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Monday, October 25, 2004
Market Recap
The market sold off on Friday and ended the day near the lows. The Dow undercut a new low for the year, and with the closing bell ringing, there was no time for a further sell off. I mentioned last night that the market was “saved by the bell”. Today I wanted to see a strong bounce for the market after having the weekend to rest - much like a fighter between rounds. Today the market did not get the strong bounce I was hoping for but we did not get the big sell off that normally happens when stocks or indexes undercut prior lows either. This is peculiar action indeed. There should have been commitment one way or the other, and we did not get it. The market was essentially flat with the Dow losing just -8 points, the NASDAQ losing -1 point, and the S&P was down a fraction. The market is in limbo with the election up for grabs. Oil prices remain high and the dollar remains weak. With all this occurring, the stock market is lost.
True Colors
Back in August when the market was rallying, I pointed out that the market was rallying on low volume. Markets that rally on low volume cannot be trusted, and the rally will most often fail and fall back. When individual stocks rally on low volume, we know the rally is not for real and they soon collapse back down. Volume is a very important part of trading; it is the fuel that gets the stock moving. Without volume, price cannot be sustained. These movements happen fairly quickly on individual stocks, but on major indices, it takes more time for these movements to develop. It took a couple of months for the market to give back the gains from the low volume rally in August, but sure enough, we are right back down to the August lows before the “so called” rally on light volume started. I have a chart of the Dow tonight to illustrate this.
Another lesson learned for those who did not believe it when we cautioned not to trust the low volume rallies we were seeing at the time. It took a while but that August rally is finally showing its true colors. It was not worth the risk, and it turns out those that bought into the rally have lost a lot of cash. I also have a chart of the NASDAQ tonight with the trading channel illustrated, and you will see by the chart that the lower trend line has been violated. This is another negative going forward unless a bounce happens very soon.
The Analysts Strike again
INSP was on our watch list three weeks ago and we opened a position. Sticking with our tight stop policy, we closed the position when it broke the trend line. It gapped down on Oct 6th because of an analyst down grade. Until that down grade, the chart looked super and it was setting up for a nice advance. Of course, this down grade damaged the chart and stopped us out shortly after we bought. Why the down grade? Simple, the analyst wanted his firm to be able to load up on the cheap because they knew earnings would be good. This is just another game these “crooks” play to steal shares at lower prices.
Today after the bell, INSP beat the street and raised guidance for the year. The stock is up 10% in after hours trading, and it will likely gap up in the morning. It is tough to trade sticking to tight stops when we know there will be these types of shakeouts. But which way do we play it? We could have stayed with it in hopes that the analyst was lying to us when they downgraded the stock. Or, silly us, we could have assumed they were telling the truth, giving us good advice for once and sell before the stock went down further. We know by now not to believe anything these so-called experts say, but if we are to stick to our rules of capital preservation, we must maintain tight stops. It is unfortunate but this is how the game is played. Wall Street is not a level playing field, there are some dirty games being played out there and the little guy is set up for failure. Today's INSP earnings are proof of it. Many sold the stock because of the analysts' down grade three weeks ago and over $10 lower than it is tonight. We may continue to be whipsawed in this trendless market as these scandals continue to happen daily. When will it stop? Not until the analysts decide to suddenly start telling the truth; so do not hold your breath. I bet it snows in Miami before we get the truth from these “crooks”.
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