now we just have to get the broad markets to stop playing around and continue it’s uptrend

The chart shown here is the play I identified on 6-19 for BIG. It is the current chart from today and you will notice that it is very oversold but has been holding up well right around the trend support line during the market turbulence of the last couple weeks. Today’s move off the trend line was a signal that the sellers had left the room and the buyers had control. Now we have to find the key to the door and lock it to keep the sellers out ! I’m using a stop loss on this play of $28.20 which is just a hair under the Fibonacci retracement level shown on the chart.

All eyes and ears will be on what comes out of the FOMC meeting on Thursday afternoon. At 2:15pm we will get a read on what their thoughts are. Expect the broad market to be volatile at that moment.

Better safe than sorry

The broad market may have a change of heart in an hour or by the end of the day.. But I don’t want to risk that. Betting is for Vegas.. Not the stock market.

There is too much uneasiness right now. I’m seeing odd trades go through which is telling me that there is some big money trying to quietly exit the back door.

The markets will always be here… And we will go right back in as soon as the ghost busters come in and sweep out the monsters.

So far… so good…

Early buying (albeit tempered). There is a uneasy feeling here in the market so far this morning. On any sign of panic selling I recommend closing your open swings and lock in the gains before they slip away..

I’m not saying we are there yet… but in case it happens lets get out. We can always come back in again if it settles down in a day or two.

We’re going to watch closely before taking new positions

No new chart setups tonight. Today’s broad market pullback warrants a cautious stance on entering new trades. But remember, the stock market can be like the weather. If you don’t like the weather today… wait a day!

So we will wait for signs that the sun will be coming back out..