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Sunday, October 17, 2004
Market Recap
The market ended the trading week on Friday with some small gains. The Dow was up +38 points while the NASDAQ gained +8 points and the S&P gained +5 points. Although a minor move up, all three of these indices traded better than average volume. Right now the Dow chart looks to be in the worst shape of the big three. It is still below both its 50 and 200 SMAs while both the NASDAQ and S&P are trapped between these SMAs on their respective charts. The S&P closed right at its 50 SMA so it is hanging by a thread. We need some good news from big companies this week if the markets are to rally. Earnings season is here and many companies are reporting so be sure to know when your stocks report, it is not safe to hold anything through earnings in my opinion.
Another Corporate Scam?
The insurance sector came under fire last week when New York Attorney General Elliot Spitzer announced a pending investigation into some questionable practices by some big players in the industry. Of course all these stocks gapped down before we could sell short and I do not chase stocks up or down. If we wait for a short while, they will settle enough so we can make a decent short entry. I suspect many of these stocks will have trouble getting any price appreciation going forward with these pending investigations weighing over head. When the news of the results of the investigations is released, we should see further deterioration in price. With that said, here are some I am looking at on my short watch list. I have not placed them on the bulletin, because they are way over sold already. However, when the charts set up again for another move lower, I will add them to the bulletin short list:
- ACE
- MMC
- AIG
- WSH
- HIG
- CB
- AOC
- AJG
Follow the Leader
As adults we do not think much about the games of our youth, yet we might draw another lesson out of those childhood experiences. When you follow the leader you are putting your trust in the person leading the way.
The market professionals try to do the same thing. When you are a part of the crowd looking for leadership, you are trained to follow the leader. When they appear to be selling, the crowd's instinct is to sell. That becomes a domino affect with many followers selling. The ones in the back cannot even see the leader, they are so far behind in the herd but they follow the crowd anyway. They cannot see what the leader is doing; they just take the same path as the guy in front of them takes. The trouble is, when the market pro has turned course and starts buying, there is still a long line of sellers in the crowd who are following the guy in front of them. The market professional is counting on this behavior and starts buying the shares everyone in the back of the line are selling. This is how market bottoms are formed. The pros buying when there is blood in the streets and the panicked crowd of uninformed investors sells them their shares at near the bottom. This is the classic shake out by the market pro. They start a panic and sit back while the crowd blindly follows each other down.
Penny Stock Scams
There are also some unscrupulous traders out there who use a similar technique to lead the less informed. They load up on a stock that have been hammered down to mere pennies, and buy a ton of shares. Then they start sending out mass email spam talking about the stock being the next rocket ship that will blast off. Ever wonder why you do not receive these emails about stocks on the three big exchanges? The stocks in these emails or pamphlets that come in your snail mail are always OTC BB stocks or pink sheet stocks. Some of these companies actually pay an email spamming service to send these emails to you promoting their stocks. They get others to buy the stock and pump up the price just enough for the leader to exit with a profit. Everyone else is left burning in flames from the rocket ship that they propelled up through their own blind purchases. Other stock message boards are also notorious for this type of activity. My guess is that 90% of all market participants are blind members of the crowd and will buy when they should be selling and sell when they should be buying.
Kick the Can
The stock market works much like another childhood game called “kick the can”. The leader kicks the can and everyone in the game runs away and hides. The pro starts the game by kicking the can (selling) and everyone else scatters (sells). One person fetches the can (buys) while everyone runs away (sells). They put the can back on home base and they have to find everyone that is hiding before someone runs out and kicks the can again. During this period while they are finding (buying) all the people that ran away (sold), the rally has begun. They find these hiders one by one until the last person has been found (last buyer back in at the top of the rally). Then out of nowhere, someone kicks the can again and the vicious cycle starts all over. The last person back in gets burned as the sellers all scatter again and the market sells off after a nice rally.
Our goal is to try and help our members see the warning signs and not fall prey to this perpetual problem. Some stock services will only tell you to buy a stock on the day they are prepared to have you buy it. You do not know ahead of time what stocks they are even watching. Only after they've loaded the boat do they tell their members that it is time to buy. If you are going to be a part of any crowd, stick with ours. We are the only free range stock group on the web where every member is on equal ground. Everyone has the same bulletin ahead of time and we all know, or are starting to learn the reason why we are watching this particular list of stocks on the bulletin. We will not lead our members astray with ridiculous picks that make no sense from a technical analysis stand point.
Other Member Picks
Although we have many great traders on our message board, many are still learning. Caution is advised before trading any stocks posted to our message board that are not officially on our Bulletin. Do your due diligence before trading any stock. I am always talking about market leaders, that is, the stocks that look strong and lead their sectors in strength. I want to be in market leading stocks. You can apply that same mentality to our message board. Some of our members are proven traders with good strategies and systems. They are the leaders of our message board; if they post a play to the board you can bet there is strong potential for a winning trade. Know who these posters are, or else you may end up getting your can kicked.
OTC BB Watch List
- NSOL Mentioned here recently, had a gigantic move up on Friday
- SRGG
- TKER mentioned here a couple of times, up over 50% since.
- CTTG
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