Between battling flu bugs and an exhausting move I’m just not able to get back up to speed here in 08 as quickly as I had hoped. Posting will be light again from me this week but I fully expect to be back working my tail off next week to bring you profitable ideas. In the meantime, look for two excellent posts from SelfInvestors contributors Robert Williams taking a look at the oil industry and Barry Brush discussing an options straddle trade.
Take the Fear Out Of Options With a Straddle
2DIME’S INVESTOR NOTESMonday, January 14th, 2008
A Simple Trade to Take the Fear Out Of Options
How many times have you selected a stock, evaluated it, chosen an option strategy and entered the trade only to have the stock move against you?
When I first started trading options, this seemed to happen to me all the time. It seemed easy to find great picks. I would buy call on a breakout and watch my investment soar often for a gain of 100% or more.
As my mood soared with the stock my emotions took over and I would start imagining all of the material treasures I would now be able to purchase. The impish voice of greed would begin talking to me and I would ride the play higher and higher to greater returns never taking any off or moving up my stops.
The next market cycle or price wave would kick in as more savvy traders took some profit off the table. My greed would tell me the play still had room to grow; but my fears began to overcome my hopes as the trade inevitably descended below a 100% rate of return. My fear would approach panic as my paper profit evaporated.
I would stay in the play until I was back to zero figuring that some how it would revisit 100%. I never sold until I was afraid I might loose everything I’d put at risk. This Battle inside my head between the emotions of Greed and Fear went on until I eventually paid for the luck I had had in my first six months of trading by bringing my account balance back to where it had started.
If any of this sounds familiar, you are on the right track. If you are there now, you have probably figured out that you should do something different. If you don’t know what it is that you aren’t doing, I suggest that you begin a trading journal. Who knows, perhaps the weather or what you had for breakfast may be adversely affecting you. More likely than not, it is only greed and fear at play.
If you are new to Options, Let me suggest a simple fool proof trade to get a grip on your financial future. The cool thing is that with this one, there is no room for greed or fear. All option traders should be able to make money if the underlying stock changes its price. The only constant is change and change is good. Up or down, it is good. We are going to expect and profit from change. We are not going to buy and hold anything. You can’t buy anything with paper profits, except maybe a failed mortgage company. BO! FA! FA! FA!
This trade is not about being right or wrong, it is about winning. You should be able to win with it 85% of the time, while minimizing your risk to about a 15% per trade. There are three steps to it.
First, find a stock that you think will move significantly in the next three weeks. You can find one based upon News, Rumor, Earnings or perhaps one of those scanners a lot of sites promote. It can be a good event or a bad event. It just has to be important enough to prompt a move in the stock.
Second, simultaneously buy a put and a call on either side of the at-the-money strike price. (Option strike price closest to the stock price) Try to have your play in place three weeks prior to the upcoming event. Purchase options with approximately 3 months remaining until expiration. There, you’ve “straddled” a price point of an underlying stock. You now have the right but not the obligation to buy or sell 100 shares of your stock pick at the same price, the strike price.
Third, relax, don’t worry – make money. If your “event” causes the stock to move in advance of the event or at the event it doesn’t matter. Give it some time, perhaps as much as a week. If its good news and the stock goes up, your call will bring a profit WHEN YOU SELL IT. Or if its good news and the stock price falls because it wasn’t good enough, your put will make you smile WHEN YOU SELL IT. You can sell at a profit or put on a stop at a profitable level. That’s up to you. I personally like to sell. I’m a “now” kind of guy.
A normal expectancy would be for the profitable move to yield twice as much as the other side looses. Two to one odds are the norm. One quick note: After you capture your profit, you might hesitate before unloading the opposite option.(s) Often a fast moving stock will reconsider its direction and retrace a bit, giving you the opportunity to recapture some of the initial decline on the loosing side that occurred as the stock made its initial move.
A fourth step is a remote possibility if you have picked a mover; but I’ll cover it any way. If nothing happens, nada, no movement, zero; sell both sides and go shopping for another trade. You will most likely be able to limit your loss to around 15% of your initial investment. Say the “Straddle” cost you $100 for the Put and $150 for the Call your total investment would have been $250 and your total risk 15% or $37.50. I’m not a mathematician but you could probably loose on 7 out of 10 of these and still make money.
No Greed, No Fear, No Worry. I’d much rather win than be right or wrong. Wouldn’t you?
Cheers, 2Dimes / Barry Brush
To contact me send an email by using the Contact form (link above) and Tate will make sure I get it. The best option is to submit your comment to the blog here 
Final Portfolio Review – SelfInvestors Up 30.2% in 2007
2007 was quite a year, perhaps one of the most difficult years to trade the markets in a very long time maybe ever. I think 2008 could be more of the same, with traders scoring the biggest gains. 2007 was a good year for the SelfInvestors Model Portfolio, following up a 2006 gain of 27.6% with a 30.2% gain this year. I think more important than the gains, were the lessons learned along the way. It’s what keeps my job fascinating (if you can call it a job). Every day presents new challenges, every year provides lessons and can highlight areas of improvement. The important thing is to track your trades, review your trades, write about your trades in a journal. It’s amazing what you can learn by going back and reviewing your thoughts over the course of the year and looking at the things you did right and the things you did wrong. That’s one thing I have been doing more of right here at the blog for all to see.
I believe in 100% transparency here at SelfInvestors with a review of my Model Portfolio every week. I do this not only because I’m disgusted with the way that this business promotes itself (by highlighting a few big winners), but because it allows me a place to track my thoughts and more importantly so that my readers can learn from my triumphs and certainly my tribulations. Reviewing the portfolio, writing the market analysis reports, the IPO updates and everything else on this blog has made a big difference in my trading. Here’s a tip: if you want to improve your trading set up a blog. Who cares if nobody reads it. It’s for you. It’s a place to vomit your thoughts out in a permanent place and review at the end of the year. Your results HAVE to improve. It doesn’t even need to be public. Set up a private blog if you have to.. whatever you do, set up a blog in 2008. Email me if you need help getting set up. It’s not as difficult as you might think. Go do it now.
Enough rambling out of me. I just wanted to highlight a few key points from the Model Portfolio this year and throw out some stats to squash some very common misperceptions about trading the market.
First and foremost. Forgive the BOLD and UNDERLINE but you need to remember this. I often get asked the question "What is your winning percentage?". I cringe everytime I hear this. It’s NOT ABOUT WINNING PERCENTAGE. Let me just tell you right now what my winning percentage was this year. I’m right a bit more than 50% of the time and I’m proud of that. If I can be right 50% of the time I know I will do extremely well year after year.
Why is that? It’s all about money management. I’ll say it again. IT’S ALL ABOUT MONEY MANAGEMENT. If my profit to loss ration is 2:1 or 3:1 I only need to be right half the time. How do you succeed by failing so much? BY KEEPING LOSSES SMALL. In a difficult market like we had last year, my profit loss to loss ration is about 2 to 1. Actually it was a little less than that as you’ll see below. In a raging bull market, I can kick it up to 3:1.
– The bottom line is that in 2007 I failed half the time, but managed to outperform the S&P500 by nearly 10X!
– IN 2007 I put on 186 positions with a winning percentage just over 50% (94 winners to 92 losers)
– My average gain was 12.5%, while my average loss was 6.45%
It was a very good year, but I’ll be the first to admit I can improve. For one, my shorting strategy was unsuccessful period. That can’t happen again this year so I’ve looked at the number in great detail to find out where I went wrong.
– I put on 51 short trades this year, but on average each trade represented a loss of .43%.
(Yes my shorting strategy did not work this year!)
– I discovered that my Nasdaq Ultra Shorts (QID) were a problem this year with losses of -10.95%, -20.21%, -10.53, -1.06%, -12.37% and -4.73! Yikes.
Taking out the failed QID positions and my average gain on the 51 short positions jumps from a loss of .43 to a gain of .72%. My style of trading is more successful with individual stocks. That’s clear from the results, so I won’t be hedging with any of the Ultra ETF’s this year. That’s one way I plan to improve my results.
Improvement Plan
Capture bigger trends!!!!!! Few profits captured in solar on the long side this year and even fewer profits (ZERO) captured in shorting financials, realty and homebuilders.
Avoid the leveraged Ultra ETF’s of the major indices. I’m better trading the inefficiencies of invidual stocks.
What Did I Do Right?
First and foremost as I mentioned above I kept losses small for the most part. That part of my strategy will never change from year to year. I don’t care what kind of market we are in. If you’re not keeping losses small you won’t succeed. Actually my average loss was a bit too large this year. I like to be closer to 5%, so another area I will work on this year is staying away from the occasional 15 – 20% loss which can happen quickly in my Quick Strike Profit plays.
Supplementing the portfolio with higher risk, higher reward low priced stocks. I began implementing what I call Quick Strike Profit plays in 2006 which has added a boost to the portfolio. These are purely technical swing trades in big momentum stocks where I’m looking for a quick 15 – 30% gain in just a few days or weeks. Examples of these kinds of trades in 2007 were CRDC (45% gain), MVIS (38%), NEXC (15%), BZP (17%), MSI (27%), ALTI (16%) and ZICA (20%).
Trading IPOs. In previous years I found that I wasn’t doing a good job of keeping track of the best companies to market and missing out on some extraordinary gains. In 2007 I did something about it, by developing the new IPO Tracker and IPO Portal as well as adding an IPO section to the Weekly Reports to highlight the best upcoming IPO’s. I didn’t catch them all this year, but scored some nice gains in LULU (26% and 23%), WX (36%) and PWRD (18%)
No leverage, lots of cash. I didn’t use one penny of margin this year and maintained an average of a 40 – 50% cash position for more than half of the year! That’s right, the portfolio outperformed the S&P nearly 10x with VERY LITTLE risk.
Diversified. I carried around 10 positions across a variety of industries and hedged with short positions for nearly the entire year. My short positions hurt me this year because of the QID failures but this year I will succeed on the short side. I have to. Having a short strategy is key to killing it in a tough year, so I’ll avoid the Ultra ETF short plays and stick to shorting individual stocks, which is where I did have some success in 07.
Google. It was 10 – 15% of my portfolio this year. A portion of my portfolio is made up of core positions and Google was the pillar this year, returning about 50%.
Stripper Stocks. RICK and PTT (now VCGH) both took off this year.
Model Portolio Commentary Highlights
The following are some highlights over the year which captures my frustrations with my underperformance in the middle of the year, my trust in my strategy, a few lessons along the way and ultimately an achievement of my goal for 2007.
May 28
After leaning the wrong way for much of the past several weeks, I’m still looking to get back in synch with this market after a strong performance in the first few months of the year. With the YTD performance at 4% (compared to 6.9%), I’ve got my work cut out for me in the latter half of the year.
June 18
With the long overdue selling setting in, the portfolio is beginning to get in better synch with this market and beginning to close the gap of underperformance. I mentioned last week that I began getting short way too early and that hurt my performance, however I expect my current positions/strategy to begin paying dividends. The portfolio was off just .2% last week, but still significantly lags the S&P with a 3.5% YTD return. I’ve certainly got my work cut out for me if I’m going to whoop the S&P again this year. I’m 15% cash.
July 15th
I still don’t regret the decision to hedge my bets with these Ultra Short ETF’s, despite te fact it hurt my performance considerably. I have to trade what I see and what has worked well for me over the years. From a technical perspective, my analysis was showing some trouble ahead. It hasn’t panned out that way but I’m still in good position to beat the market by keeping pace during what has been a highly irrational (from a technical perspective) and volatile market. A sizable portion remains in cash (30%). UP 8.9% year to date.
Aug 12
As I’ve been saying for the past several weeks here, I starting hedging with short positions a bit too early and it hurt my performance as I misssed out on much of the rally from April to July. A few people were even kind enough to remind me that they weren’t missing the rally. Gotta love the gloating. You won’t find me gloating much in this segment of the Weekly Report when I’m right just as you won’t find me kicking myself for lack of performance when I’m wrong. Keeping your emotions in check and remaining level headed is critical. The main purpose of this segment is to provide 100% transparency in my performance in the hopes that maybe other advisory services will have the balls to do so.. and as a reminder that it isn’t always easy to profit big in the market (despite what what many services will have you believe). Hopefully, you can learn from my successes and failures just as I continue to learn from my own successes and failures. I won’t always be right, but I will continue to remain confident and trust what the charts are telling me. In all, the portfolio surged again last weak, vaulting 3.4% higher, bringing the YTD performance to 9.7% which is nearly 4x the performance of the S&P. What a difference a couple weeks make. While it may seem like I’m way too aggressive in this environment it should be noted that I’ve been trading small positions and am carrying what might be my largest cash position in a few years. Overall current allocation is 52% long, 5% short and 43% cash.
Sept 23
Every couple of months or so, there is what I would call a major shift in the portfolio from short to long or long to short. Considering I was treading lightly with just a few long AND short positions and evenly balanced on either side, I wouldn’t call last Tuesday a dramatic shift in the portfolio, but I certainly acted quickly and decisively by closing out my four small short positions immediately following the Fed decision. The Self Investors Model Portfolio year to date performance increased to 10.9% and the allocation stands at 37% long, 0% short and a large 63% cash position.
Oct 7
For a few months I hadn’t been playing too many of what I call QSP (quick strike profit) trades which are basically swing trades where I’m looking for big profits in momentum stocks in a very short time frame. However, while the market has gained strength over the past several weeks I’ve begun to play these quite a bit more and this week the strategy paid off in a big way. The KEY: cut your losses quickly in these volatile plays and eventually that one big run will wipe out a few small losses and really accelerate your returns. In addition to some nice gains in QSP trades recently, the portfolio continues to be led by Google (GOOG) a long term holding as well as IPO plays LULU and WX. For the week, the portfolio surged to a 4.3% gain bringing the YTD gain to 15.6%. Now that certainly isn’t world beating performance, but as I’ve said before, the market has been unusually difficult to read this year and I missed much of the move in the first half of the year. I feel like now I’m catching up and in great position to at least double the return of the S&P by the end of the year just as I did last year. I’m still carrying a decent cash position at 32% and probably won’t move too much more to the long side until we get some kind of pullback/consolidation.
Oct 21
My strategy of playing cautious with a large cash position of near 50% but initiating positions in fairly aggressive stocks continues to pay off extremely well. If you’ve been following my review of the portfolio here in 2007 you know that I struggled a bit in the middle of the year so this is a big turn around and hopefully is a good reminder to all who trade their own accounts that there will be peaks and valleys along the way. The key is to keep emotions in check, stick with the strategies that have been successful in the past and remain confident!
Nov 4
The overall market dipped a bit last week but the Self Investors Model Portfolio continues to surge higher tacking on another 3.2% for the week, bringing the year to date performance to 27.6% (exactly where it closed 2006). I’m continuing to tread lightly in this volatile, unpredictable trading environment. As I’ve mentioned before, it really is one of the most difficult markets to read I’ve seen in quite awhile so I’m not willing to make large bets on either side (currently sitting on 55% in cash).
Dec 2
With the volatility and uncertain market, I will continue to keep the portfolio sitting on a sizable cash position of around 50% (it’s currently at 46%) as well as hedge with short positions. It’s a strategy that has worked extremely well in 2007 and I don’t anticipate deviating from it too much over the next several months.
Dec 19
At this point, I don’t really care what the market does from here to the end of the year. I’m going to maintain a conservative approach and sit on around 40% cash. If I don’t make another dime from now until the end of the year, I can be satisfied with the 30% gain here in 2007 and looking forward to next year when I anticipate a shorting strategy will be critical. I’m ready and waiting. Bring it on bears!
If you’ve read this far, thanks for sticking with my rambling vomitarium of free flowing thought on my performance. I hope it helps you as much as it helps me.
Good trading to you in 2008!
If you’re interested in trading along with SelfInvestors in 2008 have a look at my membership options or send me a shout. I’d be happy to discuss the service that can be most beneficial to you.
Minor Capitulation Near August Lows; Stock of Day – Parexel (PRXL)
Some capitulation today for sure ,but not massive by any means. We opened surprisingly strong today as the market defied the downward momentum of the day before. Some think that the Street.com’s Doug Kass article stating that the Fed will ease momentarily had something to do with it but I doubt it. According to StreetInsider.com, Kass stated:
"I have friends who are very close to members of the Fed, and they say that the Fed will ease momentarily.
This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy — far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.
And they say that the Fed will ease momentarily.
Enough said."
OK whatever.. more rumor. Countrywide going bankrupt yesterday, the Fed with surprise cut today. These kinds of rumors can lead to short term spikes either way but it’s just noise for now.
The recession or no recession debate continues to rage on but there are certainly more and more coming out of the wood works calling for a recession. Goldman Sachs economists predicted a recession this year with unemployment hitting 6.5% by 2009, prompting the Fed to slash rates to 2.5% by the 3rd quarter. Bold predictions. .. and in the blue corner is Fed President Poole, trying to put a positive spin on things saying, "2008 looks to be a year of rising growth" and "economomic forecasters expect slow expansion in the first half of the year and a quickening pace in the second half." He went on to say that the Fed can ease without risking inflation. "Stable inflation expectations give the Federal Reserve a lot of room for maneuver." Kind of makes you wonder what planet these guys are living on. I can’t wait to see how Bernanke plans to save the day tommorrow with his speech titled ‘Financial Markets, the Economic Outlook and Monetary Policy’
Enough predictions, spin, manipulation and rumor. Time for some technical talk. I really would have liked to see some panic selling below those key support levels I discussed last night, followed by a flood of buying. As I mentioned to my premium members today, holding short positions became too much of a risk after lunch. The end of day buying near the August lows of the major indices flashed the exit sign on the short side, but this move doesn’t indicate it’s time to get aggressively long for the longer haul. I personally put on a few swing trades on the long side to take advantage of an oversold bounce, but significant risk remains on the both sides of the market. If you’re not a trader I STILL recommend staying out of this market for now. Your body, mind and trading account will thank you.
The time will come to put on long plays a bit more aggressively, but it’s just a bit too early yet.
::: Major Indices Performance – The Numbers :::
(Note: volume averages are based on the average over the past 50 days)
Data as of 4:00EST – End of Day January 9th 2008
Nasdaq: UP 1.39% today with volume 35% ABOVE average
Nasdaq ETF (QQQQ) UP 2.13%, volume 53% BELOW average
Dow: UP 1.16%, with volume 43% ABOVE the average
Dow ETF (DIA): UP .88%, with volume 62% ABOVE the average
S&P ETF (SPY): UP 1.05%, with volume 43% ABOVE the average
Russell Small Cap ETF (IWM): UP 1.01%, with volume 51% ABOVE the average
::: SelflInvestors Leading Stocks :::
The Self Investors Leading Stocks Index is comprised of stocks in the Breakout Tracker, which is a database of the fastest growing companies near a breakout or having already broken out of a base. Leading stocks didn’t do particularly well today and lagged the general market. Today’s rally was all about laggards recovering from extreme oversold conditions.
Summary:
* Advancers led Decliners 176 to 137
* Advancers were up an average of 2.27% today, with volume 26% ABOVE average
* Decliners were down an average of 2.07% with volume 56% above the average
* The total SI Leading Stocks Index was UP .37% today with volume 39% ABOVE average
::: Where’s the Money Flowing :::
Many investing websites provide leading industries based on price performance alone. However, without accompanying volume levels, this can sometimes be misleading. The only way that I know of to gauge industry/sector strength WITH volume levels is through the analysis of ETF’s. A couple years ago this was not possible, but as more traders/investors use ETF’s they become a much better tool for gauging the health of the market and seeing where the money is flowing (or not flowing). Using the proprietary SelfInvestors Demand Indicator score which measures price and volume movements, I’m able to quickly see which sectors/industries are seeing the greatest inflows of cash. For a detailed look at how I go about gauging sector/industry strength please see the following post: http://selfinvestors.com/si/industry_tracking/
* Current Leading Sectors/Industries (over last 30 trading days):
Agriculture, Gold Miners, Commodities, Gold, Pharma
* Current Lagging Sectors/Industries (over last 30 trading days):
Broadband, Technology, Aerospace/Defense, Industrial, Semis
* Today’s Market Moving Industries/Sectors (UP):
Global Technology, Regional Banks, Biotech, Technology, Real Estate
* Today’s Market Moving Industries/Sectors (DOWN):
Clean Energy, Home Construction, Internet Infrastructure, US Oil, Commodities, Internet
::: Stocks :::
The stocks section will be an area where I highlight one stock selected from a group of stocks moving up with volume well above average and most likely breaking out of a base or consolidation. There were very few leading stocks breaking out with big volume to new highs today, but one in particular stood out – Paraxel International (PRXL). Despite a somewhat severe market corrrection over the past few months, PRXL just keeps chugging along to new all time highs with little attention.
ABOUT:
PAREXEL International Corporation is a bio/pharmaceutical services company, providing a range of capability in clinical research, medical communications services, consulting, and informatics and technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. Its product and service offerings include clinical trials management, data management, biostatistical analysis, medical communications services, clinical pharmacology, patient recruitment, regulatory and product development consulting, health policy and reimbursement, industry training and publishing, medical imaging services, interactive voice response systems, clinical trial management systems, Web-based portals, systems integration, patient diary applications and other drug development services. In September 2007, it completed the acquisition of Taiwan-based APEX International Clinical Research Co., Ltd., which was subsequently renamed as Parexel Apex International.
FUNDAMENTALS:
I’m surprised that Paraxel (PRXL) hasn’t received more attention over the years. This is a company that has posted substantial earnings growth in each of the past several years dating back to 2002, with the exception of 2005. Excellent earnings growth is expected to continue for at least the next 2 years according to analysts. Estimates call for a 28% earnings jump this year and 25% next year. While net margins aren’t exceptional and not characteristic of a homerun stock at just 5%, they are above the industry average. Return on equity is much better at around 15%. Overall, this is a very good company fundamentally.
TECHNICAL:
PRXL has been in a long, steady uptrend for over 2 years now and isn’t showing signs of slowing anytime soon. Given the fact that it has been so strong in a such a weak market is a testament to its strength. Having said that though, it’s a bit extended so is risky at these levels. I would look to add shares on pull backs to near the 50 day moving average.
SELFINVESTORS RATING: With a total score of 49/60 (24/30 for fundamentals, 25/30 for technical), Parexel (PRXL) is a good SelfInvestors leading stocks and should be put on the radar.
Full Disclosure/Disclaimer: The stock of the day is by no means a buy recommendation. Please do your own research and make a personal decision based on your own tolerance for risk. I currently do not own a position in Parexel (PRXL)
Market Oversold, But It’s a Bear Market
Apologies for not getting the weekly report out this Sunday. With a major move in the works for me and scrambling to get caught up after a few weeks off, it’s going to take a few more days to get back into full swing. My priorities will change a bit this year as well. No more all nighters getting blog posts up, updating databases, researching, etc.
First and foremost, my health and time with friends and family will come first. I’ve made many sacrifices over the past four years to create this site and it’s now getting much closer to the point where I’m happy with it. That’s not to say I won’t continue to work hard and present profitable ideas here, it’s just that at times posting here may be a bit on the the light side. Helping fill out the blog in 2008 will be the insights of 3 great bloggers, two of which you may have read late last year – Robert Williams (oil industry reports) and Barry Brush (options extraordinaire). This year, I think you’ll also enjoy reading articles from Lance Chastain, a serial entrepreneur bursting with insights and knowledge on personal and business success. It will be a great contrast to the trading talk.
What a week to start 08 though! With today’s loss, it marks the worst start to the S&P ever. Yikes. The Nasdaq is already down 8% this year. In my last market report I mentioned that the bulls and bears had drawn the lines in the sand, with the Dow and S&P carving out triangle formations and the Nasdaq holding above key support around 1550. A break down below those levels in the Dow and S&P last Wednesday was warning signal number 1 and on Friday when the Nasdaq took out key support, that was warning signal number 2. The lines were drawn out in the charts and the bears have won. There isn’t any other way to say it. Yes, this is officially a bear market.. for the most part. More on that below.
Having said that we are reaching oversold conditions in the short term and there will be some great trading opportunities on the long side very soon. It looked as if today we might begin a weak oversold bounce following yesterdays minor reversal off the lows. However, rumor of a Countrywide Financial (CFC) bankruptcy filing later this week took the wind out of a mid day rally and just as the market began to recover, the AT&T CEO mentioned at a conference that the company faces softness from the consumer and that the company is disconnecting more home-phone and high-speed Internet customers for failing to pay their bills. This isn’t earth shattering news but indicates the market was looking for an excuse to sell. It was a dramatic reversal in the last 2 hours of trading today and volume was heavy indicating an exodus by the institutions.
The daily charts below show the breakdown out of the triangle formations in the Dow and S&P and the setup for a test of those August lows. I’ll be looking for some kind of capitulation below those August lows as an entry point to get fairly aggressive on the long side for a few weeks.
.. and in the Nasdaq, it’s break after break of support over the past several days setting up a showdown at the August lows around 2400. Again, looking for some panic selling around this area and resulting capitulation as a signal to get long.
Bear Market Emerges
While the Dow sits right on the bear/bull mendoza line, both the S&P and Nasdaq have crossed over to the grizzly side by taking out long term trend lines. Taking a look at the monthly charts you see the break of the trends but with major support levels close by.
Dow 12500, just 89 points aways is a critical support level. Remember that it’s highly possible we dip below that level which could trigger some panic selling. The important thing is how the market closes. I wouldn’t mind seeing a big flush of sellers tomorrow. Down another couple hundred more intraday, followed my some massive end of day buying. That’s my signal to get back in with more aggression on the long side.
The break below of the trend line that has defined the bull market over the past nearly 5 years signals a bear market in my opinion. While we’re oversold in the short term and sizable rally will provide more short opportunities. New major resistance around 1450.
The Nasdaq has also signaled a bear market with a breach of the long term trend line. Look for a drop to major support around 2400 as an opportunity to trade on the long side for a bit, but ultimately this is a bear market and short positions should play a major role in your portfolio this year.
::: Model Portfolio :::
** This section will now appear as a separate report to be published on Wednesdays. I’ll have a special end of year 2007 review of the Model Portfolio up tomorrow night or Thursday morning.
Would you like to receive buy and sell alerts within minutes of each transaction of the Model Portfolio? You can receive these along with ALL of the tracking tools and reports with the very popular Gold membership. Don’t delay, get started today and join me for many more highly profitable months here at SelfInvestors.com.
::: Best/Worst Performers :::
– Top 10 Performing Industries For the Week –
1. Gold: 9.55%
2. Drug Manufacturers – Major: 3.85%
3. Research Services: 2.30%
4. Beverages – Soft Drinks: 1.75%
5. Cigarettes: 1.65%
6. Health Care Plans: 1.50%
7. Farm Products: 1.45%
8. Specialized Health Products: 1.45%
9. Drugs Manufacturers – Other: 1.00%
10. Building Materials Wholesale: .95%
– Top 10 Worst Performing Industries For the Week –
1. Mortgage Investment: -19.15%
2. Residential Construction: -18.30%
3. Major Airlines: -16.25%
4. Surety & Title Insurance: -16.00%
5. Banks – SE: -15.25%
6. Semiconductors – Integrated Circuit: -14.50%
7. Personal Computers: -14.15%
8. Recreational Vehicles: -13.85%
9. Semiconductors – Broadline: -12.95%
10. Resorts & Casinos: -12.85%
– Top 5 Best Performing ETFs For the Week –
1. Market Vectors Gold Miners (GDX) 10.85%
2. Asa Limited Gold (ASA) 8.65%
3. Central Fund of Canada (CEF) 6.10%
4. Ishares Silver (SLV) 6.05%
5. US Natural Gas (UNG) 5.90%
– Worst 5 Performing ETF’s –
1.
2. SPDR Home Builders (XHB) -16.80%
3. Powershares Dynamic Semis (PSI) -14.00%
4. Thai Fund (TTF) -13.40%
5.
::: IPO’s Worth Watching for This Week :::
This section will now appear as a separate report on Mondays, however with the beginning of a new year and the market struggling there are no IPO’s expected to begin trading over the next few weeks. It might not be until February until we get new IPO’s coming to market.
::: Upcoming Economic Reports (
Monday: None
Tuesday: Pending Home Sales, Consumer Credit
Wednesday: None
Thursday: Initial Claims, Wholesale Inventories, Crude Inventories
Friday: Export/Import Prices, Trade Balance, Treasury Budget
::: Upcoming Notable Earnings Reports :::
Earnings season doesn’t begin ramping up until next week!
I’ve Been Taking Google (GOOG) Profits
I have a confession to make. I’ve been taking Google profits. I first began highlighting Google to my premium members in 2006 and profiled it here in May of 2007 at 483.52 as the stock showed signs of an imminent breakout. That was then, this is now.. and times have certainly changed. For one thing, the market is on the verge of / in the beginning stages of a bear market (I’ll have more on this in a post tomorrow morning). In this scenario, no stocks are immune to a sale, no matter how good the company. Google is no exception.
On November 16th, 2007 I added to my long term Google position as the stock pulled back to the 50 day moving average, following a big fall run to nearly $750. In an email to members, I said:
"I’m adding to my long term Google position here as it tests the 50 day moving average. I still believe the market is going to get a decent run very soon and that a leading stock like Google will benefit greatly. Also, remember that Nov, Dec and Jan are quite often great months for the stock market and techs in particular. I think that the greatest downside risk from here with Google is 600 and that only happens if we get another spike down to test the August lows of the major indices. I’m confortable adding another $10K (less than 4% of portfolio) to my long term core position here at 623.26."
At the time of the trade off the 50 day moving average, I hadn’t really planned on trading it for a quick gain but given the uncertainty of the overall market and the quick bounce off support, I decided to lock in the trade for a quick profit. On Nov 29th, 2007 I wrote to members:
"I added to my Google position after it was demolished and hitting the 50 day moving average just over a week ago, bringing my total portfolio position to a bit under 15% of the portfolio. I believe the stock has come too far too fast and really needs to spend more time repairing the technical damage of early November. I could see some kind of double bottom base forming with decent potential of retesting the low around 615 again. I want to lock in this quick 12% profit on the 10K I took about a week ago and will consider adding to the position again once this base gets sorted out and I have a better idea of just how far the overall market will correct. I’m out at 701.23."
Roughly 3 weeks later on Dec 18th, Google would test the 50 day moving average once again, dipping well below this key support level intraday, but closing above support and keeping me in one of my long term positions (initiated in late 2006). For awhile, it looked as if Google was going to break out of a bullish triangle formation (as you’ll see in the chart below). However, on January 3rd, Google dipped below a 5 month upward trend line but managed to close just about on this line. It wasn’t until the next day that the move was confirmed and the stock sold off fairly hard, taking out this trend line and support of the 50 day moving average with conviction. It was on this day I decided to lock in gains on a Google position I had been holding for 14 months. I sent the following note to my premium members on Jan 4th 2007:
"I mentioned yesterday that core positions Mastercard and Google were not exempt from a potential sale. Given the current market environment, nothing is immune to a sale. Yesterday, Google bounced back and closed near the high of the day, so I gave it another chance to get back above the 50 day moving average today. However, it’s taking out today’s lows, yesterday’s lows and support of a 5 month trend line. So, I’m taking one of my $10K core positions off the table today at 673.25. and locking in a nearly 40% profit."
The action over the past few days indicates short term deterioration in Google, but longer term I still like Google very much. Nothing has fundamentally changed for Google at this point and I would expect them to report another outstanding quarter in a couple weeks. What I see happening is some sort of double bottom base formation with the first leg down low at 616.02, the middle "W" peak at 724.80 and the second leg down in the base at 616.02 or lower. Typically a stock will take out the lows of that first leg down, to shake out a few more sellers, so a test of around 600 is highly likely. This is an area where the 200 day moving average will approach in a few weeks as well so potentially a good spot to consider adding shares. I’m still holding one core position with a 60% profit that I got into in October of 2006. I probably will NEVER unload this position.. but then again I should never say never!
Here’s a look at the 6 month chart of Google with highlights of where I added that last November position, then sold two positions.
Disclaimer: I still own a position in Google and looking to add more, probably sometime after earnings.
Bulls, Bears Draw the Lines in the Sand
With the light holiday trading coming to a close we find ourselves in no man’s land but with the lines in the sand drawn. I’m still in vacation mode and refreshing the batteries for 08 so will keep the analysis short tonight and move right into the charts.
What you’ll see in both the Dow and S&P is channel trading over the past few weeks with price getting squeezed to a narrower point (which could eventually carve out a triangle formation). With this formation, we have firm areas of resistance and support setting up with a breakout above or a breach below revealing much about this market. I would guess that we’ll continue to trade fairly directionless for a couple more weeks until earnings start ramping up again.
Note the Dow bounced off support of this trianlge formation on Friday so the odds are good for a bit of a push up this week.
You’ll see a similar formation in the S&P with price getting squeezed around 1480. Eventually, the build in pressure must release and the it’s still up to the bulls to prove themselves. The prevailing trend is still down, so odds are in favor of a break below out of this triangle. Time will tell.
In the Nasdaq, current support and resistance levels are better defined within a channel with the upper bound around 2725 (an area it’s had trouble clearing) and the lower bound of support around 2550 (an area it has bounced from on 2 occassions in November and again here in December. The market probably won’t make any significant moves out of this channel until normal trading levels resume and the earnings season begins in the 3rd week of January. Until then, I continue to tread lightly, not making large bets on either side.
::: Recommended Reading :::
This is a new section that will appear in the Weekly Report for some time but will probably be moved to separate post at some point. Usually my responsibilities in running SelfInvestors.com prevents me from doing much reading during the trading week but if you do get a chance to read some good articles from other blogs or news outlets send them my way and I’ll post them here. Send to support at selfinvestors.com
**
Marc Faber in an article at Daily Reckoning discusses the credit crisis and inflation. He says, "Will rate cuts be of much help to the asset markets and the economy? I believe we are in a war between two major adversaries. On the one side we have the Fed (and other central banks) pumping liquidity into the system in a desperate attempt to support the asset markets and the economy. On the other side we have the private sector, which, as Hatzius explained, is being forced to curtail lending due to heavy losses in the credit market and to fight the Fed’s reflation efforts by widening credit spreads. Complicating matters is the fact that both adversaries have powerful allies."Will rate cuts be of much help to the asset markets and the economy? I believe we are in a war between two major adversaries. On the one side we have the Fed (and other central banks) pumping liquidity into the system in a desperate attempt to support the asset markets and the economy. On the other side we have the private sector, which, as Hatzius explained, is being forced to curtail lending due to heavy losses in the credit market and to fight the Fed’s reflation efforts by widening credit spreads. Complicating matters is the fact that both adversaries have powerful allies."
Is Starbucks a good barometer of the economy?
Pressure on revenues and cost increases contributed to the dismal performance of earnings in the third quarter of 2007. For example, Starbucks (SBUX) increased prices by an average of 9 cents a cup in July. However, customer visits to US stores fell 1% for the quarter ended September 30. Starbucks’ CFO noted that a "similar decline may occur in the fourth quarter although they will be positive for the full year". (This would seem to indicate that the economy slowed down considerably in the second half.) According to him, "unbeknownst to us, we saw economic headwinds that quite frankly came up probably stronger than I thought." Earlier, Starbucks’ CEO had remarked: "The consumer is being faced with rising costs in every sector of their lives, and so part of that is reflecting on us." An informed friend of ours suggested that declining traffic at Starbucks stores in the US is of particular concern, since Starbucks serves all income levels.
**
Bill Bonner of Daily Reckoning puts China in perspective.
"Per-capita income in China is less than 1/10 of America’s and its per-capita greenhouse gas emission is less than 1/5 of ours. But if 1.3 billion Chinese were to consume at the level Americans do, we’d need several more Earths.
**
Jim Cramer has evolved but continues his flip flopping ways.
Cramer says, "trying to game short-term movements in stocks (is) almost impossible," Oh really? I think many, including myself can prove him wrong on this point.
On the much publicized Fed rant: "I’m very proud of that call," Cramer says, saying the Fed really had no idea of the severity of the crisis. Arguably, Cramer was proved right by the market turmoil that followed. "I subsequently heard from people at the Fed that it had an impact," he says. The Fed listens to you? In your dreams.
**
Tom Lydon of ETF Trends reviews his ETF predictions for 2007 and makes some new ones for 2008.
1. Global markets will no longer be in sync with the U.S. market, and ETFs are the way to take advantage of global growth.
2. Actively managed ETFs fail to generate excitement.
3. ETFs hit $1 trillion in assets.
4. More ETFs will appear on global exchanges.
5. Bigger players will enter the market.
6. Commodity ETFs will continue their expansion and gain even more popularity.
7. Fixed-income assets will grow.
8. U.S. investors will begin realizing that they can look abroad for their investments.
9. Individual investors will start asking their financial advisors why ETFs aren’t part of their portfolios.
10. An ETF of ETFs will finally hit the U.S. market.
**
Really there is inflation.. really there is.
Even with gasoline prices soaring, milk still tops gas prices. The nationwide average for a gallon of whole milk is $3.80, according to the U.S. Department of Agriculture. That dwarfs the nationwide average of $2.99 for a gallon of unleaded, according to AAA.
"A lot of basic foodstuffs seem to be going up and dairy products are going through the roof," said Norris of Oakworth Capital.
It’s not just milk-drinking kids – coffee drinkers are taking a hit from higher dairy prices as well. Back in August, Starbucks Corp. (SBUX, Fortune 500) chief executive Jim Donald blamed "rising expenses, particularly higher dairy costs" for a 9-cent rise in the price of coffee drinks. For the first time in three years, Starbucks reported a 1 percent drop in customer visits to their stores, even as the value per transaction increased 5 percent.
**
Hugo Chavez is proving yet again that socialism doesn’t work.
The strength of the Venezuelan economy has long been a key factor in the popularity of President Hugo Chávez. With oil prices surging and government coffers bulging, Chávez has been able to offer generous social programs and price controls to keep basics affordable for all. But now the first cracks in the economic boom are starting to show. Inflation is surging, shortages of certain products are spreading, and the value of the bolivar, the local currency, is sliding, at least on the black market.
**
Did Bear Stearns (BSC) provide the spark that kicked off the credit crisis?
It’s too soon to tell whether authorities will find any wrongdoing. But a BusinessWeek analysis of confidential hedge fund reports and interviews with lawyers, investors, and securities experts reveals just how pivotal a role Cioffi’s funds played in the mortgage market’s dramatic rise, dizzying peak, and disastrous fall.
**
Ah, when to sell your stock? That’s the million dollar question and the most difficult part of trading. I would argue that it’s more art than science. Chris Perruna provides key points from a book by Justin Mamis called appropriately "When To Sell"
A few examples include:
1. Rule One of the professional trader is: When a stock doesn’t do what you expect it to do, sell it.
2. Stocks are bought not in fear but in hope. They are typically sold out of fear.
**
Will joint ventures bury the homebuilders? Lennar (LEN) has the most exposure here.
**
Zach provides some excellent analysis of Wuxi Pharma Tech (WX) and Interactive Brokers (IBKR)
::: Self Investors Model Portfolio :::
** This section will now appear as a separate report to be published on Wednesdays.
Would you like to receive buy and sell alerts within minutes of each transaction of the Model Portfolio? You can receive these along with ALL of the tracking tools and reports with the very popular Gold membership. Don’t delay, get started today and join me for many more highly profitable months here at SelfInvestors.com.
::: Best/Worst Performers :::
– Top 10 Performing Industries For the Week –
1. Silver: 12.05%
2. Gold: 9.70%
3. Computer Peripherals: 7.50%
4. Nonmetallic Mineral Mining: 5.65%
5. Oil & Gas Refining & Marketing: 5.45%
6. Oil & Gas Drilling & Exploratoin: 5.20%
7. Telecom Services – Domestic: 5.10%
8. Agricultural Chemicals: 5.00%
9. Oil & Gas Equipment & Services: 4.80%
10. Packaging & Containers: 4.65%
– Top 10 Worst Performing Industries For the Week –
1. Semiconductor – Memory Chips: -6.30%
2. REIT – Hotel/Motel: -5.50%
3. Electronic Stores: -4.30%
4. Water Utilities: -4.05%
5. REIT – Office: -3.95%
6. Toy & Hobby Stores: -3.90%
7. Broadcasting – Radio: -3.50%
8. Savings & Loans: -3.45%
9. Recreational Goods: -3.40%
10. Sporting Goods: -3.35%
– Top 5 Best Performing ETFs For the Week –
1. ASA Gold (ASA) 13.30%
2. iPath India (INP) 13.25%
3. Morgan Stanley India (IIF) 10.60%
4. Latin America Discovery (LDF) 10.20%
5. Market Vectors Gold Miners (GDX) 8.75%
– Worst 5 Performing ETF’s –
1.
2. Japan Small Cap (JOF) -7.85%
3. Chile Fund (CH) -3.00%
4. Ishares
5.
::: IPO’s Worth Watching for This Week :::
This section will now appear as a separate report on Mondays.
Note: there are no IPO’s scheduled for the next few weeks, so you won’t see IPO posts on Mondays for awhile
::: Upcoming Economic Reports (
Monday: None
Tuesday: Holiday
Wednesday: FOMC Minutes, ISM Index, Construction Spending
Thursday: Auto/Truck Sales, Initial Claims, Factory Orders
Friday: Nonfarm Payrolls, Unemployment Rate, Hourly Earnings, ISM Services
::: Upcoming Notable Earnings Reports :::
None
::: In Case You Missed It – SelfInvestors Blog Entries of the Past Week :::
1. Solar Stocks Still Energized – Solarfun (SOLF) Pennant Breakout
Solar Stocks Still Energized – Solarfun (SOLF) Pennant Breakout
People have been trying to call a top in the solar energy stocks for months now but the good news just keeps on coming in this sector and it remains white hot.. Now I’m in no way recommending initiating aggressive positions in the leading solar stocks at this point. It’s more a situation of a short term trade over the next few weeks or a hold if you’ve been the names for awhile. These stocks are far too extended for large positions.
Leading solar stocks such as First Solar (FSLR), JA Solar (JASO), Suntech Power (STP), MEMC Materials (WFR) and Solarfun Power Holdings (SOLF) aren’t showing any technical deterioration despite massive runs but at some point the music will stop and you better find a chair. With that disclaimer out of the way I’d like to highlight a Solar Trade of the Day.
Despite an amazing run that saw Solarfun (SOLF) nearly triple in just one week, the stock is breaking out of a bullish pennant formation and looks poised for more. Volume wasn’t great today, so it could pull back a bit offering a better entry. New support is just above 26.
Disclaimer: I own a position in SOLF
Model Portfolio Update
It was another good week for the Self Investors Model Portfolio and I continue to tread lightly here, not making large bets on either side. For the week, the Model Port outperformed the S&P500 which was down 2.2% over the past week, VS. down .6% for my portfolio. That drops the year to date performance to 29.4% which is still 10 times the return of the S&P.
The losses were mitigated this week with my short hedge positions, led by AIRM which was closed this week for a quick 14% gain. I am looking to replace this short position with another possibly tomorrow, depending on the action of the overall market. Today, I did add a small long position in a leading stock.
The longer we stall here, with the Dow and S&P submerged below their 200 day moving averages, the greater the likelihood we’re testing those November lows BEFORE testing those December highs. The market seems to be a bit in no man’s land with the bears exerting some control, but the bulls looking like they could strike and stage a year end holiday rally at any time. If the bulls are going to run, they better do so very soon. If we take out yesterday’s lows, I may close out a couple long positions as well.
At this point, I don’t really care what the market does from here to the end of the year. I’m going to maintain a conservative approach and sit on around 40% cash. If I don’t make another dime from now until the end of the year, I can be satisfied with the 30% gain here in 2007 and looking forward to next year when I anticipate a shorting strategy will be critical. I’m ready and waiting. Bring it on bears!
::::::::::::::::::::::::::
Would you like to receive buy and sell alerts within minutes of each transaction of the Model Portfolio? You can receive these along with ALL of the tracking tools and reports with the very popular Gold membership. Don’t delay, get started today and join me for many more highly profitable months here at SelfInvestors.com. Look forward to having you aboard.