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Wednesday, May 11, 2005
Market Recap
Stocks rebounded after a scare that dropped the DOW almost 100 points earlier in the day when there was a report that the Capital was evacuated due to a small plane entering restricted air space. The Air Force scrambled fighter jets and the plane never actually got close to the restricted air space. It turned out to be a false alarm as the pilot meant no harm. Stocks recovered and closed up for the day but the volume was very light. The DOW was up 20 points, the NASDAQ gained 8 points, and the S&P was up 5 points. As mentioned last night, the CSCO earnings were a non-event for this market and I suspect that DELL's earnings, released tomorrow night, will also have no impact on market direction.
Patience is a Virtue
The old saying goes, "Patience is a virtue". Our CLF trade is a prime example of how patience has paid off. We could have panicked and covered our position for a 10% loss, and perhaps some of you did, but the chart was the key. The stock made a move against our position but the chart was still telling me that our position was not in danger. Fortunately, things worked out and this stock caved in yesterday with follow through today. Some people have been asking why we do not always stick with a 2% loss on our trades. Well, sometimes trades make moves that are beyond the 2% stop loss rule and it calls for a gut check as well as a check of the chart. We cannot simply automate our trades and sell the second the 2% is reached. It is a guideline but often times not a technical level on the chart that would call for closing the position. There are times when the 2% stop loss is warranted but I prefer to evaluate each position on a case by case basis before taking any action. CLF is a perfect example of why it pays to be patient with your trades. They do not always work out this way but the odds are if you trust the chart, things will turn in your favor more often than not. We had similar reversals in other short positions such as IPS, NX and GGC. I am confident that WLT will also reverse and head lower soon.
Short Interest
Short selling allows us to profit from a falling stock or market. There are brokerage departments whose sole purpose is to research deteriorating companies that are prime short-selling candidates, looking for weaknesses that the market may not have discounted yet. They will also look for what is called the short interest. We should be looking at short interest also. The short interest can serve as a market-sentiment indicator and we need to be aware of it. Short interest is the total number of shares that have been sold short by investors that have not yet covered or closed out their position. For example, a stock with 1.5 million shares sold short and 10 million shares outstanding has a short interest of 15%. A large increase or decrease in a stock's short interest from the previous month is a telling indicator of investor sentiment. When TASR short interest increased by 10% in one month, that should have been a warning sign that the stock was eventually going to go lower.
A high short-interest stock should be approached with caution if you plan on going long. This is because short selling is done mostly by professionals, not the average investor, and professionals are right most of the time. So if the smart money thinks that the stock is going down, you may want to think twice about going against their trade. However, some investors use the contrarian approach and use short interest as a tool to determine a possible reversal to the upside. The rationale is that if everyone is shorting then at some point they will have to buy to cover and the stock will eventually have buying pressure. In my opinion, this is a mistake because if the majority of the short sellers are professional; they will organize a smooth orderly covering process that will not take the stock up. They can control this process and believe me, they do. It is a coordinated effort by the big brokerages houses to prevent a short squeeze.
Short-Interest Ratio
The short-interest ratio is the number of shares sold short, divided by average daily volume. This is called the "days-to-cover". Given the stock's average trading volume, it tells us how many days it will take short sellers to cover their positions. For example, if a stock has short interest of 5 million shares, while the average daily volume of shares traded is 5 million, the calculation concludes that it would only take 1 day for all of the short sellers to cover their positions. The higher the ratio, the longer it will take to buy back the borrowed shares. If the days to cover stretch out 4 and 5 days or more, covering a short position could be difficult. These high ratio short-interest stocks usually turn into major short squeezes if good news is released and that can become very painful.
The NYSE Short-Interest Ratio
The NYSE short-interest ratio is another metric used to determine the sentiment of the overall market. The NYSE short-interest ratio is calculated monthly and includes all short interest on the entire exchange, divided by the average daily volume of the NYSE for the month. For example, if there are 5 billion shares sold short in April and the average daily volume on the NYSE for the same period is 1billion shares per day, the short-interest ratio is 5. This means that, on average, it will take five days to cover the entire short position on the NYSE. In theory, a higher NYSE short-interest ratio indicates a more bearish market outlook. However, the contrarian in this case would be very bullish.
The Indicator
Here is the secret to calling a market bottom, in my opinion. When the professionals (fund managers, specialist, floor traders, etc) have covered all of their shorts in an orderly manner, while keeping market sentiment bearish enough to get the public interested in shorting, you can bet that the market is about to reverse to the upside. The professionals are not wrong, mean while the public is almost always wrong. If you know how much of the short interest is professional and how much is public, you can conclude with a reasonable guess if we are near a bottom. I am interested in the specialist to public short ratio but do not know where to find it or even if it is available publicly. I will continue to research and try to find this information. Armed with this golden information, I am confident that we can predict, with accuracy when the market will bottom.
”My Notes”
We would like to introduce a new feature on the website, “My Notes”. This link is located in the top right corner. It is an area where you can store notes for yourself in an organized manner. Just click on this link and a note pad will come up, allowing you to save any trading notes you may have. I use this feature myself and it is quite handy. A big thanks to Mike Tojo, our webmaster for creating this tool.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
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.
Please Tell A Friend
Please tell a friend about our service. As always, thank you for your support past, present and future!
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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