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Tuesday, January 11, 2005
Market Recap
Institutional distribution continues as the markets are still seeing significant selling pressure, with especially large above average down volume on the NASDAQ the last six out of seven days. It has been a vicious first couple of trading weeks in 2005, and today the markets were in sell mode once again with the Dow dropping -64 points, the NASDAQ falling -17 points, and the S&P losing -7 points. Besides the 3 big indices being in the red so far this year, all of the major industry indexes I follow are also red for the year, including: oil services, retail, gold & silver, biotech, networking, broker/dealer, internet, bank, software, semiconductor, and more. With all these indexes in the red, no wonder we are all cash, sitting pretty, and green for the year. Not green by much but still green while some of these indexes are down 5 - 6% percent already in the first two weeks in January. This proves that our wait-and-see approach is better than forcing the action. We cannot make the markets go up so we will sit on the sidelines while others try and fail.
Below the 50 SMA
All of the Indices, the S&P, NASDAQ, DOW, and RUT are below their respective 50 SMA lines. This is a very negative sign for the bulls. In bull markets, indices and stocks will bounce off these levels after pullbacks and begin advancing again. These average lines act as support. I thought we would see a bounce at these levels, but instead, we fell right through them. The next stop could be the 200 SMA lines. Many individual stocks are still above their 50 SMA and this is where we want to start buying. When they reach this line, you can buy with a tight stop below for a minimal risk entry. I wish the indices could have stayed above their 50 SMA but since they could not, we need to be cautious.
The markets is oversold and due for a bounce soon. Maybe we will get it tomorrow on the good INTC numbers after the bell today. The market is washed out, at least temporarily. You have to wonder if there are any sellers left. I think its time to get our shopping list ready and start to do some bargain hunting as we approach the 50 SMA on some stocks. This is not to say to go out and buy everything at the open tomorrow. We will tip toe back in the market entering just a few positions at a time at well thought out entries near support. We will keep our stops in place in case we are wrong and the market decides to head further south on us. A rally is due, but please proceed with caution at all times.
TASR Investors “Stunned”
TASR has a float of 51 million shares and 30 million (58%) of that is short. With that many shares shorted, it was inevitable that this stock would take a savage dive. TASR was at one time 85% short. Never bet against the smart money. The majority of short selling is done by market professionals, but market professionals are not the majority of the market participants. Think about this for a moment. If markets never do what the majority think it will, then that makes the minority (the market professionals) right. In TASR's case, the minority thought the stock would fall and had a heavy short position. Bingo, the smart money is right again. Funny how all the bad news seems to come out all at once right after the insiders sell tons of shares while the stock is near all time highs. Has bad news ever come out before any insiders sell? That would be interesting to know.
The Average Investor Is In the Dark
The reason most shorting is done by the minority (professional) is that most average investors do not even know what being short a stock means. They do not know that it is possible to make money when stocks go down. If you do not believe this, ask around for yourself. I tested this theory with a few casual acquaintances, not anyone really close to me who knew that I traded stocks for a living. I picked 10 people that I knew were invested in mutual funds. These were average hard working people with jobs. 10 out of 10 did not know what shorting a stock meant, and 10 out of 10 gave me the deer in the headlight look when I told them there was a way for them to make money when stocks go down. They just could not comprehend how anyone could make money if a stock is falling. It was like they did not believe me. I think they thought I was a nut case.
The majority of the retail investors are oblivious to shorting, and the other few retail investors that do know how to short are just plain afraid to do it. And if they do short, most of them lose money. Now, if we know that the majority of the average investors do not even know how shorting works, then imagine how many people do not know about options trading? A good options trader can make far more than just simply being long or short a stock. There is a good possibility that TWPD will be expanding into options trading in the future (more to come on that later).
Light Years Ahead
You are light years ahead of the majority of retail investors already. Just by being a part of our TWPD family, you are on your way to becoming a successful professional trader. A professional is defined as someone who gets paid for what they do. If you can make a living trading stocks and pay yourself a salary every week based on your profits, then you are a professional trader. You are making a living and supporting your family trading stocks. This makes you a professional.
Challenge Yourself
Some professionals are better than others, this is where the challenge comes in. Challenge yourself to become the best of the best. Do not take “no” for an answer; you can do this, we have all the tools and plenty of knowledge, we can do this together. It is not important to trade all the time. Take advantage of good markets and profit from it. When markets are bad, it is best to stay on the sidelines until the markets improve. It is like a car salesman or a realtor. If they sell four houses in the summer, they may have to make that commission pay for expenses all winter. When summer comes, they can take full advantage and sell as many houses as possible, knowing that winter is coming and sales are usually not as good. There is a time to be in the market and a time not to be. We have just experienced a couple of weeks where it was best not to be in the market. The results or lack thereof have proven this to be true.
Should We Short?
Should we short now? I do not short stocks when the major indices are oversold, and they are all way over sold at this point. I also do not like to be short when the indices are above their 200 SMA lines. When I am convinced the bull run is over, then I will short stocks. I am just not convinced that the bull is dead, and we do not want to be caught short when and if the bull comes roaring back with vengeance.
Don't forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
http://www.fulldisclosure.com/earning.asp?date=200...
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