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Tuesday, August 23, 2005
Market Recap
Stocks sag again on Wall Street with absolutely no buyers to be found. This lack of buyers caused stock prices to drift lower. The market is not drifting down because there are heavy sellers; it is simply drifting lower due to the lack of buyers. Volume again was light and as mentioned in Sunday's commentary, we expected this light volume to be a problem this week. The DOW was down 50 points today and the NASDAQ and S&P both dropped by 4 points.
The STHQ portfolio has held up remarkably well through this market downturn. Normally we would have suggested all cash for now but since we were already in solid positions, we will just let them ride until we get stopped out. I would have expected us to be stopped out by now but the charts have held up well. If the market can manage a bounce, these strong stocks should lead the way up. Even as the overall market seems to want to trend lower, there are still plenty of strong stocks in this market. This is another reason why we have not suggested going to cash yet. With so many charts looking good, there is no reason to step to the sidelines yet. Stocks like ISRG, LIFC, KOPN, ECLP, UPSI, BCON just to name a few, have moved up and look strong regardless of the recent market trend. Normally when markets are trending down, it is rare to find so many good charts. Maybe another reason to believe the market may be ready to form a bottom soon.
Gauging the Market Trend
The key determinant of whether the market is bullish or bearish is the long-term trend, not just the market's knee-jerk reaction to a particular event. Small movements only represent a short-term trend or a market correction. Of course, the length of the time period that you are viewing will determine whether or not you see a bull or bear market.
For instance, the last two weeks may have seemed the market to be bearish while the last few months the market has displayed a bullish trend. These trends can also last for months with the bigger yearly trend overriding the monthly trend. Because of this, most agree that a decided reversal in the market should be ascertained by the degree of the percentage change. For example, it is commonly believed that a standard bull market correction can be up to 10% to the downside and still be called a healthy correction. However, once multiple indexes have changed by more than 10%, say 15 or 20%, you can be certain that this is far more than a healthy correction and the trend is definitely changing direction. If after the correction, the new trend continues, it is because the market perceives a change in economic conditions and are thus attempting to price in those factors in advance of the majority of market participants hearing the news.
Not all long movements in the market can be characterized as bull or bear. Sometimes a market may go through a period of stagnation as it tries to find direction. We saw this type of action for most of 2004. In this case, a series of up and downward movements would actually cancel out gains and losses resulting in a flat market trend.
In a bull market and in a perfect world, the ideal thing for an investor to do is take advantage of rising prices by buying early in the trend and selling when they have reached their peak. Of course, determining exactly when the bottom and the peak will occur is almost impossible. The bottom of the last bear market came in October of 2002. It is easy to see now after the fact, but at the time, the way the markets were spiraling down, it was tough to want to get in then and try to catch a falling knife. It was not until February of 2003 that I sensed a new bull being born. I was late spotting it by about 4 or 5 months but you will never be able to spot the bottom in the same month so being a little late (and sure) is always best. This is because you will never catch the exact bottom unless you try to catch that falling dagger and are lucky enough to guess right. I would rather wait and miss a few points to the upside just to make sure the trend has definitely reversed. Once it became noticeable that the trend had changed, I went 100% long and that trend has been up for over 3 years since. Yes, there was a period in 2004 that the market traded flat but that did not break the upward trend that started in October 2002. More on gauging the market trend in the second part of this commentary tomorrow or Thursday.
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.
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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http://stockcharts.com/def/servlet/Favorites.CServ...
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