Monday traded down dramatically on concerns over the 700 billion government bailout. Oil rocketed up and the dollar was weaker to culminate in a huge 373 point DOW loss. Tuesday highlighted Paulson and Bernanke being grilled on the hill by the Senate Banking Committee. While they were verbally sparring , the Dow continued to drop another 161 points. Wednesday saw the Dow register a smaller loss of 29 points as existing home sales dropped. Buffet stepped up to the plate and will be investing five billion in GS. Thursday, the market thought the bailout was a “done deal” after Bush’s Wednesday night speech. The Dow finished up 196 points even though the index pulled well off its high for the day. Friday, WAMU went the way of failed banks and was acquired by JP Morgan. GDP was adjusted down by .5%, RIMM tanked on poor guidance and the bailout was walking a tightrope. Lawmakers will be working this weekend to try and fashion a bill that is acceptable to all. The Dow closed up 121 points on a late day run. The week over week numbers were down. Dow down 245, SPX down 42 and the COMPQ down 90.
Archive for September, 2008
Little John was proud of his new found knowledge on evaluating companies. L. J. had narrowed his search to ATT ( About to Tank) Industries. ATT had a marvelous balance sheet, great liquidity no debt, a P/E ratio of 10 which compared very favorably to its industry. ATT makes widgets and has five additional products in the pipeline. The ROE is impressive, a good indication that management is doing their job. Earnings per share are growing quarter over quarter for the last three years and forward guidance is awesome. L. J. was about ready to pull the trigger this can’t miss opportunity. Price multiples would suggest that ATT should be trading for at least $35 a share. So it was a bargain at $21. The charts indicate a pull back to strong support. No place to go but up and away!!
L.J. had $40,000 in the till, so he was all in on this one. He pushed the button and was quickly the proud owner of 1900 shares of ATT. Within a week, the stock was up to $25.50 and L.J. was in tall cotton. All of Little John’s due diligence paid off. It was reward time for L.J. He’d been looking into upgrading his wardrobe. So , Friday afternoon after market close he headed for the local clothier “Men of the Forest” and bought ten new tunics and then over to “Bull’s Eye Archery” and purchased a custom long bow and quiver filled with handcrafted arrows designed and crafted by “Straight Arrow” the arrow man. Little John was in a zone. Why not? He earned his success. He worked hard for it. The shopping spree set him back about $6000. Of course, it was party time that weekend and L.J. bought rounds at the local brew pub for the Merry Band of Traders. Sunday he was hung over from his night of fun but happily basking in the glory of his stock market triumph. Monday at market open ATT continued bullying its way up on strong volume to 26. A news flash on CNBC, the CFO of ATT has been indicted for embezzling millions of dollars and the stock plummeted to 17. John was away from his computer, so he called his broker on the cell and was put on hold. Finally when someone picked up, he learned that the stock had been halted. L.J. couldn’t believe it. He wasn’t able to get out and he was down big. Where would it open when trading resumed? The market closed for the day and L.J. was beside himself. What now?? There wasn’t much sleep that night. Tuesday morning ATT resumed trading at 15.50. He couldn’t sell it there, that’s too much to lose besides it’s a great company. It’ll rebound. He decided to stick it out. ATT traded down to 13.80 and finally the pain was too much to endure and L.J. had to close his position. The stock had lost 1/3rd of its value and Little John had about $6500 on his credit card from his spending spree.
There are several lessons here but we’re going to talk about Diversification. It’s the only free lunch in the stock market. You need to etch this in stone. “Never, Ever plunge into one position with all of your capital no matter how attractive the opportunity may seem.” ALWAYS DIVERSIFY!! So what is diversification? In its simplest terms, it means not placing all of your eggs in one basket. The size of your account will dictate the number of positions that you should trade. It’s my opinion that the minimum numbers of positions necessary to achieve diversification is five. Obviously, the more positions you have, the more diversification you will have. From a practical standpoint, you must decide how many stocks you can feasibly monitor. After a certain point, it may make sense just trading an index to capture diversification. When trading indexes or ETFs you should also seek diversification. If you can handle the due diligence and maintenance of the portfolio, you may want to consider 10-15 positions.
When selecting stocks, I suggest you choose stocks from different sectors and industries. You also need to analyze the impact each position may have on the other stocks in your portfolio. In a general downturn as we are now experiencing, the entire market will suffer. There are some so called “safe haven” stocks that can weather the storm better than others. Under normal market conditions, you should select stocks that are compartmentalized form each of the other positions. Being diversified in your stock portfolio is akin to owning an apartment building (your portfolio) that has several units (each stock position) but with firewalls between each (diversification) so that if one caught fire, it is unlikely for the whole building to go up in flames. Diversification should give you overall market exposure but with firewalls between your stocks. The result is that your portfolio is much safer. Unfortunately, there could be an earthquake and your entire building could be destroyed, but that is part of investing. You can buy insurance on your building for occurrences like earthquakes and I can show you how you can do the same for your stock portfolio ( another discussion for another time). Money management is crucial to your success and we’ll talk about that next week. One additional thought. Never spend unrealized gains.
By the way, Little John tried to return all the stuff he bought, but the merchants wouldn’t allow it. All sales are final. So, he wanted me to tell you that he is having a garage sale next week. His size is triple XL but unfortunately, there isn’t much of a demand for that size. It’s all about supply and demand. See you next week Robin
Tags: Add new tag, diversification, diversify, portfolio management, risk, Robin Hood
We are moving into a narrower trading range after spending all of the week of 9/15-19 with daily triple digit up and down moves. This is an indication that more indecision is moving into the market. The INDU is forming a symmetrical triangle chart pattern which usually is a precursor for an explosive move either up or down. It’s apparent that the market is waiting on the bailout bill. If the market views the final bill as positive news, we will pop higher. There is relatively strong resistance and still fundamentally significant headwinds, so IMHO, if we have a move to the upside, I need to be convinced that it has sustainability. The indication of a sustainable up move will be investor participation as reflected by increased volume especially at areas of resistance. Look for the swing low of 10459 which occured on 9/18 to provide some support. Resistance at 11150, 1135 and 11560.
See the INDU comments. Support at 1200 and the swing low of 1133 which occurred on 9/18. Fairly strong resistance at 1252, 1278 and 1319.
I am a little more bullish on the NASDAQ. There was an impressive (almost) bullish engulfing candlestick pattern that formed Friday. Support at the swing low of 2070 on 9/18. Resistance at 2270, 2315 and 2320. There was a “Falling Window” (gap down) that occured on 9/4 which provides strong resistance. This index like the others is waiting for news on the bailout. Stay tuned, it could be interesting.
ECONOMIC REPORTS
MONDAY 9/29
Personal Income, Personal Spending
TUESDA Y 9/30
Chicago PMI, Consumer Confidence
WEDNESDAY 10/1
Auto Sales, Truck Sales, ADP Employment, Construction Spending, ISM Index, Crude Inventories
THURSDAY 10/2
Initial Claims, Factory Orders
FRIDAY 10/3
Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, ISM Services
EARNINGS OF NOTE
MONDAY 9/29
CALM, CC, SCS, WAG
TUESDAY 9/30
PBC
WEDNESDAY 10/1
MOS
THURSDAY 10/2
MAR
FRIDAY 10/3
FDO
COMMENTARY
I’m not making excuses for those that got us into this mess. There is no question that greed, lack of oversight and just plain chicanery has contributed to the seizing up of our credit markets. As a tax payer, I don’t relish the thought of paying off this huge debt. However, IMHO, Capitol Hill needs to come together and “GET ER DONE.!” We have a crisis of confidence. If we don’t do something to salvage this mess, we will be looking at the inability to acquire loans for the massive supply of homes currently weighing down our economy. At last check from the National Association of Realtors, we have a ten month plus supply of homes in inventory. It’s going to take a while to work through that and without the ability to secure financing it’s not going to happen. Small Business is the heart of the American economy and accounts for a lion’s share of the operating businesses in our country. These folks will no longer be able to access a line of credit to run their enterprise and will quickly experience cash flow issues. Lack of liquidity will force these hard working entrepreneurs out of business. The result of those business failures will mean loss of jobs and spending which in turn will affect the entire economy. We haven’t even talked about the next iceberg in the water, consumer credit, car loans and commercial real estate and the inability to finance your children’s education.
Those who are responsible for this debacle need to be held responsible. After we sort this all out we need to pinpoint the major players and let them spend some time in the government hotel (jail) and set up an automatic funds transfer from their bank accout to the taxpayer. This can never be allowed to happen again. I am a free market capitalist and it appears to me that we are moving in another direction. I feel like I’m on the Titanic and everyone is screaming and running around placing blame. Who was supposed to be on watch? How did we hit that iceberg? All the while the boat is going down. Instead of panicking, maybe we ought to see if we can find space on a life boat and live to fight another day. When we come through this and we will, we need to build an unsinkable boat with a strong captain and a crew that stays on watch. In the meantime, build your own life boat and take control of your own finances. See you next week. Robin
IT’S OK TO STAND ASIDE
Many traders feel that they must be in the market all of the time. Wrong! There are times when it is prudent to “Stand Aside”. This happens to be one of those times. The wild swings we have had in the markets are indicative of uncertainty. Uncertain markets are prone to large moves up or down on news. Case in point; at this writing, there is news that the government is going to step in with a repository RTC type plan to save failing banks. Nobody at this time knows the details but the news of the plan drove the DOW up 410 points in the last few hours of the trading day. Certainly, money can be made on such swings but the lack of orderliness can be unsettling and trading in such an environment can be akin to playing roulette in Las Vegas. Trading during massive moves appeals to many traders, which is fine. However, I have known many to get crushed when trading those kinds of markets. I recently closed some short positions for a nice gain at what appears to me to be a short term bottom and until the market begins to stabilize with narrower range sessions, I will “Stand Aside” or at minimum enter only hedged positions. It really is ok to “Stand Aside”. It doesn’t mean you are a “Trading Wimp”. It means you are smart. Who cares anyway, your trading patterns are your business. I prefer to catch the “Belly of the Move”. You can excel in trading by being a trend follower. You don’t have to pinpoint every top or bottom. Although, as you progress in your trading, some of you will be able to develop your skill and ability to see turns in the market and that is a bonus. Please don’t play that game until you are ready or you will get hurt.
Remember, be true to your trading plan. Do not trade with emotion. Understand the importance of position sizing and diversification. (Position sizing and money management will be a future article so stay tuned.) Finally, I heard an anecdote that was shared on CNBC this week by Dennis Gartman of “The Gartman Newsletter”. He spoke of when he was a floor trader and experiencing a market similar to what we are going through now. While trading in the pit, he turned to a colleague and said, “Are you nervous?” His friend responded “Yeah! and I am flat!” (Flat means no positions.) If you know when to “Stand Aside” and be “Flat”, you will more than likely enhance your trading results and be able to sleep at night.
Well, I’ve overstayed my welcome and I’ve got to go. I am attending a seminar on Corporate Accountability and Ethics, so it’s back to Sherwood for me. See you next week. Robin
Tags: Add new tag, market uncertainty, position sizing, trading plan, uncertainty, volatility
In a word,“Historic”. What a wild ride this has been, beginning with LEH filing bankruptcy on Monday and Bank of America acquiring MER. The market reacted as one would expect, with a 504 point decline in the DOW. Tuesday, the market staged a rally on the news of the federal government bailing out insurance giant AIG to the tune of 85 Billion. The FOMC decided to stay steady at 2% with the fed funds rate and the DOW regained 141 points. Wednesday, surprised many of us who speculated that Tuesday was the capitulation day we have all been waiting for. Instead, the DOW closed down 449 points on poor housing starts and continuing uncertainty in the Financials. Thursday welcomed the infusion of 180 Billion into the global markets by the Central Banks. The Philly Fund Index was positive and there were rumors of further intervention to heal the credit markets driving the DOW up 410 points. Friday closed up 368 points on the DOW primarily due to the short selling ban. The volatility and volume was unprecedented with every trading day in the DOW posting either triple digit gains or declines. The DOW ended the week down by 34 point the SPX was up 3 and the NDX down by 22.
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