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Monday, May 02, 2005
Market Recap
Today was a slow day in the markets as many participants chose to stay on the sidelines, awaiting the Fed decision on interest rates tomorrow. The DOW was up 59 points but volume was pathetic. The NASDAQ gained 7 points and the S&P gained 5 points. Oil closed back above $50 a barrel today. Recall yesterday, I said that if oil closed below $50 for the second straight day, that it would be good for stocks. Well, that did not happen and oil refuses to stay below $50, as it was up $1.20 to close at $50.92. Stocks were not affected by the rise in oil as they tacked on gains from Friday's big rally. However, today's rally was on weak volume so I am still not convinced the rally is real. Tomorrow, the Fed will decide on rates and probably raise them by .25 basis points, which everyone already knows. What they say in their comments will determined which way the market goes at 2 PM EST tomorrow. If they keep the “measured pace” in the statement, I think that the market will sell the news. If they change to a more passive approach, I think that the market will rally. The past few Fed meetings have been a non-event, in other words, there has been no market reaction to its decision. However, this time I think the market will react and it will be big in either direction. Tomorrow is sure to be a wild ride so buckle your seatbelts and hold on.
Wall Street and Yellowstone National Park
I recently watched the docu-drama, "Super Volcano," on the Discovery Channel. It was a doomsday-like scenario that could possibly play out in Yellowstone National Park. It was an interesting show and certainly pointed out the potential that Yellowstone has to become a super volcano and change life as we know it. Naturally, I was thinking about stocks as I watched the show and began to think of the parallel between a super volcano prediction and a super stock prediction. The latter is a much more common prediction, but the true event happens about as frequently as a super volcano.
Mailer Stock Promotions
I bring this up tonight because of the recent market action. I am sure that there are many people that have lost a lot of money holding stocks through this downtrend. The more they lose, the more desperate they become to make it all back. Therefore, they are vulnerable to all of the scams out there that promise the next big winner. We have all heard the analysts, or someone who supposedly is in the know, touting a particular stock as the next MSFT. They make outrageous predictions of 500, 1000 3000% gains in price over time and talk about how wonderful the company is. I will not mention any names but there are publications sent through the mail with these types of predictions and most of the stocks they are pumping are OTC bb or even pink sheet stocks. All these predictions are of course just hype but they serve their purpose. They have already accumulated these stocks and need some buyers to produce volume so they can sell their shares. There are many people who receive these mailings and jump into the promoted stock immediately. Most of the time, unless they sell into the strength, the trade ends up a loser and they are stuck in an illiquid stock after all the volume dries up.
The Analyst Pump and Dump
We hear the analysts place price targets on stocks and wonder how they can predict an exact target price. I do not know the statistics but I will bet 90% of all price targets that analyst place never get reached. Most analysts know far less about the company than they want you to believe. For example, how come no analyst knew of the accounting frauds at Enron and World Com? If they were doing their job, they would have dug deep into the books and should have been able to warn investors. We have talked about this in the past, when an analyst is trying to promote a stock, the firm is already long and may want to unload some inventory so they upgrade the stock to have some buyers to sell to.
The same holds true when the analysts slam a stock, only to see the stock bounce back when the company posts solid earnings numbers. This is because the analyst is working for the firm and has only the firm's best interest in mind. When they downgrade a stock, you can bet that the firm wants to buy shares before the earnings report so they use this downgrade to accumulate shares on the cheap. Or, if they know ahead of time of bad news, the firm takes a heavy short position and then the analyst will downgrade the stock after the firm is short. You would think this would be illegal but it does happen and is an every day occurrence.
Anything is Possible But….is it Really?
Even worse than the analysts are the so called "Guru's," who hand out stock advice to anyone that will give them 30 seconds to listen. You hear them every day on television. All of these predictions of the next "super stock" and yet nothing ever really comes to fruition as predicted. Why are they not held accountable and invited back and challenged on their past predictions? Could Yellowstone become a super volcano and change the face of the earth? Maybe, anything is possible. Could a stock that gets promoted on BSNBC actually turn out to be the real deal? Sure, it is possible. But, when you put things into perspective, you begin to realize that the likelihood is about the same for each.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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