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Tuesday, March 09, 2004
Good evening friends,
Market Recap
Just like yesterday, the markets opened up near the highs of the day…and that was all she wrote. It was a steady trickle downward for the rest of the day. Even the Russell Small Cap Index took a beating today along with the other indices. I have a fresh chart of both the Russell and the NASDAQ tonight and you will see that it does not look promising for our long positions. Those of you who took advantage of some short recommendations in the Bulletin did very well today. FDRY was crushed on 6X volume so its downward slide is now confirmed.
I know some of you are frustrated with this market action, but it's part of the market's process. The Bull has been running for 9 months with a couple of rests in between. This is another rest. I don't think the Bull is over yet but it will take time for charts to recover and set up again. As long as we remain above the 200 SMA (simple moving average), we are in a long term uptrend. However, if the NASDAQ slips below this average, then it will be time to short the heck out of stocks. A slip below this average on a closing basis will mean that this was a mini 9 month bull cycle within the bigger bear cycle of the last 3 years. In other words, the last 9 months will be a pause in the great bear market. I don't think it is, but at this point, we have to start thinking of all possibilities.
Playing Poker
I spoke just last week about Kenny Rogers and his song ‘The Gambler'. That was focused on getting out of loosing stocks quickly and letting your winners run. I'd like to revisit the topic of gambling once again, this time from a different perspective.
I made a classic mistake the other evening with my purchase near the end of the day of ANCC. I even said “let's play poker”. Rather than dwell on a bad trade, I'd like to focus on the educational value of this trade.
Playing poker with friends can make for a nice evening. You win some, you lose some, but in the end everyone still remains friends. The focus wasn't so much on the game but on the camaraderie. The stock market is just the opposite. It has nothing to do with camaraderie, and everything to do with ‘the game'. Every time we place an order to buy, we are playing the market's game. Fortunately, studying the charts ahead of time is like getting a peek at the deck. That way we can better anticipate what's in store and know how to play our hand better. There are times when you go for the inside straight. You know there is risk involved, but you're willing to play the odds in the hopes of a winning hand. The purchase of ANCC was like going for that inside straight.
When you play poker your goal is to win, and to win big. When you play the market, the goal shouldn't be to win big because there is too much risk involved with that strategy. The goal should be on winning consistently over the long term. Not every trade is going to work out the way we expect but, if we're consistent in our trading, then the overall goal of making money is achieved.
Occasionally, I do trade ahead of earnings, as was the case with ANCC. I think the choice of words in the Alert could have been better, but the trade was consistent with our philosophy. We bought a strong chart; unfortunately, we got a bad reaction to only a portion of the press release that went along with stronger earnings from ANCC. The herd was spooked and they reacted negatively. Today I chose to sell ARTX before earnings and they came out with a great report and the stock is up in after hours trading. I played it safe.
As you can see, playing the earnings game is nothing more than a crap shoot. There will be the occasion in the future where a chart looks strong enough to take a risk going into earnings. So long as we don't risk too much of our overall portfolio, even a bad reaction can be taken in stride. I learn something from each trade I make. The winning trades help me to better identify what I did right and what looked right in the chart. The loosing trades help me to see where I went wrong. They not only show what I did wrong, but also keep my mind in check and so I can focus better. None of us are infallible, trading stocks is inherently risky, but we have the right philosophy and the right method to locate the winning stocks. So, if we just stick to that game plan we will continue to get the overall results that our trade record reflects.
Remember, if you're going to gamble, do it in Las Vegas (at least there you get complimentary drinks). The one thing I like about the stock market is that at least it's fair. Vegas will throw you out of the casino if you are too good and take too much of their money. They don't like you to be better than they are and they have the right to refuse to gamble with you. At least we know the stock market will never kick us out for being too good.
Because of today's market action, I only have one new stock for our list tonight. Cash is King; I'll be looking to sell into strength in the morning.
As always, thank-you for your support past, present and future! Have a great night everyone; we'll see you all Wednesday evening.
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