Archive for August, 2008

Well, we’re essentially through the earnings season and it was generally unimpressive. Oil continues to slide making investors ask ”is the commodity play done?” There is a lot of cash on the sideline looking for a home. IMHO the smart money is looking to dump their stock positions to the not so smart money crowd before the next leg down. The dumb money is seizing the apparent opportunity to go long and they don’t want to miss the train. I’m just not sure that they are on the right track. There are still just too many headwinds in the market. I’m not convinced that we’re ready to shake this bear market. We could continue with this bear market bounce, but I don’t believe it has much conviction. Non-directional strategies selling premium or hedged stock positions seems prudent at this time. I caution you not to be too anxious to jump “long” into this market until it proves itself. If you are a “technical trader” it is important to watch how the market reacts at key support and resistance areas. Make sure that your position has room to run. In other words, don’t go short just above strong support or long just below strong resistance. Be patient and do you due diligence. Robin

Remember “Boastful Bob”? Sure you do, he’s the chap that can never be wrong. It is simply not in his makeup. Bob suffers from an inflated ego. He’s got an exaggerated sense of his own importance. Bob is often wrong in the stock market but he will not validate his mistakes by admitting his errors. Bob takes oversized loses because he refuses to modify his outlook. Somehow, Bob’s identity and emotional worth are both tied up in “being right”. He will never let you know that he is a stock market loser because that would shatter the image that he has of himself. Bob loves to pontificate on his market expertise and he “talks a good game”. In the meantime, Bob is well on his way to the “Stock Market Poor House”.

What’s the fix for Bob!?

1) Bob needs to take some “humility pills”. These pills are hard to swallow. They are large and bitter. He needs to brutally evaluate his trading account and assess his decision making. Bob needs to come face to face with the diminishing value of his account. I would suspect that he is fooling himself into thinking that he is a profitable trader.

2) Next, Bob needs to embrace the fact that those who are successful in the market put their egos aside and are not afraid to admit when they are wrong. In fact, the hallmark of a successful trader is one who has the ability to recognize when a trade has gone wrong and the flexibility to modify the trade.

If Bob were driving his car on a steep, treacherous, winding mountain road with no guard rails, would he take the turns at a slower speed or would he test his ability to make the curves with no regard for the conditions? It’s hard to say. The answer may be closely correlated to his risk tolerance.

Let’s now add another factor; it’s winter and the roads are covered with ice. Driving under such conditions requires great skill and concentration. Most people would not even attempt to drive at that point unless it was absolutely unavoidable. However, Bob – having already chosen to navigate this icy road at this time – is not about to stop, or to adjust his speed. To do so would be to admit that he was wrong. Bob is now an accident waiting to happen. Bob needs to modify his behavior and decision making to realize that the road conditions have changed. He needs to either get off the road or at least put on some tire chains and slow down.

To be quite blunt, no one really cares about whether Bob is right or wrong, unless they are unfortunate enough to be riding with him. He does not impress anyone. Usually, the “Boastful Bob’s” of the world are the largest losers in the market and the canyons are littered with the wreckage of those that have careened off the steep mountain roads of the stock market. Come sit around the fireside with us in Sherwood (www.MarketTamer.com), we can help you find the right road and if conditions change, we can help you understand and apply modifications that will keep you on the road and out of trouble.

Speaking of driving, “Will Scarlett” one of my “Merry Band of Traders”, was supposed to give me a lift back to Sherwood and he’s late again. It looks like I’m going to have to thumb a ride back. I’ve had enough of relying upon others for my ride. Besides, “Will” drives much too fast for my taste anyway. Until next week. Robin

The week began on a negative note with inflation figures at multi- decade highs. Factory orders were strong and crude oil retraced. When the dust cleared, the major indexes were all down. The Market surged on Tuesday with a solid ISM report and oil faltering. However, the big news was the FOMC decision to hold rates. Midweek, the crude oil inventories confirmed further demand destruction with an increase, helping equities to finish higher. AIG and elevated Jobs Claims sent the market reeling on Thursday. The week ended with a plus 300 point day in the Dow despite a weak showing in the Productivity numbers and a 2^nd quarter loss by FNM. Oil hit $115.20 a barrel and contributed to the stout performance by the market.

The market had a stellar week even though at times the feeling was it didn’t know which way it wanted to go. The Dow Opened Monday morning at 11326 and closed Friday at 11734 for a 3.6% gain for the week. The SPX started at 1260 and ended at 1296 registering nearly a 3% move. Finally the NDX posted a whopping 5.6% gain for the week moving 103 points. As of Friday August 8^th, 449 companies in the S and P 500 had reported. 66% had bested estimates, 10% were in line and 24% had missed. ( Data source Thomson Reuters ) After the bell Friday, Berkshire Hathaway announced that profits for the 2^nd quarter were down 8% primarily due to Berkshire’s insurance holdings.

ECONOMIC REPORTS

MONDAY 8/11

None

TUESDAY 8/12

Trade Balance, Treasury Budget

WEDNESDAY 8/13

Export Prices, Import Prices, Retail Sales, Business Inventories, Crudes Inventories

THURSDAY 8/14

CPI, Initial Claims

FRIDAY 8/15

NY Empire State Index, Net Foreign Purchases, Capacity Utilization, Industrial Production, Michigan Sentiment

EARNINGS OF NOTE

MONDAY 8/11

CPST, FLR, LDK, LINTA, PBR, VAL

TUESDAY 8/12

AMAT, CREE, DNDN, JASO, NVDA, UBS

WEDNESDAY 8/13

CSIQ,CTRP, DE, ING, IOC, M

THURSDAY 8/14

BGG, KSS, NFLD, WMT

FRIDAY 8/15

ANF, JCP

COMMENTARY

It was certainly an interesting week in the stock market.  Oil continued its downward slide primarily due to demand destruction.  I guess $4.00 a gallon is the breaking point.  Earnings have not been particularly impressive.  Every day the discussion is “How much further do we have to go until the financials begin to stabilize.”  IMHO, until the housing market is under control, we will not be out of the woods.  I’m thinking that isn’t going to begin to see some relief until the fourth quarter of 2009 or even longer.  Say, don’t you think T. Boone has an interesting plan for energy independence.  I know there are those that are skeptical about his motives, but he has more money than he needs.  I just think he is willing to stand up and take a leadership role in this energy mess.  Nobody else is doing anything.  Until I hear a better plan, I’m for T. Boone.  Regarding the markets, I’m thinking we are experiencing a short Bear Market bounce and then we will resume our decline and test 1200 on the SPX.  I’ve been expecting a capitulation panic sell off but it has yet to come.  You’ll know it when and if it happens.  Massive sell off on huge volume.  That will be the cleansing process and then we can begin to move our way back up.  I just feel that the market still has a touch of the flu and until we really get rid of it we won’t be healthy.  Well, gotta go.  Let me hear from you.  Robin

 

Every week the “Merry Band of Traders” and I wander out of the safe and secluded confines of Sherwood to wreak a little havoc on the Sheriff of Nottingham. While we’re out here, I always take the opportunity to offer up my opinion on a variety of topics.

Last week, I suggested a few things that “Reckless Rhonda” could do to become a better trader. Today, I am continuing my commentary on trading personalities with a look at “Fearful Freddie”. Let’s do an “instant replay “on Freddie. He knows every metric known to man regarding any stock you want to talk about. He can discourse on the “hot sectors” and all of the stocks in the news. Freddie is encyclopedic in his knowledge; trouble is, he is a miserable trader. Freddie is afflicted with “analysis paralysis”. However, Freddie occasionally catches a winner but he gets so nervous when he is on the right side of the trade that he doesn’t want to go home a loser so he cuts his winners short. He simply does not give the trade time to work. That mindset completes the self fulfilling prophecy that he is a loser and as a result, he is a loser. Freddie knows a ton about fundamentals, technical analysis and trade strategies, he just can’t execute. However, he has been a tremendous resource to others; he just can’t seem to do it himself.

The two emotions that will decimate a trading career are Fear and Greed. Freddie is fear’s poster child. He epitomizes the fearful trader. So why is Freddie so fearful? He’s been burned before and has felt the sting of defeat. Why does he continue to trade? Well, he has all of this knowledge about the market and trading, so much so that his peers regularly seek him out for advice. It would be a shame to waste all of that. In the meantime, his trading account is shrinking steadily.

Fear emanates from not knowing what the future holds and being unsure of outcomes. If you are informed of the possible outcomes, then fear diminishes. One who is confident of possible outcomes will be trading with little or no stress. Unproductive emotions are disarmed and your path is well defined and known. Freddie is regularly “shaken out” of positions. Freddie regretfully witnessed many of his hasty and fearful exits turn into winning trades. The “smart money” crowd has preyed upon the likes of Freddie. Is there any hope for Freddie!? The answer is a resounding YES!

My prescription for Freddie is

1) Begin with prudent money management and strategy diversification.

2) Test the waters with small positions and defined risk trades.

A good example would be a high probability out-of-the-money credit spread like a bull put. This position incorporates selling a put comfortably away from price action and limiting risk by purchasing a put below the short put in the same expiration month. The trade should be placed in the current month or the next month out in order to take advantage of time-decay. The bull put has a defined reward (the credit) and a defined risk (the difference in the strike prices minus the credit). The bull put credit spread can make money if the stock goes up, remains neutral or even if it goes down a little. The position does not require constant vigilance. This is “end of the day” trading so Freddie does not have to watch the computer all day and get sick to his stomach on every tick of a one minute chart. Therefore, we have to a great degree removed directional trading from the picture. The trade can be structured with a high probability of success and with a defined exit.

Now Freddie is less fearful because we have removed the unknown. He knows his reward (the credit). He knows his risk as defined earlier and he knows his exit. The market defines his exit on options expiration day, the Saturday after the third Friday of the month. The trade can be very mechanical in its execution with very little left to discretion and emotion. However, what if the stock were to go dramatically bearish? OH NO!! Freddie is “pitching his cookies” What do we do now!! “The Merry Band of Traders” AKA www.MarketTamer.com, has a quiver full of arrows (adjustments) for Freddie so he can modify this trade or any trade for that matter to stay on the winning side of the market while eliminating Fear and Greed. We’re launching September 1^st, so drop by and pay us a visit.

Well, Lady Marian just pinged me on my Blackberry and she wants to grab a burger and fries, so I’ve got to go. They just opened a new “Red Robin” on the edge of Sherwood so we’re going to give it a go. “The Merry Band of Traders” and I will see you next week.

Robin