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Tuesday, December 14, 2004
Market Recap
The Fed raised rates today by ΒΌ point as expected by the majority of market participants. And as usual, since it was expected, there was little or no reaction. As we stated last night, if there is a raise, we can expect basically no reaction from the stock market and that is just what happened. There was very limited reaction to the announcement initially and then a small dose of buying came in the last hour to take the Dow up +38 points by the close. The NASDAQ gained +11 points and the S&P gained +5 points. All and all, the Fed decision was a non-event. Charts are still setting up nicely and I expect the market advance to continue on up through the holidays.
End of Year Portfolio Check
Is your portfolio feeling under the weather? The cold and flu season is upon us and when the temperatures drop so do some portfolio balances. If you have a sick portfolio, you may get sick yourself just thinking about it. I want discuss emotions in trading tonight. We have talked many times about leaving the emotion out of your trades. If you have many stocks in your portfolio that you are getting emotional over, you are already in trouble. Emotions affect the way we trade. If you trade scared to lose, you will almost always lose. If you let emotions control you enough, your entire portfolio can be at risk. Normally, emotions do not come into play until you have a losing trade. These are the sick stocks that can make you sick to your stomach. No need to have them in your portfolio at all. We have had some losses in the portfolio also but those bad trades are not controlling us. If you are using good trade discipline and watching those losses, you can prevent yourself from getting emotional over the trades and can avoid potential disaster in your portfolio.
I would like to reiterate our 5% trading rule. The rule states that no more than 5% of your portfolio should be put into any one trade. If the trade goes bad on you, there is much less chance for it to have any material effect on your overall portfolio return.
Whenever I hear someone talk about a string of bad stock trades, you can always trace it back to an emotional attachment to a particular stock or trade. If you are emotional over one stock, it will cause you to think unclearly when trading the next stock, and the next one after that, and so on. It becomes a chain reaction, and the emotions lead to trading at the absolute wrong time. Trade without emotion and stick to your stop losses. The stop loss takes all the emotion out of the trade. If your stop executes, you simply move on to the next trade.
Tax Loss Selling
It is that time of year for tax loss selling when we must review our portfolios and remove losers weighting down our gains. Removing bad stocks in our portfolios is the key to out performing the markets. If a stock is not going up, there is no need for you to own it. If it is going down, remove that stock from your portfolio immediately. We will certainly be getting rid of our losers come late December. These stocks should have already been sold but I was not available at the time to send alerts at proper sell points. Because we base our buys and sells on alerts we send, we have held these stocks in our portfolio since we never sent a sell alert at the stop price. This is no excuse for anyone to be still holding these stocks. If a stock does not perform, please move on to the next stock and do not wait for a sell alert from us. We will take the hit for that when we finally sell at the end of this month.
We will sell these losing stocks for the end of year tax loss. If you are still holding any of these stocks, please move out of these positions that have little chance of improving in the new year. Instead, take a tax benefit, and be ready to move into stronger positions as the markets continue to improve in January 2005. Expect tax loss selling from us on TPPP, STNKY, AMW, IPIX, MAMA, NMKT and covering our last two shorts TINY and TARO before the end of the year. Even with these losses, our trading profits still exceed 400% since the inception of our service in May 2003. This is because of our strict money management system of no more than 5% in any one position. Without the 5% discipline, these losses could have done much more damage to our portfolio. As a result, there is not much harm to our overall return. Having said that, without these losers we would be up over 500%. The lesson to take away here is to cut the losses quickly and let the winners run. We have taken measures to prevent losers like this from happening again in the future. Preventing loses like these will greatly enhance our performance and overall gains going forward.
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