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|Sunday, August 08, 2004|
Good evening friends,
Friday was another brutal sell off as the Dow plunged another -147 points after a -163 point loss the day before. This time it was the lousy jobs report before the open that sent the markets into a free fall. A -300 point loss in the Dow in just two days has this index quickly over sold and down close to the support area of 9800 mentioned in an alert on Friday. This market is over sold with this fast drop, and it is due for a small relief rally.
A look at the VIX chart tonight indicates that the market is getting closer to a bottom and a rally could come soon. One problem with a possible rally is that any rally needs to be accompanied by volume, and because we are in the month of August (the weakest volume month of the year historically), it will be hard to believe in any rally without significant volume. Nevertheless, the market is due for at least a small bounce.
The NASDAQ was down a sharp -44 points Friday for a total of -110 points for the week. The S&P was down -16 points Friday after a -17 point lost Thursday.
The selling is way over done in my opinion, and we should start to look for some good charts for entry as long positions. I am not saying to go over board and load up, but we do need to start getting our wish list together on stocks we want to be long when the market comes back. In this situation, we do not just buy everything and anything. We still want to only buy the strongest charts in the market that look ready to advance when and if we get the rally I am looking for.
I think we could start to see a rally in the last two weeks in August and early September. Volume should start coming to market then when traders come back from vacations. Also, because of the bad jobs report, the Fed is less likely to raise rates this week when they meet. I said last week that the .25 rate hike was already priced in the market. If they do not raise interest rates, this may ignite a rally and some short covering could be the fuel to get it started. Of course, another way to interpret fed's decision if they do not raise interest rates is that the economy is not doing as well as expected. This could send these markets down for the final count with a big finale sell off. In either case, I think a bottom is near and then we can start to rebuild the charts.
Google - One More Time
Internet stocks may be suffering because of yet another botch in the Google saga. There should be a soap opera based on Google and their IPO. Now they are in trouble with the SEC for potentially illegally selling shares. It is one thing after another with this company, and now their integrity is in question. The IPO is now delayed, and I learned that they are trying to pull off a 15 day lock up period. This is unheard of as normal IPO's usually have a 180 lock-up period. A lock-up period is put in place to prevent insiders from selling immediately after the shares are open for public trade. This is to protect the stock from heavy selling pressure. It is obvious the Google founders are running the show on this IPO and dictating the terms to the investment bankers and brokers. The 15 day lock-up should not be allowed, and the SEC needs to step in if they get away with this. The more I hear about this Google IPO, the more I want to short the stock right out of the gate. There can be no other reason for wanting a 15 day lock-up other than greed. These guys obviously want to sell their shares fast and who is going to pay the price? That's right, the people who buy on the open market on IPO day. Two weeks after the stock goes public there will be immense selling pressure if these two people are allowed to sell those $135 shares they bought for .35 cents each. There ought to be laws against that kind of fleecing. I will be shorting the stock if I hear the 15 day lock-up is indeed a fact, providing there are any shares available to short.
A Look Ahead
This is a crucial week coming up; the markets need to hold this support area shown in the charts tonight. I hope it will hold up, but if the institutions do not step in and start buying to support this market, further down side is likely to come. We will still be looking for potential long positions and trying to buy stocks near support areas ready for a bounce, but we will not take a lot of risks on the long side until the markets turn around. The market cannot go down forever, but right now, it sure seems like they can.
Look at the VIX chart posted tonight and you can see there is panic setting in. Panic sets in when there is blood in the streets. When there is blood in the streets, it is nearly time to go long. This is the time when you buy shares on the cheap from scared people who have lost a lot of money and cannot take it any more. They panic and sell at nearly the bottom. When there is blood in the streets, the shorts are dancing in the streets. I hope you have joined the rest of us at TWPD in shorting stocks for the last few months and preserving our cash. No matter the direction of the market, we will be there on the right side of the trend. TWPD is your friend; trade the trend with your friends.
The Problem with Bear Markets
We can make money no matter what direction the market goes, but the one problem with a bear market is that it does not bode well for making serious money. Do not get me wrong, we have do quite well shorting stocks and playing the down move, but I would much rather be trading in a raging bull market. We cannot do any better than a 100% gain on the short side for a particular stock, and that would only happen if a stock traded down to zero. However in a raging bull market it is possible to make well over 100% on our trades. We made quite a few trades last year that gained over 100%. So obviously, I would rather have the markets going up than down.
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