QUICK THOUGHTS
I will go over this in detail in the weekly chart review to be released in a few hours. Looking through the price action this past week, it is such a grossly muddled picture across all averages and sectors that it is difficult to bullish, even with the action in futures (+1% on news of a debt resolution) currently. Investors should be cautious as we are entering a historically volatile period for the market. And I feel there will be more to the debt issue than meets the eye over the coming weeks. I would be highly cautious of a powerful move up tomorrow morning in the averages. I have moved to a 20% cash position. A relatively high number for me, as I am very bullish long-term. All of my current holdings have little to no correlation to the general market averages. I have shed whatever exposure I had to general market volatility last week. If you haven't already done so, go ahead and read the results of the test I ran on our current oversold condition when paired with excessive pessimism. It gives way to some dramatic volatility over short periods of time over the past few years. I don't think this time will be different. More details coming in the chart review...
10 STOCKS TO BUY SHOULD THE FIREBOMBING IN THE MARKETS CONTINUE
Human beings enjoy picking on others as long as it can be done with some measure of privacy. Internet forums of various sorts have proven this time and time again. How many times do you hear individuals being loving and understanding as opposed to angry and confrontational? The anonymity of the internet gives human beings the power to avoid their greatest fear. That is the fear of direct, face to face confrontation where real thoughts are expressed with fluidity. The financial markets can also serve as a venue for expressing our passion, as human beings, for anonymous aggression. This is after all a zero-sum game. For every dollar you make, somebody is on the other side of your trade losing a dollar. That Ferrari that your investment in Google bought you came at the expense of a guy who had his Ferrari repossessed by shorting Google. Joy is bought and misery is sold on a daily basis. Unbeknownst to market participants, the investments you are making can become like a shove in the chest to a guy who is taking the opposite side of your trade. If we were to personify the markets it is nothing more than a Battle Royale. Steel chairs, closed fists and mayhem on a minute by minute basis. There is no group I enjoy picking on more than short sellers. It's not because I am opposed to short selling. I have sold short stocks many times in the past and will continue to do so. What makes brawling with short sellers so appealing is the fact that a majority of them are traders at heart. When any stock is dominated by traders, the footprints that stock tends to leave become all the more transparent. You can sniff out its intentions well before it gets to its destination. They will sell short into failed patterns and pile on as the stock continues to move lower. Weak markets make them more aggressive. A bearish liquor of sorts is passed amongst them. They literally swarm like an army of angry ants on a hapless caterpillar that has stumbled into their den. And much like an army of ants will react to a group of kids pouring water on their den, short sellers will do the same once a stock reverses course and begins moving up. They literally scatter in each and every direction looking for cover. This causes explosive moves in a stock that would otherwise be impossible without the help of short sellers adding fuel to the upside by covering their positions. For this reason, the list of stocks that aggressive traders or investors should get...
6 STATS FROM THE PAST 6 YEARS THAT CREATE CRYSTAL CLARITY
This article also published on Forbes "What is obvious is obviously wrong" is one of my favorite market mantras. Just like any market mantra, it is subject to the conditions of the market at the time. There is no rule in the markets that hasn't at some point or another been broken for profit. What you consider to be absolute sin in trading or investing is another mans livelihood. And what you consider to be the system or method of thinking that bought you the house with a white picket fence is what has another man residing in his van down by the river. At any given moment, there are groups of traders who are scratching their heads, punching their computer monitors or vomiting on their desk because what they thought was a golden ticket turns out to be anything but. The markets, at some point or another, makes a mockery of every participants genius regardless of background, religion, color or creed. I bring this up because of an internal conflict that I faced as an investor during the past week. I have numerous points of data that are pointing to the fact that nearly everybody is as bearish as can be on the US markets due to continued gridlock in Washington. At the core of my soul as a speculator lies a belief that the market hates being predictable and despises participants who feel that they can profit from predictable situations. At the same time, I have been through my fair share of governmental conflict over the past 17 years trading and have seen countless examples of these conflicts rendering traditional indicators used to pick turning points in markets useless. I personally know of many professionals in the markets that were blown out of the water by the statistical outlier that the second half of 2008 became. Traditional indicators, mantras and even the most sophisticated quantitative studies fail miserably during such events. My analytical mind is telling me that pessimism is at an extreme according to various indicators that I track and the markets are very oversold, again according to various indicators that I track. My experienced mind is telling me that we may be entering a point over the next few weeks where the market will hurt those traders or investors who rely on such studies. It may be a moment in time where what is obvious is obviously right. Given the steel cage match ongoing between my analytical mind and experienced mind I decided to look at some simple indicators of investor sentiment. I paired the investor sentiment numbers with a couple of standard overbought/oversold indicators...
NFLX WANTS TO EAT MORE SHORTS. LOTS MORE.
A review of the price action in NFLX is below. Notes in the chart and all. The earnings numbers mean nothing. Companies like NFLX don't top on bad earnings numbers. You see, that would too easy. It would be the equivalent of the market giving you a big hug, followed by a bag of cash. The market doesn't give out hugs. It is a miserly old scrooge that wants you to fall into a deep crevasse, far from civilization so that rescue will be impossible. When NFLX tops, it will do so on fantastic earnings numbers, followed by an overwhelming feeling of conviction amongst longs in the stocks and outright fear, panic and depression amongst the shorts. It doesn't seem we are close to that point. I'm expecting new highs shortly. NFLX chart is below: click to...
ANOTHER SIMPLE RULE THAT WILL HELP YOU CULTIVATE VOICES IN YOUR HEAD
There are simple, niche rules that I like to use in an attempt to understand the illogical, treacherous nature of the financial markets. One of the many niche rules I have is that of a dodged worst case scenario. What do I mean by "dodged worst case scenario"? Coming into trading on Monday I thought that the odds heavily favored the bears being able to seize control of the markets early and not allowing the bulls a chance to resurface. I wasn't expecting a devastating decline by any means. However, I also wasn't expecting the bulls to be able to turn what should have been a bad day into a run of the mill down day. The bulls managed to dodge the worst case scenario by a wide margin. The bears failed to capitalize. What does that tell you as an investor? It is similar to a football team that recovers a fumble and then is unable to score 20 yards away from the end zone. Failing to capitalize on such an opportunity usually means that your football team has numerous weaknesses. Weaknesses that will prohibit that team from being able to make a run for the playoffs or even finish the season with a winning record. The bears failed to capitalize on an opportunity to take the markets down....again. The bulls showed that they have full control over the markets by salvaging what could have been a 1% plus down day in the major averages....again. Bulls win and bears lose....again. Here is another example of it from my weekly chart review three weeks ago: If you read the notes on the chart by the blue box, you can see how the bears failed to take advantage of a fumble by the bulls in May. From that point on the bulls just held onto control of the ball, burning down the clock, until they scored a devastatingly effective series of touchdowns with the recent move in gold. The bulls dodged the worst case scenario in GLD by a mile. The bears failed to capitalize. The result: a record move in gold prices to the upside over the past few weeks. The markets are always speaking to you. Every single day. You just have to quiet your voice (read: ego) and listen to the only voice that...
MY SINISTER GAMEPLAN FOR MONDAY
Here's the script: Tomorrow is most likely going to stink. I am seeing a lot of people who think the gap down (more than likely we'll see a gap down unless something transformational happens by the time I wake up tomorrow) should be bought. I don't think it should be bought. Neither do I think that it should be sold. There is an art of inaction that I feel a lot of traders need to learn. I can always tell the guys who have been doing this a long time from the guys who haven't by their need for action. Most individuals get into this line of business for action. And most individuals end up breaking themselves as a result of that very need. Those who learn to control and harness that need - finally realizing that taking no action actually is an action - are the ones who have taken one step closer to being able to realize success in the business of investing, speculation, whatever you choose to call it. I am not sure if we will turn around by mid-week. I will tell you mid-week. The market loves to tell you what it has in store for investors. Most participants enjoy the sound of their own voices a great deal, which doesn't allow them to listen to the voice that actually matters. My plan: same plan I would have had if the market was going to gap up tomorrow or open flat. I have a list of stocks I would like to get short should they behave a certain way. I also have a list of stocks I would like to get long should they behave a certain way. I will be watching those stocks, along with the ones I currently hold for any relevant clues as to their future plan of action. What I won't be doing is hastily selling out of positions. What I won't be doing is hastily shorting stock in an effort to make gains so I can feel better about myself as an investor. What I won't be doing is trying to pick a bottom that isn't there yet. I'll be waiting for the market to tell me what to do next, as it always...
6 MONTHLY CHARTS THAT WILL MAKE YOU THINK THE UNITED STATES IS FUNCTIONAL AGAIN
Whatever analysis I provide in our weekly chart review will be destroyed by Congress and their indecision with respect to the debt ceiling. There is simply too much going on to provide any of the weekly analysis that proves useful to readers. For that reason, I am zooming waaaaayyyyy out and looking at the monthly charts for a number of key issues. Gives some perspective about where we are headed long-term: click on charts to...
PHASE 4 INVESTORS ARE EMERGING FROM THEIR MAN CAVES
A good time to check in on what Phase 4 investors are up to. It has been a little more than a month since we last checked on this reliable group of investors. Unbeknownst to themselves, they have become one of the best market timing indicators out there from a contrarian perspective. On June 20th, I noticed that Phase 4 investors were selling at a furious pace, indicating an extraordinary amount of fear. That marked the exact bottom of the correction. The article from June 20th is here. They only recently (by recently I mean the past few days) have been stepping up and buying stocks. This is despite the fact that the Nasdaq 100 is at a decade plus high as of Friday's close. The ferocity with which the markets have gone up caught a lot of people off guard, Phase 4 investors included. They have been hesitating to buy. I think they are just beginning to feel comfortable. The lack of interest in these stocks is a good thing for anyone who is bullish on the markets. There are other Phase 4 names that I track also. While they haven't experienced the level of lackluster price action that FNSR, JDSU and CIEN have, there has also been some hesitancy amongst the most speculative groups of investors to do business again. They are fearful of the markets, which is exactly what you want them to be if you like your rallies to be fruitful in nature. I will be updating when and if anything changes with our Phase 4 buddies. If you are not familiar with Phase 4 investor theory, please read about it here. Here are the charts of FNSR, CIEN and JDSU with...
HOW YOUR SURVIVAL IS THE GREATEST ASSET YOU HAVE
The financial markets are one of the few places where every aspect of behavior, valuation, and price movement is broken down into quantifiable terms. There are ratios to measure valuations. There are ratios to measure the ratios of valuation. There are a myriad of statistics to measure how investors are feeling on a particular day, week or month. There are thousands of measures of price and even more measures to measure the various measures. It's a world dominated by numbers and the interpretation of the values that those numbers have on a minute by minute basis. There is a number that makes its home right in the center of this universe of values and ratios that is rarely discussed or even mentioned. In fact, for all the years I have been involved in finance I haven't heard it mentioned at all. This is despite the fact that this number may be the most important number of all. What is it? I call it the survival quotient. The fact that you are in the markets and freely available to speculate with the capital you have at hand has a value. The value comes in the form of opportunity. When your capital diminishes significantly, so does your survival quotient. The moment you cease speculation in the markets due to a disastrous loss, your survival quotient will go to zero. Meaning that all of the opportunity you had and the potential that came with it to generate X% over your lifetime disappears. The fact that such a value exists means that when you take a loss in your portfolio of a fixed dollar amount, then the value of taking that loss is a lot greater than it would seem on the surface because it boosts your survival quotient. Here are two examples: A. Trader John runs a portfolio of $50,000. He is a reasonably skilled trader who understand the basics of risk control and invests semi-aggressively. He can reasonably be expected to bring in 10% per annum when all of the volatility is averaged out over the long-term. The $50,000 compounded on an annual basis at 10% over 20 years will become roughly $340,000 at the end of the period. If Trader John was unable to control his risk, then not only would he lose a percentage of his current capital, he would also jeopardize the possibility of him getting to the $340,000 that could be his at the end of his 20 year trading period if he sticks to simple risk management rules. This simply means that Trader John cutting losses and having a defined risk management strategy raises his survival...