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Monday, May 17, 2004
Good evening friends,
Market Recap
Fear is in the market, and soon, panic selling could drive this market to a catastrophic sell off. Another deadly terrorism act caused a big drop in not only our markets but all markets around the world. The Dow posted another triple digit loss and the NASDAQ fell 27 points. The NASDAQ chart looks even worse after today's big gap down. The S&P 500's 200 SMA is 1079, and today it managed to touch that level and barely stayed above it closing at 1084. This is the key level that must hold for the bulls. It is the last hope for the bull market. If the S&P falls below its 200 SMA, this market will be back to Bear status and you will need to sell all long positions and prepare to short the market.
The charts have been telling us for weeks now that this may happen so there is no reason not to have been prepared. We have 24 short positions with the addition of two more today. If the market falls like I think it will, we are going to be in great shape.
Shorting
I have had many emails asking why I do not short the lower priced stocks. There are two reasons why not. The first reason is for the same reason I would rather go long on the lower priced stocks as opposed to the higher priced ones, and that is volatility. If I were to short a $5.00 stock and it goes up to $5.50, I am down 10% already. A 10% move in a lower priced stock can happen in one trading day. The chances of a $70.00 stock going up to $77.00 in one day are much less because the higher priced stocks are less volatile on a percentage bases. True, if I am right, we could make more money with the lower priced stock if our $5.00 stock went down to $4.50 before our $70.00 stock gets to $63.00. But that leads me to my second reason: availability of shares to short. If you are putting 5% into each trade then you only need to short 100 shares of a $50.00 stock in a 100K account. If you are shorting a $5.00 stock, you would need to short 1000 shares to get 5% of your portfolio in the position. This means the likely hood of your broker having the available shares to short decreases since you are looking for more shares to short. I can almost guarantee that your broker will always have the higher priced stocks available for you to borrow if you are only asking for 100 shares.
What's The Latest Fad?
Teenagers can probably answer that question with more detail than you would ever want to hear. It is amazing how much kids can teach us if we listen to them. Teens are a marketing force to be reckoned with. They have more buying power today than any other generation of teens. Marketers know this, and that is why teens are the most targeted market. The marketing is not always visible to you and I but ask any teen what the latest fashion craze is, and they will tell you. Ask them who the hottest musicians are and they can tell you. Ask them what the hottest stocks are, and believe it or not, they can tell you that to, you just have to really listen to them. That's right, the group we are least likely to want advice from can potentially tell us where the next hot stocks are going to be.
How can that possibly be? One word explains it all - fads. Whenever a new restaurant opens up, it is most likely the hardest place in town to get a table the first month or so. Then slowly over time, the hype dies down, the newness is gone, and people move on to the next craze. The key to remember with fads is that they are cyclical. What is hot now likely will not be in a month or two. Sometimes it takes a bit longer, but things always move forward and those who fail to change get left behind.
Krispy Kreme donuts is a great example, it was the hottest stock around just after its IPO. The donuts were selling like “Hot Cakes” and they were opening new stores weekly across the country. As with anything new, the hype is what initially drove people in to buy donuts and the stock was soaring because of it. Diets and changing lifestyles are partially to blame for what is now happening with KKD.
Icons Can Weather the Storms
I do not think Krispy Kreme is an American icon yet. McDonalds is a decent example of an icon. McDonalds has struggled in recent years, but because of their icon status, the company is able to weather any storms. They are also always looking for something new to try to keep the customers coming back. But for KKD, how many different ways can you make a donut? If people do not buy donuts, then they are in trouble, and I do not think Krispy Kreme is planning on opening a salad bar anytime soon.
Fad trading is a bit like sector trading. If you can identify the hot sector and then find the best charts, you stand a very good chance of profiting. Likewise, if you can identify the next trend or fad, you stand a good chance of riding that wave as well. I remember the Pokimon craze a few years back. A company called 4 kids entertainment (KDE) went from under $5.00 to $90.00 in a period of 9 months during 1999. The Pokimon craze was out of control, and this company was reaping the benefits of their exclusive rights to license some of the products. During that same time frame TOPP went from 2.00 to 12.00, because they printed cards of the Pokimon characters. There have been many other examples of this type of fad investing too numerous to list here.
My latest fad play is AMWS. Their products are soft drinks with zero carbohydrates and zero sugar. Seems like a good play on the no carb craze, so we are long the stock. Not doing well yet, but it is a play worth trying. We will see if the no carb fad sends this stock up in time or not.
If you can identify the fads as they are heating up you can play the stocks in that “sector” of the market for some pretty nice returns. I think it is time to spend some quality time with my teenage boys. And while I am at it, maybe they can fill me in on next fad!
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
- None
Joke of the Week
There are primarily 3 different types of investors who post on yahoo message boards.
1) Those who don't know anything
2) Those who don't know much
3) Those who don't know they don't know
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