We opened a position in Hutoton Royalty Trust (HGT) last week and plan on dobuling that position bringing our basis cost down. The stocks is being dominated by the break down of natural gas prices which appear to have bottomed in the short term anyway. I will sending out an alert to members when we do add to this position and when we take profits.
Watch Stocks:
Sears Holdings (SHLD)- We traded this stock long a couple of weeks ago for a large profit. The stock has continued to rally and appears to be topping out as it hit it’s 50 day moving average.
THQ Inc (THQI)- This is a penny stock which may provide some upside opportunity if it continues to consolidate.
(TZA)- TZA is a leveraged ETF which puts you 3x’s short of the Russell 2000. We are watching this ETF because although the Russell 2000 is in rally mode it is rallying on decling up volume. More details will be going out on my outlook for the markets to members in The Week Ahead Commentary.
Michael Kors (KORS)- This is a recent IPO which we are looking to short but not yet! This will be a short term trade to the downside.
Broad Vision (BVSN)- This is one that I have been watching for two weeks. Dicipline when approaching this short trade is essentail. We are near the point of where it is safe to open a position but not quite yet.
This week I discuss our trade of Sears Holdings (SHLD) which we took profits on last week. This contrarian trade made us a profit of 10% within a few trading days. I also discuss Hutoton Realty (HGT) which we are not trading to the long side. This is an extreme ovesold stock with and RSI in deep oversold territory and a double bottom stochastic.
Sears Holding is one of our classic contrarian trades which newcomers and non believers in contrarian trading think is nuts until they see the rally on massive volume. We screened SHLD and is very near a buy alert which will be sent to our subscribers. Take advanantage of our 14 day free trial to see where our price target is and to received our buy / sell alert.
How main stream RSI and Stocastics ruless would have made you poor
Were you not a student of contrarian trading you might have followed the foolish advice provided by the so called technical analysis gurus who make vague, overlysimplistic and worse dangerous statements on how to use the RSI and Stochastics. So I begin the video showing how using their buy sell rules would have ended in big losses if you did not use a stop loss order which most people do not. Don’t get me wrong, I love the RSI and the Stochastics just to name a few. However, if you fail to identify historic support levels, observe price and volume action and simply rely upon indicators and ocillators you can go broke.
Well once again we blew away the S&P 500 yet the mutual fund mangers continue to collect fat fees for underperforming their respective benchmarks. What do we forecast for 2012? Volatility will continue to reveal itself because of an unresolved European Debt Crisis and Iran. Our strategy for 2012? The same, Contrarian Trading. We will use high volatility to day trade and low volatility to swing trade.
How did we outperform the S&P 500 again in 2011?
Contrarian trading requires that you identify over hated and over loved stocks and study their prices and volume action as well as the charts for divergences in technical indicators such as the RSI. What did we trade?
Apple Inc – Short
First Solar -Long
PF Sweed- Long
Netflix- Long
TZA – Long (TZA puts you 3x’s short of the Russell 2000 /IWM)
TNA- Long (TNA puts you 3x’s long of the Russell 2000/IWM)
Watch stocks Sears Holding (SHLD) Oversold
We will be looking to get long of SHLD in the coming week. I will be sending our Trade Alerts to members. For Exclusive services take advantage of the 14 Day Free Trial.
These stocks represent future opportunities as we move into the new trading week. Winners from last week are PF Sweed and Advanced Battery.Although we remain bearish on the stock market we will remain net short but will look to hedge our short portfolio with stocks that look to be at oversold levels.
Europe and its impact
Europe will continue to discount the stock market causing traders to take profits quickly. When will Europe cease to be an issue? When we have a default of a bank or valuations of U.S. companies reach a level that will cause value managers to go shopping for bargains.
Alhough our trading portfolio is positioned to the short side we do like to take advantage of oversold stocks and short squeezes during stock market corrections. Oversold stocks include First Solar, Home Away, Sequans Communications and PF Sweed. The RSI indicators on nearing oversold levels but in the case of First Solar it has more further downside risk than the others. I will be sending out Buy Alerts to members.
Last week we again traded DMND for a profit on each trade.
Yes there are balance sheet issues and yes you had an auditor commit suicide
last week. But as contrarians we view the markets over reaction as an
opportunity to scalp a trade. Let me emphasize that DMND is not an investment
yet and until there is clarity in their accounting practices you should not
consider this stock as an investment. A short term trading vehicle is another
matter.
Economic Data
Economic data released last week showing that GDP coming in
at 2.0% versus 2.5% was no surprise to contrarians. It doesn’t take a Harvard
Business School degree to help you understand that a Europe entering recession
a slowing China and an over leveraged US
Consumer are nothing but head winds for economic growth.
These are the stocks that appeared on our screener as providing
the best opportunity for short term profits. These are not investments but
short term trades only. ANF,TPX and OPEN
were once Investor’s Business Daily darlings and remain great companies but
there is a lot of healing to do. They are part of the Retail Sector which as
viewed by the RTH are weak and will probably get weaker. My analysis over the
years has proven that oversold stocks have a tendency to rally off of oversold
levels only to break down to new lows only days to weeks after their counter
trend rally. My point to investors is that there is no rush here.
We opened our short position in Apple on November 9ths and took half profits on November 11th and then on November 17th we covered our short closing out the trade when APPL hit the lower band of it’s rising uptrend ling.
Diamond Foods (DMND)Oversold Long Trade
We bought shares of DMND on November 15th and took profits on November 16th. We expect the stock to continue remain weak. DMND it remains on our buy watch list. I will be send out trade alerts to members when we pull the trigger.
Direxion Russell 2000 Short ETF (TZA) Long Trade
We went long of TZA on November 11th and were stopped out on November 15th. We went bought shares of TZA again on November 16th and took profits on November 17th.
On November 1st I posted a my opinion of as to why Apple (AAPL) was a short. Since that time we have traded AAPL twice with each time being profitable. The path of least resistance appears to still be down but not straight down. AAPL is still a great company with a massive follwing among not just consumers among the investment community as well. There will be short covering rallies and that is when we will add to our positon. To receive Trade Alerts you need to be a member of The Contrarian Trader. To members I will be sending out The Week Ahead Commentary on Sunday.
Please give me your opinion of my video in the comment section below and don’t forget to subscribe to our blog alerts. We do not share or sell email information.
Finding a reputable stock training school online is becoming increasingly difficult, as the lucrative field continues to attract participants—many of whom may not be truly qualified to provide top-notch instruction. Some online stock trading schools are merely fronts for eventual “up sells” to proprietary investment techniques or other resources. The schools themselves may offer relatively little to the prospective investor.
There is good news, however. Even though there are many questionable online stock trading schools, there are also some superior options that have proven themselves over time. Novice stock traders interested in “attending” stock trading schools should take the time to seek out these better institutions. Here are a few hints that may be helpful in isolating a quality virtual institution.
Evaluate price tags. The old saying, “If it sounds too good to be true, it probably is,” holds true for stock trading schools. If you find a trading school offering free or remarkable low-cost tuition, you should immediately be on the lookout for potential problems. The only way schools of this sort function is by enticing students with partial information or marketing hype and then “up-selling” them on a more expensive guide that features all of the details necessary to put the strategies discussed into practice. Likewise, one should be concerned about incredibly high-cost programs. Although you can’t expect a quality stock trading education free, you should also be wary about spending a small fortune for instruction from a non-accredited institution.
Investigate instructors. A potential stock trading school student shouldn’t be satisfied by the stated “fact” that an instructor is a successful trader. That’s because successful trading isn’t necessarily indicative of actual instructional talent and because there is a substantial risk that the instructor’s biography might contain exaggerations and/or outright lies. Potential students should make a serious effort to learn as much as possible about featured instructors’ histories, reputations and credibility before making a tuition payment.
Keep expectations reasonable. If you hope that participation in a stock trading school will immediately take you from being a wet-behind-the-ears novice to the status of a world-class trader, you should recalibrate your expectations. Don’t look at stock trading school as a cure-all. Instead, recognize that it is one course of information, among many, that you will need to climb the stock trading learning curve. This also means that potential students should have reservations about any stock trading school that makes wild claims or that portrays itself as a one-step, comprehensive source of all necessary trading information.
Stock trading schools can be a wonderful way to learn more about the markets and how to use them to your financial advantage. It is possible to select a strong school that will provide a quality experience. By considering costs, evaluating faculty, and being sensitive to the true limitations of any school you can make a smart stock trading school decision.
Now that you know what a stock trading school is and some ways to identify the best options, you can begin to search for a program that meets your needs!
We added (DMND) earlier in the week and doubled the positon early this morning on the big pull back. I do not like the way this market is selling off. We also closed out (KBH) which we bough last week and scalped a profit. I wanted to add to both of these posititon but market conditons being what they are make it criminal to allow profits to turn into losses. This pull back is no surprise to Contrarians as the recent rally has only been on very light volume
Other reasons for concern it Italy’s bond yield skyrocketing and our own 10 Year Treasury auction being poorly received.
Looking to short (AAPL) and(TZA) again. Alerts will be sent to members.
I mentioned in The Week Ahead Commentary posted below that we had added Diamond Foods (DMND) to our Oversold Watch List. I discussed that the stock had further downside to and sure enough Monday brought us very close to pulling the trigger on this trade. I went into great detail of this trade with Contrarian Trader members. We puled out to the weekly charts to analyze the best entry point by identifying historical support.
What do we like?
We like the fact that on a forward looking basis the stock is trading with a PE of less then 11. This is a discount to its historical PE range
We like that fact that the RSI is at 16 which is an attractive entry point
We are very near to historic support levels
What don’t we like?
We closed near the lows of the day
Downside volume was very high indicating that institutions are selling
What do we need to see?
We need to see volume drop off considerably.
We need to see bottoming tails on the candlesticks
We need to buy in increments so as not to accept to much risk all at once.
I will be sending out an email alert to members of The Contrarian Trader once we begin accumulating a position. For those folks who have never traded extreme oversold stocks I caution you that this type of trade is for only the most diciplined of traders. If you have any questions post them below.
We took profits last week on TZA and on AAPL. Our short trade of APPL was quick scalp of $7.00 per share. The stock has since rebounded but we are looking to once again get short. Stocks that we have added to our watch list are CEDC,FSLR, LNDK,CEDC, SWIS, DMND,AMAG,RBCN and GNW. I go into a few of these potential oversold trades in The Week Ahead Commentary and go into all of their chart set ups in The Week Ahead Commentary- Members Edition which will be sent Sunday November 6th. I caution anyone looking to trade these stocks not to jump in on Monday morning as I believe that many if not all have further downside.
Does the Hoopla Surrounding the Euro Make it a Good Contrarian’s Bet?
It has been nearly eighteen months since the European debt crisis burst upon the scene as the next impending disaster facing our global financial markets. Government officials seem unable to create a solution that the market will accept since unanimous consent within the Eurozone is a more foreboding task than busting a filibuster in our Senate. The press has had a field day lambasting each superficial attempt to reach some accord, and this uncertainty has driven our trading markets to new heights of volatility. The Euro has been front and center in this debate, and most investors have avoided the currency as if it were infected with the Black Plague of old.
The often-heard mantra of contrarian traders is that the time to buy something is when no one else wants it. Does this rule of the road apply to the Euro in these troubled times? The answer to this question depends on your individual tolerance for risk and whether you are adroit enough to handle the “whipsaw” machinations of our forex market. Despite the hoopla that has been created by the talking heads on our financial news channels, the Euro has actually performed as most experienced traders would have expected under the circumstances, yielding excellent opportunities for gain if you understand how to profit from volatile swings in the currency markets.
Stock investors may have shunned currency ETF’s for the time being, but charts from this medium do illustrate a few valid fundamental points that suggest that technical trading with prudent use of leverage can be a good profit angle for the knowledgeable and experienced forex traders among us. Here is one example worth a review:
The diagram above depicts the changes in value over the past twelve months for the Euro, the Canadian Dollar, Oil, and the S&P 500 Index. Pricing data from popular ETF funds have been used to construct this chart. “FXE” represents the Euro, and “FXC” is a substitute for the “USD CAD” currency pair, reversed to resemble share value criteria. Data from forex brokers would closely resemble these ETF results.
Several conclusions can be drawn from this representation:
The Euro has actually behaved in a very predictable wavelike pattern over the period, ending the year at roughly the same value as when it started;
The Canadian Dollar, known as a “commodity” currency due to the large oil reserves that fuel exports for Canada, is also seen to correlate very closely with the price of oil, although at a less volatile pace;
The Euro, as a rule this year, has correlated more closely with the S&P 500 Index, an indication that Europe will benefit if U.S. companies recover and post positive earning reports. Most experts would claim that, after the first few months of the period, the S&P 500 Index has actually been buffeted by the trends of the Euro, which have ebbed and flowed based on the latest bit of Eurozone news, whether favorable or unfavorable as to resolution of the present debt crisis;
Currencies are actually less volatile than stocks, which “vibrate” at amplitudes some 2 to 3 times greater than for either the Euro or the Loonie.
Should a contrarian investor look to the Euro as an opportunity? “Buy-and-Hold” strategies rarely apply in the currency world. Position trading with manageable leverage is the strategy recommended by most forex traders. Profits are derived from speculation as the market continually seeks a new equilibrium, based on the relative economic considerations of each currency pair. The concept of “intrinsic value” does not exist.
I have had Apple Computer (AAPL) on my Watch List for stocks to short for some time now. Yes the stock is cheap on both a current and forward PE basis and to say that I don’t find that a bit troubling is an understatement. What gives me the courage though to entertain a short positon in AAPL are some non-aruable techincals. So, let’s begin.
When you plan on shorting a stock that is so widely held and loved like Apple Computer you had better not rely on daily charts. You need to watch the weekly stock chart and the weekly charts are signaling to us that since April 2o1o AAPL was in fact weakening. What? You might say AAPL’s share price increased by 26%. How can you argue that? Well you can’t argue the increase in share price that is a fact. What is also a fact is that the vigor in which the stock was being accumulated peaked in April 2010 when the RSI was above 85. After correcting the stock resumed it’s uptrend but the RSI tended to lag the stock. This divergence became magnified begining in January 2011 and that divergence continues to escalate.
Fast forward to recent weeks and you will note how the choppy action on the Stochastic RSI failed to confirm the new highs in AAPL . The death of Mr. Steve Jobs, disappointing earnings are just a couple of the catalysts for a sell off. Add into the number of potential catalysts the common love affair among the analyst community with AAPL. Of the analysts covering AAPL 27 have Strong Buys and only 1 has a Sell on the stock. This has been unchanged fro the past year. Yes granted analysts are usually behind the curve but I find it hard to believe that the passing of Steve Jobs will not have an immediate and long term impact on their opinion of the stock. I am sure the pipeline of products at AAPL is strong but analysts are like lemmings. Once one turns negative they all seem to jump off the same cliff.
The key reversal displayed by AAPL during Monday’s trade did not go unnoticed by us and by many traders who use technical analysis to time their trades. Take note also of the declining up volume over the past few trading days. I call up days on light volume after a poor announcement “rotation days”. Those days provide institutions the opportunity to slowly rotate out of a stocks without causing it to tumble. The stock is in a tight pennant formation on a daily basis and it will soon show us that it is going much higher or lower in a rapid period of time.
The key to shorting a widely held and much loved stock like AAPL is to accumulate a short position in small increments and to utilize a static stop loss order above key resistance levels. If and when AAPL does begin to break we’ll convert our static stop to a trailing stop loss order to not just capture as much profit as possible but more importantly protect our downside. I will be sending out Trade Alerts to Contrarian Trader members as we begin to accumulate.
Your opinion matters so please leave your feedback below for discussion.
If you are feeling a bit exhausted and whipsawed as of late, you are not alone. Thank goodness for the weekend! We had an impressive week that saw the Dow rise 5%, the S&P 500 lift 6% and the Nasdaq gain 7.6%, but the solid showing does not feel all that great when we have had so many wildly up and wildly down days and weeks over the past two months. A 5% daily gain loses its luster quickly when the market is down 4.5% the next. It seems as though the stock market is driven only by fear, reassurance, fear, denial, fear, and finally a whole lot of positive-sounding press releases from Central banks all over the world.
This strange scenario becomes even stranger when you try to really figure out just who is bailing out whom over in the EU. There are “official” economic charts and graphs available online that attempt to describe the complexities in Europe, and then there are lampoon-style sites that have charts that look similar, but still make some serious fun of how crazily complicated it is over there. How can any EU banker or politician ever make sense of anything when the parodies of a bad situation seem as real as the “real” situation?
So, what is “real” right now is hard to decipher. The reason for all of the stock market gyrations we have had over the past couple months is because “the market” knows things are really bad, but it is unable to figure out how the longer-term variables play out. This leads to the day-to-day overreactions. It is a day-to-day battle between the Central banks and the “reality” they seem to ignore, postpone, and never confront. That is why the “can gets kicked down the road” endlessly. Politicians and Central bankers are far different than entrepreneurs, who actually CREATE jobs, and we are now painfully learning that we need a whole lot more entrepreneurs than bureaucrats if we are to get out of this mess.
On a different and technical note, the S&P 500 put in a loose, double top pattern in July around 1350, before that fade late in the month, which led to the plunge downward into early August. Since bottoming around 1120 several times in early August we have had nothing but wild rollercoaster rides up and down ever since. Amazingly enough, the S&P 500 closed out at a two-month high Friday, and it had many of the exhausted bulls thinking that maybe, just maybe, this could be a great time for a final turn from what has been a high-speed, 20% bear market decline.
It would definitely be a great time for a larger, upside run, but we historically hear of rallies from October lows, not rallies off October highs. Many strategists are still scratching their heads over the recent strength in stocks, but then again, there are quite a few market “seers” saying that fear levels and pessimism had become so high that a change was definitely in the air. Again, the supposed pros are still divided on the intermediate market environment, and the broader investor world is divided as well. The volatility we have seen shows that it is a tough and important juncture for stocks, so we will just have to wait and see what unfolds.
Meanwhile, across the pond, Germany and France had said that the end of the month was their deadline for coming to some sort of agreement on the Greek bailout, but we all know how that can be “extended and pretended” at a moment’s notice. Look for any “real” reform to likely be pushed into 2012 or later, after the current politicians are retired, reelected, or lobbyists or some sort of a combination of the three. The Greek card is the Joker Card right now, and it will be interesting to see how this EU deal concludes. The longer they wait, (the buzz goes) the more painful the Day of Reckoning will be, and the worse the situation gets, the less politicians want to address it. And, that is worrisome!
I first wrote about Netflix (NFLX) being oversold a couple of weeks ago and guess what? It is still oversold and likely to get cheaper. My buy price targets are correlated to the oversold condition of the NFLX using my indicators, price and volume action. My initial price target was $130 then it rallied which is when I lowered it to $120 and I have now again lowered my price target which I have shared with my members.
I sent out and alert to my members on Monday 10/10 advising them not to chase NFLX which was being spiked in the pre market as high as $12.00 on non news. I suggested to my members that they should be looking to short NFLX into that strength. The stock flashed a key reversal and closed lower on the day by 5%. This is the type of move that kills confidence in a stock and provides contrarian value investors an opportunity to grab these shares on our terms, not the Wall Street thugs who spiked it pre market.
The same action as seen on NFLX can be experienced by the S&P500 if they spike it up into the 1200 level. Why is that bad? Did anyone look at the stock charts to see how much volume fueld the S&P500′s 3.5% move Monday? You will need your magnifying glass because there was no volume! None. There will be a time to get net long of this market but the time is not now. Yes key pennant formations and averages are showing bullish break outs but without volume this rally must remain suspect.
We rarely day trade but when volatility this high I simply can’t resist the opporutnites that presnet themselves. We traded Bank of America long for a 3% gain and shorted Cheniere Energy (LNG) for a 6% gain.
We took half profits in our short positions DXD and SDS which put you short both the DJIA and S&P 500. We have held these positions for several months in anticipation of this correction. We still hold each in our portfolion and will look to add on pull backs to the lower band of it’s uptrend channel.
We took half profits in FXP as it spiked above the upper band of it’s rising uptrend line on Monday morning. Using a diciplined selling approach is critical survining these markets.
The markets went out at extreme overbought levels due to the short squeeze in the final hour. Expect a pullback early on Wednesday. I will be send
On Monday we took part of our FXP profits off of the table as it gpped above it’s upper band of it’s rising uptrend line. The FXP puts you short of China. If you are disciplined follower of technical analysis you know that a disciplined and consistent rule for selling some of your position is critical. We remain short of FXP and fully expect it to head into what I classify as “Extreme Overbought” levels. It is a that point where we will sell more.
Besides China we remain short of the DJIA using the DXD and the S&P 500 using the SDS. I expect that we will be taking some profits on this in the coming days to weeks. The goal here is to either A) build cash to add back to these short ETFs on a pullback to support B)build cash to take advantage fo some bargain that are appearing on our stock charts using a “Weekly Screen’ of the stock market, not a “Daily Screen” as it is way to short term.
For shorter term day trades we will be using the TNA which puts you 3Xs long of the Russell 2000. It is very volatile so if you are risk averse it is not for you.
I want to set our members up to enjoy a great Santa Claus rally to as contrarian investors intra highly bearish environment and in fact near bear market territory we want to begin looking for bargains to get long of. I will be sending out my Weekly Screen of stocks to members this evening and each week thereafter.
If you are not a member and would like to receive our Weekly Screen our Buy/Sell Alerts and Stock Market Commentary take advantage of our 14 Day Free Trial Offer.
As a contrarian I take note of when the stock market sells off on better then expected economic data. That sell off is in of itself a contrarian indicator because the market is telling you that the better economic news is being overshadowed by some other problem which overshadows the news. The problem that the market is concerned about is the impact on US bank exposure to Europe. Did anyone happen to see what happened to Morgan Stanley (MS) today? The rumor being shopped is that they are overexposed to France.
Europe is only one area of concern for this market. The slowdown in China and the impact of a slowing Europe and United States on the Chinese economy. Doubt that? Take a look on US Steel (X), Freeport McMoran (FCX) and Crude Oil (USO). They are getting clubbed like baby seals becuase the slowdown in China is for real and it is impacting commodities.
As I type this I am watching Larry Kudlow and he is reasonably concerned. However he has talking heads coming on telling people to buy stocks. And, if we don’t we will regret it. Are these guys on CNBC nuts? I have been telling members for months that certain sectors like the banks, commodities and housing will retest their 2009 lows. The break that we saw today in the stock market is only the beginning if the Europeans do not act and show a willingness to protect their banks.
I went into this in my Contrarain Trader, The Week Ahead Commentary- Members Edition last night. Today was no surprise.
Bulls had been hoping that we would somehow get one of those late-session rallies on Friday, which would magically makes all of the bad go away. Instead, we got a late-session selloff that raised a lot of questions about next week. Not only did the late-day fade raise questions about next week, but it also raised questions about October. A late-day fade to close out a very turbulent quarter is not exactly the type of thing the bullish camp wanted to see on Friday, especially heading into the historically tough month of October. Friday’s fade left the major indices down 2.2% to 2.5% each, and while it was not that bad, it did not make the quarterly or monthly losses look any better.
Financial headlines touted the fact that this was the worst quarterly performance since the financial crisis of nearly three years ago, when stocks bottomed in March of 2009. Monthly losses for this September were 6% for the Dow, 6.4% for the Nasdaq and 7.2% for the S&P 500 (thanks to many financial stocks that were hit hard). The quarterly numbers were equally painful, as we saw three-month declines of 12% for the Dow, 13% for the Nasdaq and 14% for the S&P 500. This might still be in what technicians consider 10% correction territory, but it certainly feels a whole lot more like a rapid-fire bear market with a textbook 20% decline.
The big concern all week was, of course, how the Greek Tragedy and the fate of the rest of the EU will finally play out on the global financial stage. There is so much posturing and pandering going on that it is difficult to gauge just what will happen. Most of the countries’ banks are loaded to the gills on every other country’s debt, so it really does seem like a house of cards if one country like Greece defaults, and essentially pulls out one of the lower cards from what is apparently a BIG house of cards. Critics of the ongoing EU “song and dance” say that the faster Greece defaults, the better, and the longer they wait, the worse the problem becomes. It is a tough call, and probably especially tough to be a politician in the EU.
While all of the focus in Europe is on whether Greece will default or not, there are definitely other worries there as well. Bloomberg reported that inflation picked up a bit last month, rising from a 2.5% rate, to a 3% rate in August. It could be the result of commodity prices rising, but it also could be a sign that all of the bailout money that keeps slushing around might be starting to put upward pressure on prices. The last thing Europe needs right now is rekindled inflation just when so many governments are running out of money. Bad economies are destroying tax revenues, and yet, these governments keep going deeper into debt. This is a game of chicken that might not end well.
Increasing inflationary pressures in Europe might ultimately be the direction the U.S. takes, especially since it has also flooded the economy with cash in order to keep the financial markets afloat. The problem is that most of the bailout money went to the banks, and they are still simply not lending to anyone or lending for anything. That money is still there, though, and it can be very tricky for the Fed to reel the trillions back in if those trillions do start to seep into the economy and fuel inflation. Oil and commodity prices have been hit hard lately, though, and that is helping keep the lid on inflationary pressure at least for the time being, but the concern about inflation remains on most economy watchers’ minds. China’s economy has cooled down a bit, and has also eased inflation worries, but we all know that China could easily kick back into overdrive in a blink, and their inflation issues would be back as well.
Another issue that has the market feeling insecure is the state of the “Too-Big-To-Fail” banks that the Fed seems to have grown to love so much and that the general population has grown to “not love” so much. Bank of America (BAC) has dipped to nearly $6 per share as lawsuits over its Merrill Lynch acquisition, as well as a lawsuit over its selling of apparently toxic mortgages, weighed heavily on the bank’s stock price this week. You need only look at the two or five-year charts on the big banks like BofA, JP Morgan (JPM) or Citigroup (C) to see why the broader market is reeling and looking a bit seasick. The fact that behemoth banks are looking so comatose three years after the biggest bailout in history is heartbreaking. Imagine if those banks were allowed to fail and all of that money was just sent to every household in the country.
Bank of America was caught in the cross hairs this week not only by the lawsuit news, but also by the fact that they want to charge $5 per month to account holders who use debit cards. This did not play well in the Heartland, especially since a debit card is used to access one’s OWN MONEY. It is not a credit card, and it is in place of a check, but for the negative vibe this sent out from a “Too-Big-To-Fail” bank, it had bank watcher’s scratching their heads at the timing of such an announcement, especially during what are still rough economic times for a lot of people that use debit cards instead of cash or checks. Again, this was one of the Big Banks that received white-glove treatment from the Fed and the Treasury three years ago, so you have to wonder who is driving the boat when they slam a $5 monthly fee on a debit card. Unbelievable!
I prepared The Week Ahead Commentary – Members version which has been sent to members. The 35 minute video deals with the technical analysis of the stock market using charts. To receivie the commentary which is prepared for members each week take advantage or our 14 Day Free Trial.
I recently read Whitney Tilson’s letter to shareholders (found here) where he discussed having a drawdown (loss) of 20%. His letter explained that large drawdowns were part of the process to achieving long-term investment success. I don’t manage a fund but I do invest my own capital. The concept of money management and limiting losses is a taboo subject among value investors. The reason being EGO. Value investors including myself spend hundreds of hours researching a company. I like to think my work, which includes digging deep behind the numbers, gives me a good perspective to place a fair market value on a company. My due diligence includes not only financial analysis but also an exhaustive amount of work speaking to competitors, customers, ex employees and analyzing the psychological profile of the management team. This research is critical since all I do is turnaround investing and look for stocks that will turn into 5 baggers. With large returns comes large risks. However, despite wanting large returns, I do not like or want large drawdowns. I incorporate both technical and sentiment analysis to help me identify when a stock has bottomed. In most cases I have been pretty successful picking bottoms. It takes patience and is like watching paint dry in some respects. However, when I am early I can be very early. Since I take concentrated positions being early is not pleasant. This is the hard part for value investors. You have spent months analyzing a company and placed your savings down to take advantage of what you consider a fabulous price. Then the stock is down 10% then 20% then 30% then 40% what does one do. Does an investor have a strict rule where he cuts losses based on an individual security or on the entire portfolio? Many value investors pride themselves on buying companies with great balance sheets or discounts to working capital. They believe it allows them to buy more as the share price falls. It will come back they say. However, has that investor considered the concept of value traps? How many value investors purchased the home builders after they had fallen 50%. Only to watch them fall another 80% in many instances. Having operated turnarounds, I know how quickly industry dynamics can change and how those changes can quickly impact pricing, cost structures and a companies competitive position in the marketplace. An investor needs to realize cash flows can decline very fast. Value investing is buying shares in companies that are experiencing problems one way or another. You can never underestimate the problems a company can experience when its industry turns down.
The next issue for Value investors is their comparison to Buffet and his philosophy that a lower price makes it’s cheaper and a better buy. I understand the theory but an investor has to understand their temperament and capital position. When you manage other people’s money they don’t care about value they care about cold hard cash. Whitney may love his positions but his investors are not happy. They may realize that china is slowing, we are in a balance sheet recession and those circumstances may create numerous value traps. Buffet can hold his positions because his capital comes from an insurance company. Mr.Tilson’s investors may not be so patient. His 20% loss may not allow him to stay through the cycle. He is in the horns of a dilemma.
I have been very bearish on the equity markets for the last four years but am beginning to warm up to equities as prices fall and valuations become attractive. I have begun to invest in 3 highly selected shipping stocks that have the balance sheet and working capital availability to survive the shipping depression and turn into 3 and 5 bagger returns. Many shipping companies are going into chapter 11. I am investing in what many consider a precarious time. I believe I am right. However, I am in drawdown now on the positions as they have fallen. I am in the horns of a dilemma. My ego says to keep buying more as it goes down. However, the markets are bigger and stronger than any one of us. Over the past 20 years I have seen brilliant investors wiped out and taken out of the money management business because they did not want to take losses. I suggest everyone read a passage in the book, ‘Inside the house of money,” page 202 which is a profile of Yra Harris. He speaks of this concept of being right but at the wrong time. Many people in the money management world are super smart having Harvard MBAs and CFA certificates etc. However, they you and me are not bigger than the markets. I am super bullish on my three shipping equities but it looks like I am early. I want to live to fight another day, so I am putting my ego on the shelf and ring fencing any further losses. I will have a stop and reenter plan. I will cut the position size but have a reentry plan to get back to a full position. I look forward to hearing from other value investors and there strategy for dealing with losses. It is the most important and least discussed topic among investors
Yes I know the Chinese miracle how can we short it. Let’s face it, if there is no demand China’s export driven economy simply must slow. Just take a look at the recessions hitting Europe and now the United States. Commodities such as Crude Oil, Copper and Steel are getting clobbered with no hope in site. The Chinese banks have been forced by the government to continue to tighten loan demand and raise loan loss reserves.
Add to the above mentioned items that China has built not just ghost towns but ghost cities. They are lying vacant and in need to maintenance. And lets not forget folks that although the United States has really gone off the tracks with respect to democratic values and the traditional respect for hard working capitalists China is and will for the foreseeable future be a communist country run by a highly corrupt government.
All of these reasons combined caused us to open a short position in China back in 2010. Now that it is breaking out we have begun adding more and will add more in the future. Our vehicle of choice is the Pro Share Short China FXI ETF (FXP). Am I suggesting that you buy some on Thursday morning? No! It is too late, you must wait for a pull back to support levels. I will be sending out alert to members as we add to positions and scale out of positions. Use caution as (FXP) is a very volatile ETF.
Sure NFLX is oversold but it is about to get even more oversold. On both Monday and Tuesday morning of this week I sent out alerts to my membes not to get to excited about any stock, especially NFLX which has had stiff resistance at the $130 level. I warned that the longs were squeezing the shorts off of the 1100 level on the S&P 500. Sure enough we saw a close well off the highs of the day Tuesday. What were we doing on Tuesday when the market was pushing higer? We added to short positions when the risk to reward using technical analysis was in our favor. Use caution folks please! Don’t get suckered into buying into a stock market which is spiked higher at the open just because the jolly talking heads on CNBC report the news to fit the futures. Learn to use stock charts to determine your best entry and exist points.
As CNBC and Bloomberg get negative on the stock market I become more positive on the stock market including Banking stocks such as Bank of America, the Housing Sector and Commodity Stocks but not yet!
For those visitors who are not yet members use the 14 Day Free Trial to receive his 35 minute video commentary of my anaylsis of the stock market using charts and headline news out of Europe and Washington D.C. Contrarian trading is the only way to trade this market right now. Stock charts and technical analysis is essential to timing the stock market correctly.
China’s stock market correction is a bubble that is bursting and I discuss the (FXI) and the (FXP) which puts you 3x’s short of the (FXI)
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