Monday, December 20, 2004

Market Letter

Jesse Livermore used to say that the market's job is to confuse asmany people as possible. That is exactly what the market has beendoing for the last few weeks. As expected, the market paused rightaround its highs from January of this year. Right now the battlebetween the bulls and the bears is keeping the market from makingany progress in either direction. We've had 3 nasty sell offs inthe last two weeks, which has raised a caution flag for me as far ashow much strength the market has right now to move higher. But acloser look at the leading stocks, and you'll quickly see, that theyhaven't budged. Most are calmly biding their time while the marketworks through its current congestion. The S&P which has beenleading since August has also continued to make new multi year highseven as the NASDAQ and DOW move sideways. Right now is a good timeto look through your stocks and weed out the laggards from yourportfolio to rebuild your ammo stockpile (cash or margin) so you'reready to buy new breakouts in your better performing stocks or newemerging leaders. It will also protect you if the market has runout of steam. As always, if we get a couple more of these nastysell offs in the next week or so, the current bull could be introuble and don't be afraid to go to cash until the market can getits footing.

The rest of this week and month should see a decrease in tradingactivity as Wall Street prepares for Christmas and New Years.There's not much as far as earnings until the second week ofJanuary, when earnings season will begin.

A reader asked about NAVR, and immediately tried to justify why itshould be bought right now because of fundamentals. Pastfundamental performance is meaningless if the stock is headinglower. The market only cares what the fundamentals will look like6 - 8 months from now. Estimates might look good, but the smartmoney knows better then to look at estimates available to thegeneral public. They have their own team of analyst doing theresearch, and that's the research you'll never see. All I see is astock with good fundamentals but poor technicals. The stock triedto breakout of a late stage consolidation (base), and quicklyfailed. The failure could be due to the market having difficultygoing higher. But, the stock sliced though it's 50 DMA on heavyvolume, and hasn't been able to recover back above it. At thispoint, I would at least take some profits off the table, and keep atight watch over the next few days and weeks on the stocks technicalaction. If you're not in it, then wait for it to setup again, rightnow the risk/reward isn't in your favor considering the technicalaction of the stock and market.

You might be thinking that the estimates and data available is useless. By themselves I would say yes. Combined with technicals,it allows you to get a clearer picture of what the smart moneyknows. Are the technicals always right? No. But our job is tominimize our risk, and maximize our gain. We will miss some of thebig runs, but we will also avoid some of the big sell offs, savingus allot of money in the end. Remember, 100% gain, can be wiped outby 50% loss. So it's easier to lose your money, than make it.

If you want a good example of how using only fundamentals would'vefailed big time, just look back to 2000 when the bubble burst.Every stock that was absolutely getting creamed, fundamentallylooked like they were going to be the next CSCO or MSFT. But, justlike clockwork, 6 - 8 months later most of those companies startedto report problems with their fundamental picture going forward.

Saturday, December 04, 2004

Market Letter

So much for the pause, the market blasted ahead this week onpowerful volume. Economic news was mostly good, except for thepayroll job numbers. The economy added jobs just not at the pacethe economists expected. Without the job news, the market could'vebeen up allot more, after Intel guided their earnings higher. Theguidance shouldn't have been a surprise, since the semi-sector wasalready strong, indicating better news ahead for the entire sector.Earlier in the week, a rapid drop in oil prices got the market in abuying mood. The market may pause again this week, as it approachesthe January highs.

A reader asked me about SIRI and AMX. SIRI is an interesting stock,but a highly speculative one. If you owned it before the suddenmove up, great, but to buy it now would be exposing yourself to toomuch risk. AMX is a great stock. It has it all, fundamentals andtechnicals, but the best time to have bought the stock was back inOctober. The stock will move with the market. It's ok to buy thestock here since it has paused, but I would be out quick if themarket starts to sell off hard or the stock gives you sell signals.Otherwise, it should be a good one as long the market is still inbull mode, may have power to $70 or above.

Monday, November 29, 2004

Market Letter

The market has paused since the 17th. Can we say dollar? Yes, thedollars depreciation has almost taken over for oil as a potentialmarket drag. But all bull markets like to climb a wall of worry, sothis is the new worry of the day. Don't worry; oil is still in theback of most people's mind.

All bull markets pause to consolidate and shake off the froth. Thisweek brings alot of big economic reports. GDP, oil inventories, andpayroll numbers. Any of these numbers can jolt the market one wayor another. If you've noticed the action in the market, you've seenthe market gap up and come in almost regularly on these reports,similar action to the bull run of last year. This type of actiontends to suppress the speculation in the market, and allow it tomove in a steady fashion. But, speculation can't be held backforever, and once it is unleashed, that final run is usually a signof a top to come. My point is, in a gap up opening, be careful ininitiating long positions that day, as they might quickly reverse onyou. Best times to buy, is a flat opening, or a down opening and areversal into positive territory.

Keep looking for breakouts as leading stocks continue to consolidatewell, as the market takes a breather. If my assumptions arecorrect, the market should continue to move higher through the firstquarter of next year. But keep an eye on it, conditions can changein as little as one week.

Wednesday, November 24, 2004

Market Update

Market continues to act well. We are in for abreather at some point, and Friday may have started it. But by the way the market reversed today it looks like it just wants to continue higher. I'm not one to argue with the market as long you have strict risk and profit management rules in place. Several mergers and big dividends are about to close and get distributed. This will add alot of liquidity to drive the markethigher. On top of the economy reaccelarating, andchristmas just around the corner, it looks like itwill be a merry christmas and a happy new year for themarkets. Leading stocks, continue to lead. Even asthe market has had some bouts with distribution days,they have held up nicely, and have corrected modestly.Earlier this year, the exact opposite occured,leading stocks came crashing back into bases as themarket got sold off. Hold onto your winners as longas they are not showing sign of weakness, and look fornew buys that maybe setting up for the next leg up.Oil could still pose a short term problem, but as soonas it stabilizes the market just discounts it andmoves higher. The rally that started in late Augustis still intact. We got rally confirmation days onall the indexes, even though the DOW needed to do ittwice since it undercut it's August rally low, on theSpitzer affect. Volume has been running much heavier on up daysthan down days. Look back at MArch 2003 and you will see alot ofsimilarities between the two markets. Earlier this year, everyrally was followed by heavy selling in the indexes. The advancedecline has also been trending higher since August. The 20 and 50DMA have crossed overon both the NASDAQ and S&P, and we're just waiting onthe DOW. The S&P has been the leader so far thisyear, but that may change as the NASDAQ ramps up. Nomatter which index leads, just look for the leadingstocks. If you haven't particiapted up to now, there are stillopportunities out there, you just need to look for them.