Chuggah Chuggah CHOOO CHOOOO!!! and keep the train moving! What the hell am I talking about? I'm talking about moving on. As you may recall at the start of the year I was extremely bullish on True Relgion Apparel, a maker of high end (ie Overpriced) denim goods that it sells at its own stores and through high end retailers. The company's products are very powerful and the retailers I have talked to said they can not get enough of True Religions products in their stores. This has led to powerful growth in TRLG's earnings and sales as well as some nice appriciation on the stock itself. So, at the beginning of the year I was very hot on this stock and we bought a good number of shares. I thought it had the potential to go up 100% or more over the course of the year, however the price action is suggesting otherwise. In the end, price is king, everything else is secondary at best. Lets look at another stock that I liked a lot, IBM. This is one that I was very hot on shorting due to a nice chart and what I feel is some aggressive accounting which is likely to come back to bite them in the butt. I talked about IBM a number of times and was really looking forward to having a setup so I could put a position on in the beamer, which I antticipated making a lot of money on. In both of these cases I had invested a lot of time and energy into stocks that I really liked, in both cases nothing came of that investment. This can be very disapointing, but it's just part of the game. The longer you trade, the more times its going to happen to you - and each time you must do the same thing. Shrug your shoulders and keep moving. You do not buy stocks with the words "through sickness and health, good times and bad, till death do us part", instead it is a relationship of convenience, nothing more. No stock is worth taking home to mom, and 99% of them are not suitable for life long relationships. They will eventually break your heart unless you are willing to move on quickly if needed.
Moving onto the market. What can I say? I must say that this has been a difficult year thus far. We have been in a rather wide range and the market is holding it pretty well. Unfortunatly for me, I am a breakout trader, so this type of action does not mesh well with what I do. Fortunatly I have taken advantage of the opportunities the market has given me and taken action quickly when things have not worked out. The year started off with a lot of promise, I was up 10% in the two and a half weeks of the year. Since then though the market has gotten rather choppy and difficult to trade, thus I have not been as aggressive. If I had continued to be aggressive and trade as though the world was great and there was nothing to worry about in the world I'd have likely given back all of my gains and worked my way into a loss, but I have not. I have been very bored pretty often, but I am currently up 18% on my client accounts for the quarter during a period when most of my fellow traders and money managers are down or flat. I have only had four days so far this year that I lost money. Why am I bringing this all up? Well cos I like to break my arm patting myself on the back of course! Well actually that and because I want you to know there are still money making opportunities out there, nice ones too. Since I am managing other peoples money I can not tollerate the drawdowns, but there have still been great trades out there that have produced gains. No matter how bad the market is, there are always pockets out there that you can trade.
More on the market then! We continue to be in a range with the S&P500 and the Nasdaq Composite and Nasdaq100. However, the Dow has broken out now to new 5 year highs, while the Russell 2000 (small caps) and the S&P400 (Midcaps) are at new all time highs. Ordinarily this would have me dancing naked in the streets- however right now I just cant get myself real excited about the market. It still feels very rangy to me, but setups are starting to work. There for awhile nothing was working long or short. Now I am finding that things are working on both sides of the market, this is good. My list is my most important indicator. What do I mean by this? Well each night I scan and on the left side of my sheet of paper I write down the stocks that have technical setups to go long, and on the right side shorts. When the market is healthy there are a lot of stocks on the left side of the page and there is a lot of follow up with them. I want to just briefly though draw your attention to a storm cloud on the horizan. That storm cloud is JAPAN. Since the end of World War 2 Japan has been in a giant easing cycle on interest rates, so much so that real rates have been negative in Japan for some time. That means that you essentially are paid to borrow money from Japanese banks. The low rate party though is about to end. We are now in a world wide interest rate tightening cycle, and for the first time in modern economic history the Bank of Japan is being caught up in it too, if you look at a chart of their short term vs long term rates, they are actually on a collision course to invert! Our own bond rates are also rising and are uncomfortably close to breaking a multi year downtrend and going above 5%. If we go above 5% on rates in the US rates will go to 7.5% to 8.5% eventually, there is no doubt about it in my mind. There is also no doubt in my mind that once Japanese rates start to rise it is going to hurt, and there is a chance (Id put the odds at 20%) of it triggering a global crisis such as we saw in 1987 with the crash and then again in 1998 with the Asian Currencies, Russian and Emerging Markets Bonds and that whole bit. This could be AT LEAST that bad. And the big problem is that right now every one is leaning in one direction, and that direction is LONG. Not only are they all long, they have good reason to be long. I think global equities are very much like Oil stocks were right after Hurricane Katrina, which is scary to me. What do I mean by this? After Hurricane Katrina nearly everyone got very bullish on Oil stocks and bought them, and there were many good reason to do it. When oil stocks finally came down it was like the rug got pulled out from underneath of people and the major oil related indexes crashed 10% to 15% in two or three days. Some of the weaker individual names lost 30% to 50% in under one week. This is the kind of risk we currently are exposed too with equities. Right now I don't think there is is a lot of action to take around this because its not something that is currently unfolding, and it might not ever. However, its something to keep a close eye on because if it comes to pass its going to unleash a Hurricane Katrina on the global equities market. The only thing I see currently related to this is the TLT, which I am currently short and will be looking to add additional short exposure to if it breaks down further.
