My thoughts and journal

On Friday the S&P500 gained 7.07 to close at 1,184.52. The NASDAQ Composite gained 17.35 and closed at 2,087.91. Volume on both exchanges was down to flat, with 1.33 billion shares changing hands on the NYSE and 2.09 billion shares traded on the Nasdaq. Of note is the fact that both exchanges saw a pretty strong A/D line, better than 2 to 1 in both cases.

I came into the weekend scanning feeling pretty bearish. The markets have started the year pretty rough with the Nasdaq already down 6% and the DOW down about 3%. In addition to the raw percentage number the market has been going down on heavier volume then it has been coming up. I was very suprised then to see that there has been some very god leadership, which leads me to believe that maybe this is more of a nasty decline than the start of something bigger.

Again I was pretty suprised with all the leadership I saw this weekend, but its not something to ignore either. As far as sectors go Internets, HMO's, Homebuilders and some Retailers are all looking pretty good. Individual stocks of note are GOOG, DIS, AMZN, ASKJ, CVS, GENZ, BWLD, GT, PD. All of these have shown very good relative strength and volume patterns during this most recent decline in the stock market. For the year I have made 4 trades now in the equities markets and am down about 3/4 of 1%. Action has been choppy with limited opportunities. Not trying to make something out of what is not there has allowed me to preserve capital. The best action so far for me this year has been in the Currency markets with the dollar staging a very strong rally since making new lows right before the new year. So far this year gains there, along with cotton, have been nearly 15% but both of those trades I feel are about working themselves out, and after that maybe there are a lot of other opportunities, maybe there are none. I tend to play for tops and bottoms there.

Brandon
 
On Tuesday the S&P500 gained 11.42 points, closing at 1,195.94 while the NASDAQ Composite closed at 2,106.04, gaining 18.13 points. Overall volume was lighter on this rally, coming in at 1.58 billion shares on the NYSE and 1.95 billion shares on the NASDAQ. Ideally we should see heavier volume on up days and lighter volume on down days as that shows a market that is under accumulation.

In yesterdays Random Rants I pointed out that we had been seeing decent leadership in some groups and certain stocks. The market confirmed this with a strong rally off the lows and most of the stocks mentioned responded very well. I am currently long GENZ, GOOG, and CVS. One area I do have a problem with is volume, it was terrible. In fact overall volume yesterday was the lightest of 2005. This is not what you see in a truely strong market, so I have not committed heavily and I will be very cautious with. I think that the momentum top has probably been put in here, which doesnt mean the overall indexes will not go higher, but it should do so with less and less leadership, which of course will eventually wiegh it down and lead to a larger correction.

Earnings season is in over drive this week, and something like 75 companies in the S&P500 are due to report thier results this week. Earnings can do do change everything, so they are worth paying attention too. Last night IBM reported good earnings and seems to be reacting well too it. What seems to be being overlooked is that the majority of that improvement has nothing to do with IBM, but is currency conversion related. I will be looking to short IBM on any sign of weakness today. Speaking of currencies I just closed the Sterling short trade I have had on for some time now. I remain long March Cotton.
 
I have gone back to cash except for some thinner issues that I dont feel will trade with the market. I also shorted IBM on the open and have covered the majority of that. I will look for 93 on the balance.

Brandon
 
Trading the markets takes a lot of nerve. Decisions often need to be made quickly, and if one flinches, one may miss a significant price move, and divert a sound trading plan. Fear and anxiety often are at the root of hesitation. One may fear a loss, fear being wrong, or fear not having an opportunity to exit. The more a trader can control fear and anxiety, the more he or she can avoid the tendency to hesitate. A classic experiment on the study of emotion control provides a solution. One of the best ways to control fear and anxiety is to take an objective and analytic approach to interpreting events.

In the 1960s, Professor Richard Lazarus and colleagues elicited fear in a laboratory setting by showing participants films portraying various stressful situations. They called one of these films the "sub-incision film." In this film, an Australian Stone Age tribe demonstrated a primitive ritual in which crude surgical operations were performed on young men as a rite of passage. Participants watching the film knew these crude incisions were going to be made, but they didn't know exactly when. Physiological measures of fear, such as skin conductance, respiratory functions, and heart rate, were monitored as participants watched the film. As might be expected, levels of fear were highest at the point the incision was made. But fear was also very high while anticipating the fearful event. Anticipation of a stressful event is often associated with fear and anxiety. After the incision, fear immediately decreased. The vantage point that participants used to view the film exerted a powerful influence on emotional experience. By manipulating the soundtrack of the film, and coaching participants on how to cope with watching the incisions, researchers were able to help people manage their emotional reactions. One approach was to "intellectualize" the film. Participants tried to view the film as a scientific documentary in which one removes oneself from the ongoing process and tries to look at the events from a rational and impersonal perspective. A second approach was to try to "think positively." Subjects were told to focus on the positive aspects of the film. For example, the young men in the ritual looked forward to it, and were viewed as having a higher status in the tribe once the ritual was completed. Results showed that taking an objective and intellectual approach was much more effective at controlling emotions than trying to think positively and trying to ignore the negative aspects of the film.

This research study shows how taking an objective approach to trading can reduce fear, and in turn, reduce hesitation. Any way that you can objectify or intellectualize trades will improve your ability to control fear. For example, looking at trades as a percentage of increase or decrease in capital rather than dollar amounts can help greatly. Don't think of the value of the money, and what it can purchase. Look at it as merely objective percentage points of loss or gain. This will help you remain rational and calm. It will help you control your fear, and reduce your tendency to hesitate.

Now the market. Although the Small Caps, Mid Caps and Dow are hitting new highs we are still seeing a very split market. I believe the momentum top has been put in. What that means is that this is a stock pickers market, and the easy money is out. There are several key things to watch right now. Number one is Oil. All of the oils are testing resistance. If they break and it occurs on volume the market is going to struggle. We also have bonds testing important lows. This is another market to watch carefully. Again, if bonds continue lower I think the market will struggle. Right now Oils, Steel, Housing, Energy, Utilities and Coal are the strongest groups, but there have been few bases to buy.
 
Thursday was a rather mixxed day. The S&P500 gained 2.24 points, closing at 1209.25 while the Nasdaq Composite lost 1.57 points and closed at 2,059.72. Volume on the NYSE increased by 5% to 1.6billion shares while the Nasdaq volume declined by 1% to 1.84 million shares. On both exchanges declining shares led advancing shares by a moderate margin. The NYSE saw 61 new 52 week highs and 27 new 52 weeks lows while on the Nasdaq there were 44 new 52 week highs and 70 new 52 week lows. Stated simply we are still dealing with a very split tape.

My thoughts coming into this year was that its going to be tough. The momentum top has been made, which means that the easy money is out of the market. Interest rates, the dollar, the debt and oil prices and other commodity prices all remain at critical levels and something is going to have to give. In the long term I expect it will be the equities market, in the short term your guess is probably as good as mine.

One thing that is standing out to me in the short term is the Semi Conductor stocks. They have shown some excellent relative strenght vs the rest of tech and the overall market the last few days. On Wednesday while the market got hammered the semi's barely budged. This is an excellent sign of strength. Noticing that I started to accumulate a sizable position in that group yesterday ahead of the Intel mid quarter report. Stocks include IRF, XLNX, NSM, SGTL, TXN and the SMH. We will see what happens going forward. I had entered this trade thinking it would be a longer term trade, though I am less certain of that now.

Brandon
 
Led by higher oil prices the major indexes lost ground on Friday. The S&P500 lost 9.17 points, closing at 1200.08 while the NASDAQ Composite lost 18.12 and close at 2041.60. Volume was slightly higher, increasing 1% to 1.45 billion shares on the NYSE and increasing by 2% on the NASDAQ to 1.8billion shares. This is the first time in three weeks that all the major indexes ended lower, and overall volume was higher. In the last several weeks we have seen several distribution days.

The day started off higher on Intel's Mid-quarter Report. You will recall that into the close on Thursday I was an aggressive buyer of Semiconductor stocks. However, it became apparant about 5 minutes into the day Friday that I was wrong and I closed those positions.

Going forward there are several area's of concern which I have already mentioned over the last few weeks. In addition we can now add the probable false breakout in the S&P500, Midcaps and Small Caps. A false breakout will occur when a stock or index barely breaks to a new high and then quickly reverses to head lower. If the decline occurs on heavier volume than the break to new highs this typically marks at the very least a momentum top. This is not encouraging. Additionally we have had a strong move up, but it has been led by the "wrong" groups if you ask me. Commodity stocks have been running sharply, and in fact 16 of the top 20 performers in the S&P500 this year are commodity stocks. This is all well and good for those stocks, but for the majority of American's as well corporations this simply increases costs. The trade deficit continues to expand and record levels, putting an awful lot of pressure on the dollar. This is good for multinational corporations as they can convert FX profits into dollars, however most major commodities are produced locally in other nations and sold in dollars. As the dollar weakens, the prices go up. In fact, if you look at the price of Crude Oil priced in Euro's it has barely budged in the last several years. This is a hidden cost we are all paying for the weak dollar policy of the administration.

As I scanned this weekend I did not find much for sectors that interested me except to short, but I did find a few stocks. Among the potential buys I like are PNRA, SNRA, JOYG, MBT, FLIR, CMTL. On the short side the entire internet group remains shortable, with the leading stock GOOG very close to a major breakdown. Additionally leading steel stock TONS has broken down under its 50 day moving average on the heaviest volume ever to trade, and its recovery has been very weak. It's not likely to test its highs any time soon.

Note: As many of you know when Toni and I lived in Iowa we did foster care. This week is spring break in Iowa City, so we brought Jeff and Alexis down yesterday to spend the week with us at Disney World. They are very excited, and, I've never been there either so I can't help but be infected by their enthusiasm. At any rate, I will be out the majority of this week and will return next week. This newsletter will then resume daily.

Brandon
 
I just got back from Disney. If you don't mind being out in the rain, go on a cold rainy day. No lines! We got on all the rides in under 5 minutes of waiting.

I just wanted to write a few brief words about the market. For the most part it can be summed up by saying yuck! The Nasdaq 100 right on its 200 day moving average. Nothing good will come of a break below this level, and I see no reason for it to not break it in the not too distant future. The S&P500 is now down below its 50 day moving average for the third time this year. Volume patterns have been horrible. By this I mean that we are seeing heavy volume on down days and light volume on up days. When this volume pattern is present, no substantial rally will occur. At this particular point we are oversold, but oversold has a habit of becoming more oversold. Right now what I would do is wait for a bounce and see how it come off. If it its another low volume affair then it is shortable and we should see substantially lower prices.

Finally, in the last report I sent out I mentioned several stocks, a few of which have setup and are doing amazingly well, especially given the enviornment we are playing in. Lets start with the shorts though, TONS broke below $71.85 and triggered, it closed Thursday at $61.27. GOOG setup when it traded under $180, it is flat. On the upside PNRA setup when it broke out of its long base above $54.90, it closed at $57.17. Volume on this one has not been as robust as I'd like to see, and given the current market enviornment I would be quick to take profits. The other buy that setup was CMTL, this occured when it traded above $43. Thursday it closed at $48.26.

Sometimes it almost looks like I do this for a living and I know what I am doing :). In any event, I will be explaining the rational behind all of these trades to members of our Live Trading Room next week. Please feel free to join us. Toni is going to be gone all week, so it will just be me. The inmates are running the asylum. I have to run the kids to the airport at 4am, this is going to screw up my sleep schedual so if I am in today (Friday) it will be late.

Brandon
 
On Friday the NASDAQ Composite Index lost 8.63 points to close at 2007.79. The S&P500 lost 0.56 points, closing at 1189.65. Friday was quadruple witching which occurs when stock, futures, index and stock futures options close on the same day. This occurs four times per year and accounted for the large volume surge. On the NASDAQ 2.22 billion shares changed hands, while on the NYSE volume was 1.95 billion shares. This was an increase of 27% and 24% respectively. Advancers trailed decliners on both exchanges, and we saw 133 new 52 week highs and 168 new 52 week lows.

On the surface the above stats do not look good, and frankly this market looks to have one foot in the grave and the other on a banana peel. However, in the short term, possibly the very short term, I suspect we see a bounce. I say this because the market is very oversold at this point and Friday started off looking like it was going to be more of the same. However by the end of the day the markets had managed to rebound decently, led by what I feel is one of the most important sectors, the financial's. I do not feel that this bounce is anything playable on the long side in a broad sense, even though there are a few individual stocks and groups I like which I will mention below. The most important thing is going to be to watch the volume as the market does rest after this sharp move down, and to see how this rest occurs. We have recently been seeing a very ugly volume pattern, strong volume on down days and lack luster volume on up days. Should this continue this bounce should provide some very nice intermediate to long term short entries. Again though at this particular moment everything should be treated as a short term trade.

I know that over the last several weeks a number of people have spent a great deal of time talking about how hard it is to make money in "this market" and that there are no opportunities. I always have to agree with this sentiment, and its usually expressed by losers. First of all it is important that we all realize being in cash is a position. It is saying that the opportunity offered by being flat is greater than that of being invested. Additionally periods of general market weakness offer you as an intermediate to short term trader the VERY BEST opportunities to isolate leaders. There will be certain stocks and groups of stocks that no matter what the market throws their way will not go down. They are much easier to spot during periods of weakness. They also tend to use these periods to rest, and thus you are able to buy them later at a point when they are not so extended.

As I scanned over the weekend there were not that many stocks that stood out, but a few did. Stocks such as JBL, ADBE, ELOS and WAG responded very well to "good" news. Each of them is extended at this particular point, so I would not buy them right now. However, I am going to continue to watch them to see what happens during their resting period. If they base well I will be buying them on breakouts. Other stocks that have attractive charts and good fundamentals include MINI, PII, UTX, UNM, CMCSA, BA, UNM, CNTY and LEH. I am particularly interested in LEH since the financial group rebounded so well.

Finally I thank you all for your patience as this once regular column became not so regular over the last several months. I have been dealing with some personal health issues related to a side effect from a medication I had been taking for my migraines. For a long time it was making me feel ill and sorry for myself. This column though will now resume on a regular basis again. Also, the kids, Toni and I had a great time at Disney World. It has not rained in Florida for the last three or four months, but we had buckets of it Wednesday and Thursday. I know that for most people that may not sound great, but it was warm and no one else came out, so instead of waiting 2 hours for the best rides we waited five minutes and they let us go on them as many times as we wanted. I will send out some pictures of our trip to Disney this week in the Newsletter, but since it is currently 3:30 AM I'm not feeling all that motivated to post them right now.

Have a great week.
 
You must log in or register to reply here.
Back
Top