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Thursday, January 20, 2005
Market Recap
Follow through selling today in the markets as investors ran for exits early and did not bother to return for any after Christmas sales. The weakness did not come as a huge surprise after EBAY disappointed the street and missed estimates by 1 cent yesterday. The futures indicated a lower open and this time the futures did not tell a lie. Anytime a big cap tech stock like EBAY trades lower by as much as 20% in one day we have to expect it to take much of the market with it. The Nasdaq finished the day lower by –27 pts and closed at the LOD. The Dow closed down –68 pts and the S&P closed the day lower by –9 pts. The Nasdaq has now given up almost 70 points in 2 days and is now down almost 6% for the year. All of this is taking place on very high volume. The volume is speaking volumes so we will continue to be very cautious and protect our capital until the volume tells us otherwise.
Today's action certainly confirms that the bears are in complete control of this market. Trend lines, moving averages and price support levels have simply been brief rest stops on the way down. Most companies reporting good earnings are being rewarded with a trip to the barber for a price haircut. I entered some positions today in anticipation of a bounce off the trend line and 61% Fibonacci retracement level that I showed in the chart Monday. This level unfortunately did not hold up and we were stopped out of a couple of these positions quickly. With support levels not holding up and the strong down volume, there is now a very good chance that the Nasdaq could be headed to its 200MA currently at 1976.
4 More Years
Well, it is official. George W. Bush was sworn in early today as the President of the United States for the next four years. I do not know how many of you may have taken a few moments out of your trade day to watch the ceremony. There was one thing in particular that stood out. Security was at an all time high. Both visible security and the not so visible security were out in force. I think this is an indicator of what we can expect to see as we head deeper into 2005. Security stocks were hot in 2004, and we were predicting the sector being hot again in 2005. Bush gave further evidence of this in his speech, “My most solemn duty is to protect this nation and its people from further attacks and emerging threats.”
We also need to pay attention to other parts of his speech and use those as indicators of where we need to be focused. The president is in his 2nd term, as we all know. He does not have to worry about the burden of re-election. Most 2nd term presidents are more bold than those in their 1st term. The reason is that they are not worried about their chances of a 2nd term. We can expect a lot of pressure applied where Bush indicated it should be applied in his speech.
“To give every American a stake in the promise and future of our country, we will bring the highest standards to our schools and build an ownership society. We will widen the ownership of homes and businesses, retirement savings and health insurance -- preparing our people for the challenges of life in a free society.”
There are a few things that we can discern from this. The widening of home ownership hinges on interest rates. The president may be hinting to the Fed to keep rates at historical lows. If rates rise, even the first time rates rise. The restrictive pressure from even a modest rise in rates can result in the elimination of thousands of potential homeowners from realizing that dream. We have already talked about the potential of Social Security reform. I think this is going to be a hot issue this year, and we may very well see President Bush get his way. The influx of dollars into the stock market would be a real shot in the arm. Business ownership is a sounding call for unemployment numbers. President Bush is likely to pursue tax breaks and other incentives to pump up the small business ownership. This would be good news for unemployment figures, given that the largest potential for employment actually comes from small businesses across the country. Lower unemployment numbers means a larger potential for more cash flow in the economy. More coming in means more going out.
Do not 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...
Looking Ahead
I know all of you are probably sick and tired of hearing about how a bounce is due and that the markets are oversold. A bounce is going to occur and it will probably happen when we least expect it. All we can do is continue to prepare each day for when it does happen. Many of you are probably wondering why we have not added any shorts to the watch list or why I am not shorting any stocks. The time is getting near that we do need to start looking at stocks to short. I plan to do some extensive searching this weekend for stocks that have broken long term trend lines and are now setup to move lower. The reason I have been cautious to short is because shorts are by far less profitable than longs. Also, I prefer only to short when the indices are all trading below their 200MA. So while we could have probably made some money on shorts recently, I think the reward is not worth the risk just yet. I also think a bounce is coming that will cause you to forget about shorting for a few days.
I would like to refer you back to a chart I showed a couple of weeks ago of the Nasdaq. I have this same chart again tonight that shows the longer-term 38% Fibonacci retracement level. This level is my next target bounce area for the Nasdaq. I also have a chart of the SOX index that supports a bounce happening right around the same time the Nasdaq reaches the 2023 level. If that was not enough the Dow also has its 38% retracement level just below. I guess we can call this a “Perfect Storm” of chart support. However, I do have a feeling the ending of this story will be better than the one in the movie. I never wish for market weakness, but in this case I am hoping that we do touch these levels so that we all have a chance to buy on weakness instead of trying to chase the bounce.
Remember that the further we fall without any significant bounce, the harder the bounce will be when it does happen. The 2023 level that you will see on the chart is a significant support level IMO. My plan right now is to put a good amount of cash to work to the long side, if and when we do hit this level. The way the markets have been the last 2 days, we could very easily reach it tomorrow. If it does look like we are going to reach the 2023 level tomorrow, I will send out an alert listing the stocks I plan to buy and at what prices. I want to be long when the bounce occurs and I think our chance is coming very soon. If we are able to catch the market near its short-term bottom, we should be able to lock in some very nice gains in a short amount of time. This, by no means, is a suggestion for you to go out and load up 100% long. We still need to be aware that more downside is possible and that tight stops are a must. Also, be prepared to sell any positions that do not bounce as planned.
Trust me folks, even though I trade full time, the market still frustrates me on occasion. I am sure you felt my frustration reading last nights commentary about the over reaction to EBAY's earnings miss. Sometimes I may sound frustrated in my writings and I may sound frustrated in a post on the message board, but I can assure you that no matter what my frustration level is, I still make it a point to trade with discipline so that we can all live to trade another day. Every stock I buy and every alert that I send is executed with the utmost caution, as I know how all of you depend on TWPD and myself to help you to make sound trading decisions. We will always walk the path together.
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