WHAT TO DO IN THE MARKET NOW? KEEP IT SIMPLE STUPID
You have to make it simple for yourself here. It is the only way to get past this period unscathed. Yes, unscathed. You cannot make money in every single market environment. There hasn't been a man on Earth who has been able to accomplish this feat over a long period of time. Those that have tried typically end up being talked about in the past tense with respect to their financial careers. Get out of difficult periods in one piece and you are 10 steps ahead of the competition. How do I plan on making it simple for myself here? I discussed earlier this week how I have developed ways of dealing with weaknesses I have in trading and investing. I have created mechanical methods to take ME out of the equation completely. This way I will not, under any circumstance, allow the market to do exactly what it is trying to do at such junctures within the greater trend: Confuse, dismay and create a smoke screen that causes me to begin giving away my gains for the year as if I was an bikini manufacturer in Afghanistan. My short-term (3-4 weeks) trend indicator turned down on Tuesday for the first time since November. This is part of the systematic portion of my investing that takes over during difficult periods. I have learned not to go against it. Seasonals, technicals and fundamentals are all screaming CHOP here. Chop is meant to throw you off course. It is the equivalent of throwing a well-seasoned, 8oz. steak in front a hungry guard dog. No matter how hard it tries to guard the fort from that point, the confusion of hunger will drive the dog to do its job much less effectively. You are much the same. No matter how smart you think are, choppy seas will have a profound effect on your psychology. A sideways range creates self-doubt, anxiety and worst of all over-analysis of the situation at hand. You begin to over-think. You begin to rely on the opinions of others. You begin to dwell on decisions you make or choose not to make. You begin looking at the market through a completely different lens than the one which made you money in the past. This is all by design to force you off balance so that you will take your eye of the ball, missing the big move that lies ahead. Every experienced trader has different ways of dealing such periods. The key word is experienced. You can always separate an experienced trader or investor from an amateur from observing how he or she deals with such periods. The...
GOOD YEARS ALL COME DOWN TO A FEW GREAT TRADES…THIS IS ONE OF THEM
The market requires you to be actor. You have to adjust to its nuances the same way a good actor adjusts to the demands of different directors and costars. You must be an aggressive, singular minded profit machine at times. And then manage to morph into a timid lizard sitting on a rock and running at the first shadow that appears from the distance. You can't always be a profit machine or you'll go bust. You can't always be a timid lizard or you'll never make money. You can't always be anything or you are not adjusting. Get it? I've adjusted thus far in Q2 by pulling back from my aggressive posture that marked most of Q1. I wrote back then about a potential intermediate term top occurring in the April or May. We are now in April and the market is beginning to act like it wants to move into sideways mode is here. Sideways mode has always been a challenging area for me as a trader/investor. I have tried on numerous occasions over the years to stick through sideways markets, despite foreseeing their arrival. Never once have I found the decision to slosh through the mud that is a sideways market rewarding. Sideways markets have the tendency to turn stock picking into mush. You know where I excel? Stock picking. That is my scrambled eggs and chocolate milk. When the market turns my specialty into random acts of volatility based on absolutely nothing, it makes my methodology about as effective as throwing darts. Backing away is the only choice. I'm not looking to get into 100% cash. I am, however, looking for opportunities to get more liquid. Good years all come down to a few great trades. Preserving your gains during an unpredictable Q2 will be one of those great trades in 2012. Tread...
QUESTION OF THE DAY: ARE YOU VIEWING THE MARKET OUT OF THE WINDSHIELD OF AN OLD DATSUN OR A BRAND NEW ASTON MARTIN?
I know my strengths and I know weaknesses. My greatest strength: I am a very good stock picker during bull runs. I have put together triple digit percentage years many times in the past based on a combination of stock picking talent and advantageous market conditions. I doubled the return of the nearest hedge fund in the 2003-2004 based on stock picking alone. Pay no mind that it was Peter Thiel that was in second place to me that year. Just several months later he invested in Facebook while I was in the process of discovering my greatest weakness for the upteenth time. My greatest weakness: I am a terrible seller. Every stock I buy I believe has the potential to go to $1000 per share. I want to hang on in order to extract every single dollar of profit. I am greedy in this respect and I know it. I've developed a way to deal with my weakness while capitalizing on my strengths to the best of my ability. The only means of dealing with being a terrible seller or profit taker, if you will, is to create a mechanical system that takes you - the human greed machine - out of the game. I have done this by creating three trend indicators that slowly pull me into cash whenever the market is turning. My opinion of the markets be damned. These trend indicators take precedent over all else. When they begin turning...I take profits. It is that simple. My short-term trend indicator turned firmly to the downside today. That is the bad news. The good news is that the intermediate and long term trend indicators are nowhere near turning yet. However, the severity with which the short-term trend indicator plummeted, particularly today, is disturbing. Fortunately, over the past couple of weeks I have been taking profits on the names I bought in January and February. I sold PRGS, SPRT in March. I sold GSIG on Monday. The only original holding from Q1 is PTGI. I continue to hold SYNC and CIS that I have purchased over the past couple of weeks. I am also holding a very small position (less than 2% of portfolio) in DPTRQ. I have been battling myself in this profession long enough to know when things are getting foggy for me and I should simply back away. There are moments in the market when the picture is so crystal clear for me and the trading so fluid that I can't help but win. It is like looking out the window of a brand new vehicle. The smell, look and feel of the road...
BEING WILDLY BULLISH ISN’T KEEPING ME FROM HAVING THE FOLLOWING CONCERNS
On January 14th of this year, prior to starting my equity buying bonanza, I posted the following "Surprise: Call Buyers Returning To The Market May Not Be As Bearish As Advertised." This was one of many studies that I pursued during January that led me to have the conviction to buy into individual equity names for the first time in months. In addition, this was one of the many studies I pursued during January that pointed to an April-May intermediate-term top for the markets. The primary motivation behind my call for an April-May top was rooted in the way I interpret various sentiment measures. In my studies, it is not the absolute levels of sentiment indicators that determine reliable buy or sell levels. It is, in fact, the way in which the sentiment measures (put/call ratio being the primary) get to their final destination that is of importance. Meaning the velocity and time it takes the put/call ratio, as one example, to get to what is considered a contrarian based buy or sell area is the most important consideration of all. The theory behind this is very simple. The longer it takes a group of investors to embrace one side of the market, the more sure you can be that the prevailing sentiment of that moment has fully engulfed the heart and soul of market participants. This leads to extended runs in the market that defy any logical expectation for price targets and the like. We have seen that recently as the market runup in 2012 has been nothing short of amazing. This is not because fundamentals are flying through the roof, with economic utopia knocking on the door of both emerging and developed economies. No, it is rather a function of the deeply-ingrained bearish mindset that prevailed during the second half of 2011 and the extent that the market has to go through to recalibrate the hearts and minds of investors. I was reminded of my call for an April-May top because of the market action this week. It was the worst week for the S&P for all of 2012, thus far. We have now seen two red weeks out of three, lending some credibility to an interruption in the fields of green that have been prevalent during 2012. On Friday the jobs report came in weaker than expected. At last check Dow futures were off some 130 points on Friday. I am sure that we will see a triple digit down open on Monday that gaps us down right through the all important generational trajectory that was expected to be a support point for the markets. It...
SORRY BEARS: THE ONE GROUP OF INVESTORS THAT SIGNAL MARKET TOPS ARE NOWHERE TO BE FOUND
More and more traders seem enamored with the idea of the market topping in spite of the massive rally and generous market conditions. In order to entertain their obsession I am going to remind everyone of Phase 4 Investor theory. It is my own invention...and it works. Case in point: On February 17th, 2011 I wrote the following article for TheStreet, "Beware the Phase 4 Investor Stampede." In the article I mentioned a certain group of investors who are reliably incorrect in their market assessments on a frequent basis. They pile into the same stocks. They exhibit sloppy behavior in their buying causing expansions in both volume and the trading ranges. They signify impending tops in the market with such great accuracy that they deserve a title of their own: Phase 4 Investors. Phase 4 Investors like to pile into Phase 4 stocks. Phase 4 stocks are led by names like FNSR, JDSU and CIEN. The same names that the most speculative investors were trading 12 years ago are still bringing in the same types. To quote the article from February of 2011: It's not just the fact that they are going up; it's the manner with which they are going up that should of the greatest concern. Phase 4 stocks tend to attract Phase 4 investors, meaning sloppy, run-with-the-herd type investors who simply pile in. The price action and volume seems to be confirming that Phase 4 investors are moving into Phase 4 stocks and throwing everything they have behind them. Get cautious, get some cash and get ready. Phase 4 bulls are going to be having a change of vocabulary in the coming months, and the path to get there is never pretty. The article called the top in these names to the week, with the exception of CIEN. Six months later FNSR was down 65% from that point. JDSU was down 65% from that point. And CIEN was off 60%. The Nasdaq 100, in the meantime, had fallen 15% from the time Phase 4 Investors began french kissing their favorite stocks in public. Phase 4 Investors proved, yet again, to be an invaluable tool towards accurately assessing sentiment at that moment. So it proves worthwhile to check on them from time to time to see where they stand. Here are the charts of the Phase 4 names with commentary provided: click chart to enlarge Phase 4 Investor theory leaves us with one very solid takeaway: The most speculative of investors have yet to return to the market pushing up their favorite stocks. With that said, sentiment may not be as frothy as you are being led to believe...
IF YOU HAD A BRILLIANT FIRST QUARTER SHUT UP ABOUT IT ALREADY
The first quarter of 2012 was like a Grateful Dead concert if you are into dropping acid and experimenting with mushrooms. There were plenty of opportunities available to get what you wanted. The results were immediate. And everybody walked away with great experiences to talk about for years to come. Here is how it went for my individual stock picking during the first quarter: -- PRGS position initiated on 1/17 (position liquidated on 3/28) +26% -- PTGI initiated on 1/17 - 1/18 (still holding) +28% -- GSIG initiated on 1/17-1/18 (still holding) +10% -- SPRT position initiated on 1/29 (position liquidated on 3/29) +20% -- DPTRQ position initiated on 3/22 (still holding) +34% -- CIS initiated on 3/26 (still holding) +15% -- SYNC initiated on 3/29 (still holding) +6% I'd love to talk about how my in-depth analysis led to these opportunities that leave me in rarefied air that cannot be matched by mere mortals that I laugh at while petting a striped cat from my castle in the sky. But that would be bullshit. That would be giving myself more credit than I deserve. That would be playing the game that so many others with a keyboard and an ego like to play. This was the best first quarter in 14 years for the US equity markets. That means that the environment was extremely accommodating and forgiving to anyone who decided not to get in his or her own way. The more aggressive your strategy, the more favorable your returns. That is as long as, again, you didn't get in your way. And that was my genius in the first quarter. It wasn't my stock picking. Not even close. It was the fact that I came into this year bearish after being bullish since the bottom on October 4th when I loaded the boat with leveraged ETFs. Right before Christmas, I believe it was, I began buying inverse leveraged ETFs planning for the market to tank into January and beyond. I had sentiment data that was corroborating with technical data and further confirmed by fundamental data telling me the market was on its way down. And now here is the real genius of my first quarter. Are you ready? This is going to blow you away. My genius and my secret to success in the first quarter was that I changed my mind. Yes, that was it. On January 10th, I took the losses on my inverse leveraged ETFs and I didn't look back. The market was telling me that I was wrong and I didn't argue with it. I could have stuck to my guns, dug my heals...
HERE IS THE BREAKDOWN ON WHY I PURCHASED SHARES OF SYNC TODAY
Took profits SYNC position on July 10th in the mid-14 range for a 100% plus profit. Bought shares of SYNC today in the low-7 range. A small starter position to begin. I will increase as the performance warrants. I mentioned SYNC briefly last week. I wouldn't call it an investment, as it doesn't possess the value/restructuring angle that I look for when I profile companies in "The Gun". I wouldn't call it a trade either, as I am willing to hold it for longer than a few weeks. I guess you can call it an "investitrade". It's a mix between an investment in a concept company that has some real potential and a trade in a company that is exhibiting a good deal of technical strength. Insiders were very active in buying the company after it IPO'd at the low end of its expected range recently. They were snapping up shares all the way up to $6 per share. They have been consistently growing revenues while achieving profitability in 2011. Their major source of revenue comes from advertising as a result of a partnership with Google and shared with the companies they count as their clientele. Major customers include Verizon, Toshiba and Charter. Given the fact that they are in the high profile and increasingly popular world of facilitating online video content they do make for an acquisition target for a company looking to expand their reach in this field over the coming years. Acquisition will come with growing their customer list, adding more sources of value for those customers and becoming an indispensable part of those companies online presence. As those initiatives take off, which I believe they will, so should the stock price. This comes from the S-1 filing for SYNC: Well-positioned in large and growing market . The market for Internet-delivered content has grown rapidly over the past several years. We have been delivering online solutions to customers since 2000 and, as of September 30, 2011, had over 45 customers, including some of the nation’s major high speed Internet service providers and one major consumer electronics manufacturer. We continue to make ongoing investments in our platform to expand its functionality. We believe we are one of the only companies that has a platform solution with the scale and functionality to allow the largest high-speed Internet service providers and consumer electronics manufacturers to develop or expand their online video or other online and content offerings. As a result, we believe that we are well-positioned to gain share as the market for these services continues to grow. Established customer base with predictable search and display advertising revenue . We have long-term...
CONSTANTLY ATTEMPTING TO AVOID RISK IN THE FINANCIAL MARKETS IS A FOOL’S GAME
I draw on experience quite a bit since I have been at this since the mid-90s. The only time I have been away from it is from 2006-2009 after I closed the doors to my hedge fund and decided to take my professional life in a completely different direction. The entire time I have been trading I have been public about it. By public I mean that I have a need to share my thoughts and analysis with whomever will listen. When I was working on an institutional trading desk I would share ideas with those around me. When I stopped working for Wall Street firms I would talk shop with friends who were also involved with the market. I started a blog in 1998 before blog was a word. I simply began typing ideas and posting trades. As a result of these experiences and interactions with all types of investors I have drawn a distinct picture of what each period was like. In the 90's you couldn't get a single trader to even consider hedging. It wasn't a consideration in the least bit at that time. There wasn't a need for it due to the favorable circumstances. If you wanted to avoid risk you went to cash and that was that. In the early 2000's the bullish euphoria was ongoing despite the bursting of the internet bubble. My website was quite popular then and I had a small army of paying members. I remember when I went from being the ultimate cheerleader of the bull market to raging, shit kicking bear I had a mutiny on my hands. This was during the second half of 2000. I was balls to the wall long at the March 2000 top in the Nasdaq after being up nearly 400% in 1999. I wasn't about to take my foot off the pedal. I paid for it by one of the steepest and fastest drawdowns I have ever experienced between March and June. When I recovered the drawdown during the summer months and began really looking into the market, I decided that the party was indeed over. The punch drunk bulls of the time were not ready to hear that song and I lost a good deal of followers, members and "friends". At that time, being bearish was considered being stupid, late and backwards thinking. Starting in late 2002 the ramifications of what had happened and the dim prospects of recovering what was lost began to sink in. 90% losses in some of the popular names were not uncommon. The thought of technology coming back was the last thing on the minds of...
THE GUN: SHARES OF CIS ARE A LOW RISK/HIGH REWARD OPPORTUNITY BASED ON THIS ANALYSIS
Chinese stocks were decimated and banished from the vocabulary of all speculative investors in 2011. The mere mention of Chinese companies trading on US exchanges is still associated with reverse mergers, frauds and lack of transparency. Entire research firms were built around dismantling Chinese stocks. Hedge fund managers that fell for some of the better known names, such as Sino Forest, were decimated. The ravaging that took place in these stocks last year has led to a dead period in many of these names in 2012. By dead period I mean a period of sideways trading with very low volume and a general disinterest by nearly every class of investor. These dead periods are a prerequisite to the better established names - call them survivors if you wish - carving out trading bottoms that allow for the companies to experience substantial upside gains. There is a baby with the bath water mentality that takes place during these types of blanket panics. It is only natural that there will be value to be had in companies that potentially have exponential upside once sanity returns. One such company with the potential for substantial gains in the future is CIS. One of the largest IT companies in China, they provide services to everything from the financial services sector to energy and media. I purchased shares of the company today with plans of holding for the long-term. Reasons are as follows: Fundamental picture Key Points: - Price per share was $16 exactly one year ago. Currently trading at an 80% discount at a little over $3 per share. - Share decline was exacerbated by numerous factors that were reinforced by the panic surrounding Chinese stocks in the second half of 2011. - One such factor was the forced liquidation of shares held by management that were pledged as collateral for margin loans. These forced liquidation represented nearly 10% of total outstanding shares. - Another factor was the departure of the CFO from the company during the second half of 2011. - Another factor was that the CIS used the same auditor as another embattled Chinese stock VIT. Vanceinfo's (VIT) auditor was issued a subpoena by the SEC during Q3 2011. - Following these events the company restructured their management team during Q4 2011. - The company is currently trading at less than 2 times NET CASH and less than 1 times NET LIQUIDATION VALUE. - The company balance sheet is as clean as a whistle. Debt free. - Top and bottom line took a hit during the second half of 2011 due to the turmoil within the company, as well as turbulence within...
HERE IS A VERY SIMPLE WAY TO JUDGE IF THE MARKET IS PREPARING TO TURN INTO A MONSTER OVER THE COMING WEEKS
There are many complicated and drawn out methods of market analysis that attempt to extract profits from either individual stocks or entire indices. A majority of these complicated methods of analysis are nothing more than tools that allow the originators of such work to internally justify an overpriced education and an abundance of hair gel. Perceived genius, while allowing you to have an abundance of swagger around your wife and kids, doesn't play well outside of your own home and often leads to painful lessons in humility shortly thereafter. With that said, I enjoy keeping things as simple as possible so that I can avoid having an inflated ego inside of my home and being constantly humbled "the old country way" outside of my home. It also tends to work better within the structure of the markets. The most simple methods of analysis are often the most profitable. During the coming week there will be a very simple means of judging whether the market is in the mood to unleash Easter bulls or Easter bears as we enter April. In the chart below, I have outlined a phenomenon that I like to describe as fields of green and red clouds. Whenever these fields of green are interrupted by red clouds then it is a sign to be vigilant of a change in character for the market. The chart below has all the details: click chart to...