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Wednesday, June 09, 2004
Good evening friends,
Market Recap
Today the indices started the process of working off an overbought market. We have had a nice run-up of late and a little selling was due. The Dow was down -64 points, the NASDAQ suffered a -32 point loss, and the S&P was down -10 points. All three of these indices closed near the lows of the day, and as a result, they now have a long red bar down on the charts. This red bar is negative, and it will most likely lead to further selling tomorrow.
The NASDAQ closed below that critical 2000 level again but all is not lost. Many times breakouts above critical resistance (in this case 2000) are often re-tested. Pull-backs do occur to shake the weak into thinking it was a false breakout. The index is still above the 50 SMA and remains bullish as long as price holds above this average.
NASDAQ Chart Revisited
Please take another look at the chart of the NASDAQ I showed a couple of nights ago. The channel the NASDAQ is in is still intact with today's selling. We were up against the trend line last night with a close of 2023. I had mentioned this trend line was 2020, but with charts dating back a year, it is tough to get the exact slope of the trend line. In this case, I was within 3 points of the resistance, and today selling ensued.
Security Stock
Some security stocks bucked the trend today as they often do. IPIX was up big on news this morning, but eventually it came back to earth by the end of the day. These stocks will continue to be very volatile in the coming months. Try not to chase them when they run, otherwise you may get whipsawed out with every pullback if you place a stop. Yes, we normally want to limit losses at 2-5%, but with volatile stocks like IPIX, stops will only hurt you in the end.
Stops are excellent tools, but there are some circumstances when they do more harm than good. These stocks can swing widely during the trading day anywhere from 5-10%, so if you set stops, it is likely to get taken out. The best way to play these stocks is to only buy on pullbacks and sell when they spike up on any news. If you do play the breakouts, sell as soon as the low of the 3rd bar after the HOD bar on an intra day chart is taken out. This is how I play my day trades. Or I simply set a stop order just below the low of the first 30 minutes of trading. Both methods are effective, and you will either lock in some quick small percentage gains or cut your losses to very minimal losses.
The Google Effect
By now you must have heard about the pending Google IPO. Google is the leading internet search engine, even more popular than Yahoo. It is one of the biggest search engines around, but the problem with their business model is that their entire income is derived from advertising only. They have no other source of revenue.
Years ago, during the internet bubble days, online advertising was hot. Even novice webmasters could set up a website, add a few banners, and start generating income from ad revenue. Advertising revenue has slowed tremendously and who knows when it will pick up again.
Even if it does pick-up again, is Google worth the price you will have to pay to get some IPO shares? The Google IPO will be way over priced as far as fundamentals are concerned but will that stop the stock from sky rocketing? I do not think so. This is an IPO that most small investors will chase. The big boys already have their allocation of shares and will sell into the IPO mania. Some will even sell on the first day of trading. Others will be restricted to hold the shares for a certain time period (usually six months); this restriction on selling often fuels the rally. If nobody can sell, then the stock goes up. This could be a rocket; it is hard to say at this point. Some IPO's that are over priced decline immediately but considering the popularity of Google, we may not see a decline.
Because of the hype surrounding this long awaited IPO, let's think about profiting from the mania and potential rise in stocks in the same sector. Remember, the smart money moves before the rest of the market and is always one step ahead of the news. Because of this hype, we may be looking at a pending 'Google effect' in the internet stocks. As the IPO approaches, more and more hype will be spreading about the stock and what it means to the rest of the internet community.
There could be a very strong carryover effect in other search engines and in other online companies such as YHOO, ASKJ, NTES, LOOK, TOMO, and MAMA just to name a few. I suspect that the Google IPO will be the hottest stock offering of the year. It may even be as hot as the IPO of our favorite donut maker (KKD). The Google IPO could have a big effect on the stocks mentioned above.
The question is: will the effect already be priced in to the stocks on the day of the IPO? My guess is yes, because many other traders will move ahead of the news. As we know, the market prices in news ahead of the game. I will be watching this sector as the IPO gets closer to try and take advantage of some solid returns during the pre IPO run-up as the whole sector gets a lift from the Google effect.
Our Bulletin
Because of today's market action, there are not many stocks setting up for advances. As a result, there are no new stocks tonight. The market will be closed Friday so it will be a good idea not to take any new positions going into this weekend unless we buy more security stocks. Those will be good to hold over the weekend.
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Sunday evening.
Reminder: No Bulletin Tomorrow
The markets will be closed on Friday, June 11 to pay respects to former President Ronald Reagan. Because the market is closed on Friday, there will be no Bulletin Thursday evening.
OTC BB Watch List
- COPY
- WHAI
- BIPH: look at the 5 month base on this beauty. Unclear if it is ready to run yet.
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