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.
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