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Thursday, July 22, 2004
Good evening Friends,
Market Recap
As predicted in yesterday's commentary, there was selling today with the Dow down 90 points intra day and falling below the 10K level. However, the bulls battled back and took the Dow back up with a close above 10K and a positive finish on the day. The NASDAQ was up as well, closing +14 points higher.
Do not be fooled by the high volume on the volume indicators for the charts of these indexes. Most of that volume was during the morning sell off; the afternoon buying was on lighter volume so it is deceiving to say the least. I do not want to knock a good rally, but I want you to be aware of where the volume was today. Any reversal of this magnitude is good in my opinion, but the charts are in such bad shape that we will need to be patient for them to set up again for long positions. I would much rather trade a bull market than a bear. We can make some gains being short, but they will be smaller gains (10% targets). The real money is made on the long side. Even though I am mostly short, I am still rooting for the bulls because I know in the long run that is best for our portfolios.
More Good Earnings, More Selling
Most stocks have been tanking after releasing earnings. Only a few stocks have done well after their release. I am about as cold as an Eskimo's toes when it comes to playing earnings. WEBX, CCMP, and LLTC are three stocks that have gapped up on us while holding short positions into earnings. These are some of the very few that have done well after earnings. The number of stocks that are tanking after releasing solid earnings and forecasts this week is almost beyond belief. It is absolutely amazing how stocks are getting pounded day after day, despite racking up very solid earnings.
Today, it is Caterpillar (CAT). They announced earnings of $1.55 a share, up from $1.15. The analysts were looking for $1.71. Caterpillar's earnings grew by 40 cents a share. How can the analysts have been looking for growth of 56 cents a share? That is nearly 30% higher than what Caterpillar was able to produce.
The analysts do not have to justify their numbers. No one will audit an analyst and ask them how they came up with their consensus. For some reason, most people do not even question their projections or how they came up with such high numbers. Most investors only see that the company failed to meet the analysts' estimates. They will sell first and ask questions later. It is absolute robbery what these analysts are able to get away with in my opinion.
After Hours Earnings Update
As I type this, MSFT missed estimates by a penny. However, the stock is not selling off as much as expected after a miss. BRCM is down 5%, DCLK is down 12%, and CA guided lower. I am unsure what will happen tomorrow, but this selling after hours is not a good sign. Of course, it may mean nothing the way this crazy market has been reacting lately. It is definitely not reacting the way we expect it to.
Capital Preservation
Since we are clearly heading into a bear market, let's clarify what I mean by “cash is king”. Stocks are going lower; even great earnings can not seem to save the day. If you are able to short, this is certainly a short seller's market. If you are unable to short stocks, the name of the game is cash preservation. Sit on cash today, and live to trade another day.
This does not mean that you can not be making money on long positions. What it does mean is that finding solid charts and buying a breakout will be harder and harder to do. I would not recommend doing so until charts shape up.
When I take a long position, I am looking for a 20% return these days. I would look for a much higher return if the markets were bullish. When I take a short position, I am looking for at least a 10% gain. If you do not feel you can make these amounts then the risk is not worth the reward in my opinion. It is better to pass on the trade and move on.
Getting into positions also means setting up an instant stop loss to prevent failure. This service is not about day trading, but there are opportunities out there everyday. I do not list my day trades, but I am trading. I am preserving my cash while I trade buying closing all of my day trades the same day.
In this market, I have been day trading support and resistance levels. Just as discussed in a recent commentary, I short stocks at resistance and ride them down, covering before the close. I buy stocks at support and play a bounce mid day and sell before the close. Most days I am successful, but not always. Even on our long positions that we want to swing trade over a few days, if a profit is there I am likely to take it. If you see opportunities to pull cash out of the market, take them.
‘Cash is king' is not about sitting on your hands and not considering a trade. It is about preserving the cash that you have, and keeping an extremely watchful eye on the market. I do not want to turn people off to trading altogether, but I do want to caution you not to be trading long and holding these stocks without smart, protective stops in place. This protection will guarantee that you will have cash ready to be put to work when the Bull market resumes.
When the bull is back, I want to be sitting on a pile of cash and ready to start buying. Even if you do not trade, there is plenty to learn while you are waiting. There is a lot to learn from this service; if you have not had a chance, get to know your fellow subscribers on our message board. I would also suggest reading all you can. Study the charts in the chart section, they are a wealth of knowledge and they will prepare you for the next bull market.
OTC BB Watch List
- None
Please tell a friend about our service. We would like to become a referral service only, and with your help, we can be. As always, thank-you for your support past, present and future! Have a great night everyone; we will see you Sunday evening.
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