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Sunday, November 07, 2004
Market Recap
The Dow continued its bull-like run Friday with big gains for the third day in a row. The Dow tacked on another 72 points and is now up over 350 points in the three days since the election results were official. We knew a rally would come after the election, but the selling just after the initial rally I thought would happen has not taken place yet. It should start this week as this market is very over bought. However, I expect profit taking to be meant with buyers on every pullback. The bears need to cover their shorts and they know it. Any weakness will be an opportunity to do so. This market is poised to move higher after a brief rest.
The NASDAQ has reacted a little slower than I thought it would, gaining about 60 points since the election results came out. It was up another 15 points on Friday. I expected a little more gain after the great employment numbers out Friday before the bell. But unlike the Dow which did not rally prior to the election, the NASDAQ was a little over bought going into the election, so that maybe the reason for this lack of movement. The NASDAQ rallied and closed above its 200 SMA five days prior to the election. Both the NASDAQ and the S&P are in need of a rest now. The S&P was up +4 points on Friday and has been up an amazing nine days in a row. It is trading at 52 week highs and volume has been very heavy during this big nine day run with 2 billion shares traded in 7 of the last 9 days, well above average volume.
This super volume at 52 week highs tells us the rally is for real. This is different than the August rally when there was a hard charge up on weak volume that eventually led to the Dow falling all the way back below 9750 in October, even lower than where it was when the August weak volume rally started. We cautioned buying that August rally and warned it would not hold up. This time, the conditions are much better and unlike August, the volume is there to confirm this rally. Watch out bears, the bulls are back to make their traditional holiday run (the “Santa clause rally”). However, I advise caution after a nine day run on the S&P 500. There should be a slight pullback at some point soon but nothing prolonged. In bull markets, pullbacks are natural and healthy for the market and a chance to buy if you are not long yet.
Same Old Story
The talking heads said to buy oil just a couple of weeks ago. From that point on, it has fallen steadily. Let's look at a few other examples. Within the last couple of months the semi conductor index has been downgraded by just about every analyst out there. Two months ago the index was at a 52 week low. Can you see the pattern? Downgrade when it is at its low for the year and upgrade or pump when stocks are at there 52 wk highs. This is done to get retail investors to sell at the lows and buy at the highs. Now all of a sudden the sector (SOX) is up over 100 points since the lows of two months ago when all the analysts down graded the sector. Those analysts were able to use the downgrades to panic the crowd into selling the stocks down. Now that they have loaded up on the cheap and the SOX is on the move, do not be surprised to see some analyst upgrades (or will they wait a year until the SOX is at a new high before upgrading?) hmmm.
Google is yet another example of the games analyst play. Many analysts started off by saying how overpriced the IPO was at $135. The IPO price was adjusted down to $85 instead. This was all a scam so the insiders and investment bankers could have more shares at the cheaper price. Or they just wanted it cheaper so it had more room to run when it began to trade. Just about every analyst out there even thought that $85 was overpriced for the stock. Suddenly when the stock hit $150, the analysts start tripping over themselves to upgrade the stock, slapping outrageous price estimates of $200+ on the stock when less than a quarter ago the stock was overpriced at $85. Now look at what is happening:
http://money.cnn.com/2004/11/05/technology/google....
Someone figured out that Google has competitors. The stock was down over $15.00 on Friday alone. They are also now stating they see “severe price drops” in the stock over the coming months. Are they kidding? These are the same analysts who weeks ago were saying $200+. When the target of $200 was reached, GOOG promptly began to sell off. They sold their shares and reversed their position and went short. Now they are ready to tell people the real value of Google, and it is right on time; after they have run it up over 100% since the IPO and after they have sold and shorted near $200. The analysts have helped push the stock up to dizzying heights. Expect an equally impressive sell off after the lock-up expires and those shares flood the market. The so called experts know about the lock-up expiring soon and they will be on the right side of the trade as the stock declines under heavy selling pressure. The demand for shares will no longer be there because the float will increase as insiders dump into the open market. The stock should tumble as a result. You can bet, the smart money will have already sold at these lofty levels and have short positions ahead of the crowd.
MAMA is another example of what analysts can do to stocks. MAMA closed near $7.50, up $.50, just before their earnings came out, and what earnings they were! Revenues were up 90% and they nailed the forecast. The one analyst following the stock had projected revenues to be $5million. MAMA missed this by over $1million. In other words, the one analyst covering the stock put a revenue target on it of roughly 200%. He raised the bar so high that failure was inevitable.
AIRT, What Happened?
AIRT had a beautiful chart, and it was set to explode on the north side of $35. They surprised us with a quarterly statement of earnings that was not listed anywhere. Everything looked quite solid in the 10k filing. The stock is solid, and the chart was read correctly. The reaction in the after hours session really hammered the stock on Thursday evening, leaving it with a gap open on Friday. When stocks gap down on the open, it is very hard to recover on the same day. It was down well under $30 in after hours but on very few shares. It is always suspicious when a stock declines so drastically on such meager volume. The one factor that may be hurting the stock is the price of fuel. Their estimates for 2005 included a caveat statement that higher fuel costs will have an impact on earnings. Aside from that, there is nothing in the quarterly report to justify the reaction on Thursday after hours and Friday. If fuel costs come down in 2005, AIRT should surprise to the upside. With the float so low, if they do surprise, there should be a massive run-up in the stocks price.
Key Statistic
Another election statistic to ponder: The Dow has soared under the last two presidents that served a second term. Under President Clinton the Dow was up 55% in his second term. In President Reagan's second term, the Dow amassed an amazing 82% gain.
The Power of Three
The elections are behind us and it is time to start looking ahead. All the uncertainty that was in the markets before the elections is now gone. Oil is starting to decline from the highs it recently set. Despite the recent declines, oil is still overpriced. If it continues to fall, the stock market will continue to rise. Having said that, there are still three events occurring that will be factors in whether or not we will see an all out bull market in 2005:
1) The U.S. dollar - The US dollar is deteriorating, and it is near a 10 year low against other currencies. A declining dollar is not good for the economy or the stock market.
2) Interest rates - The Fed meets again this week and will most likely raise rates by another .25 basis points. Rising interest rates do not help the markets either.
3) Oil prices - If oil prices start creeping up again, it will hinder the progress of the stock market.
These three key factors will forecast how stocks will do next year. Right now the charts look good but the dollar must improve, oil must go down, and the fed needs to stand pat on the hikes for a little while. If we can get these three factors all lined up the right way, this market could explode upward over time.
OTC BB Watch List
- ONEI
- EDIG
- UNWR
- UGNE
- NMVN
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