Click chart to enlargeAbove is a chart of CF. Far sooner than we thought, it is approaching the top of its channel once again. The ideal scenario would be if these fertilizer stocks reached the tops of their channels before earnings are released next week. We could then sell them and avoid potential disaster. If you're a frequent reader, then you already know our take on the effects of earnings... it depends more on where the stock is trading ahead of them than it does on what they report.
The logic behind selling ahead of earnings is as follows: It is easier to overcome a missed opportunity than lost capital. This is one of the cardinal rules of trading/investing.
Below the chart of CF is a pie chart courtesy of TDameritrade showing the current positions in one of our accounts. Cramer, are we diversified? We would love for someone to call into his show and ask that question:)
Ok, so if the fertilizer stocks get overextended ahead of earnings and we sell, what do we do next? It all depends on what happens next. Although we're getting ahead of ourselves talking about the next trade while still in the current one, we like to have a theoretical game plan so that we're prepared to act should opportunites arise. If the fertilizer stocks sell off enough after reporting, we will simply buy them back. If not, we are looking at loading up on DDM (Ultralong Dow) if the market capitulates. We believe we are very near a short term bottom in the Dow, but it may require a capitulation day to seal the deal. This could easily be provided this week after the financial companies report. We would like to see C drop to 11, and the Dow drop to its 2006 lows of 10700. At that point, we would be willing to enter into a substantial long position in DDM.
We cannot answer all of the emails we receive. Many of you know, we do not even respond to all comments on this board. It's just a matter of how little free time there is in a day. One email, though, hits at an important point, and we would like to share our answer with everyone...
"Snot, I am an avid reader of your blog and I have been watching your trading strategy and learning from it every day. I have heard many times that no one can time the market. Yet you seem to do it pretty well, and you make it look easy using your channels and averages. I believe that you really do have the results you claim because you mention your trades when they are happening instead of after the fact. Your approach to trading yields from my estimate about 50% a year. How is that possible that you can do that when all of the professionals can't? Especially in this crappy market! What am I missing? It seems too good to be true. I am happy I have found your blog because your basic principles have helped my trading a lot. I hope you continue to post every day because I'm sure many people enjoy and benefit from your market commentary as much as I do. Thanks! Greg, WA"
Greg,
First, thanks for the kind words, and we're very glad that you and many others enjoy our blog. We do this largely for fun, but if we help people to understand a different approach to trading, then all the better. The answer to your question is very simple. In fact, it's answered in that little pie chart above. The professionals surely could beat us at this game. But their hands are tied. Faced with billions of dollars to invest, professional fund managers are forced to choose their 40 or 50 favorite stocks. Fortunately, the small investor does not have to. The pie chart above shows that by buying just 4 or 5 stocks, you can leave the pros in the dust.
As far as being able to pull this off in a "crappy" market, it really doesn't matter what the market is doing. As Cramer says, there's always a bull market somewhere. It's very true. Opportunity is not found in the direction of the market, but in the volatility. Up or down is irrelevant.
Best of luck with your trades, and please do not blame us when we someday get it wrong! The best any trader can do is put the odds in their favor over the long term. But short term, errors are inevitable, which is why we have developed a plan for damage control! -Snot, NY
42 comments:
Snotm not all the ags stock is close to the top of the range..MOS?
Not yet, but earnings aren't until next week. Even just one day can make a difference. We would only sell the one/s that reach the top (if they do), and hold the others.
Snot...thank you for replying and teaching me (and I am sure others) to have patience when it comes to trading and channel trading...this is a wonderful blog!
I have 2 questions..how do you think the sale of MOS nitrogen business will impact the stock (generate extra cash)?, and the top range of MOS is it above 156?
The sale is only $1.6B, which is nothing compared to MOS's $60B+ market cap, so it is of no concern. If anything, it should help the stock a little. The more they can focus on one thing (potash), the better they will be able to deliver it.
According strictly to the channel, the next high for MOS is 170. By the time it gets there (if it does), the channel will have moved up, perhaps to 175 or so. We don't push our luck when buying or selling. We usually start to unload a stock as it nears the top and continue to sell if we're fortunate enough to have it continue all the way to the very top. It isn't that we don't think it can go higher, it's just that we're confident that with patience we will be able to buy it lower, so there's no sense in holding a stock once it's near the top of the channel.
I've been using the regression line drawing tool in StrategyDesk. Where do you typically start your lines? At the beginning of a consistent trend? That would make sense, but I would like to confirm your technique. And do you have a minimum time frame?
Ak, yes start it at the beginning of a consistent trend that is at least 8 months long. For the channel to be legit, the moving average should parallel its slope. See chart of CF above... it's textbook.
But you can't just slap a channel onto any stock and hope your way to a million dollars. We chose the fertilizer stocks because of their relative strength, growth story, earnings, visibility, market cap, valuation, and institutional sponsorship.
Every era of the market is defined by a small handful of stocks. The DELL's, AOL's, GOOG's of the world is what you want to target. The timing is just the icing on the cake, making a good investment into a great one with the power of compounded returns.
Uh-oh... Black Tuesday. We should be more careful what we wish for.
This is hilarious! Bush wants to see economic growth! LOL!
Wait until the economic stimulus package kicks in, LOL! People have already gotten their checks and they either did one of two things with them:
1.) Filled their gas tank
2.) Gave up and just sent their check directly to Dick Cheney.
Bush: "Will take time to bring down high gas prices."
Yes, it will take until November to bring down high gas prices.
Electric cars that run 400 miles on a single charge and reach 60mph in under 4 seconds do exist, they're just not available to us!
Bush can reverse this entire market and economy under 4 seconds, too. There's just no personal incentive for him to do it. Perhaps instead of another $150B bailout, we just give Bush $10M and Cheney $10M and have them mandate that all new cars sold in the U.S. be electric. The oil industry would be just fine. It would take some time before gas engines were phased out, and people would still heat their houses with oil. But it would make a powerful statement that would reverse some of the economic damage he's done.
We're in limbo with the fertilizer stocks now, as we do not average up. Prices would have to fall comfortably below our break even prices before we begin to add to these positions. These stocks went too far too soon. We may be stuck in this middle area for quite a while until their correction takes the full 1.5 to 2 months that it should. On the bright side, the lower they go, the safer they are to hold into earnings, which will be stellar. The best case scenario at this point (for us) would be if they all retreated to the bottoms of their channels or a little lower, allowing us to get that other 40% of our capital invested. We're only looking for POT, CF and AGU to stay above support. MON and MOS are likely to fail technically if this selloff continues. We expect MOS to participate in the pursuing rally either way, as it is one of the major players in the space. The p/e's of these companies, once again, are becoming very attractive. Triple digit growth at 10 times earnings... hard to call that a bubble.
ugh... I bought MOS after totally forgetting about that sale they did. Wouldnt it be my luck if MOS misses out on the coming rally...
The sale is a good thing. MOS will participate in the next rally. When exactly that will be is anyone's guess. If they stay down ahead of earnings, we think earnings will spark the next rally. Isn't it funny how only after all this mess does Bush finally call to Congress to lift the ban on offshore drilling? Hey, thanks for the great reversal timing, George, now we can all enjoy the oil prices we had 3 days ago!
check out HAS (Hasbro)
Thanks for the charting tips. Where do you get your relative strength data from?
that comes from watching the market, look for the stocks that hold up the best on big down days, and the ones that go up the most on up days..thats relative strength
-d
Thanks d, I do that as well, but I was looking for something more specific, such as the IBD RS ratings. Schwab's trading platform has a proprietary RS rating field, but I do not believe TD Ameritrade's StrategyDesk has one, which is the platform I think Snot uses.
D is right, you just feel relative strength. When the market corrects is the best time to see what people aren't selling. These are the stocks that will do best when the market reverses. It works well in a bull market, but in a bear like this, almost everything is getting hammered. It's still useful, though, because you can weed out the strongest stocks in a sector in the same way. CF is a lot stronger than MON, for example.
Snot, what is your take on oil's sell off today?
Oil's selloff... a reaction to Bush lifting the ban on offshore drilling? It's a symbolic move that is more a slap in the face than anything else. This should have been done long ago, and even then, would only be an emergency move to hold us over while we wheen ourselves off of it.
Too little, too late. Government only acts when an emergency has reached desperate and irreversible levels.
What's really troubling here is that with a plunge in oil prices like that, you'd think the market would go up. We read today's weak market in two ways. First, people are waiting to see how the financial companies report before committing money to the market. Second, people don't believe that the move in oil is anything more than just another iteration inside its channel. If it really broke down, taking out its trendline and its 50dma, the market would take notice. Despite today's large drop, oil prices are only back to where they were 3 days ago.
Anyone have ESLR on their radar?
Short term chart looks bullish (higher highs and increasing lows), and big news today.
Given the market may hit bottom by Friday or Monday, my gut's telling me this one might pop.
Would love to hear what you think.
Thanks to all and keep it up!
Has the cavalry arrived?
The Fed wants to curb naked short selling in financial stocks:
http://news.yahoo.com/s/nm/20080716/bs_nm/sec_shortselling_dc
Will we see a major short squeeze and a run in the Dow and S&P? Or will the SEC continue being a toothless tiger? What's the record of the SEC in these matters?
newfrankyboy
That little chicken clarke seemed to be right on oil. He sure gets his commodities calls right at least.
Historically, the SEC is useless. When a crime is committed by a financial institution, they are usually forced to pay a fine equal to approximately 10% of their profits from said criminal activity.
We have estimated in the past that inflation is at 10% a year. Today's CPI proved us wrong. At 1.1% a month, inflation is at 1.1x12 = 13.2% a year. The fact that the Dow is up on that news is a very bullish sign.
Where is the fertilizer rally? Is it sector rotation time?
George
Do you think today's action is anything more than an oversold bounce Snot?
Also I had a question about your DDM call. I totally agree but I'd been thinking SSO instead. Any reason you prefer the DOW over the S&P? And how much would a substantial position be in your portfolio? Would you use your remaining 40%? Maybe purchasing in 4 slugs of 10%?
Thanks, Craig
I'm seeing a lot of weakness in AGU's chart, compared to POT, CF, and even MOS. Do you still think it is going to be the leader in gains when the August rally comes?
I think the graybeards on CNBC hit it spot on: "We're in for more pain and this is nothing more than a technical bounce." But what a pretty bounce it is!
We still consider Ag to be in rally mode. It just went too far too fast and is consolidating those gains. Why is AGU seen as being weak? It's doing just as well as the others. Better than MOS, actually.
Our guess is that a bottom has been put in, and that although we may retest it, we're likely to see 12,000 before we see anything below 10800. We buy DDM instead of the others because we're just more familiar with the Dow and how it moves. Any Ultralong index fund would work. When we said we'd pile into DDM, it was something we were willing to do if the fertilizer stocks hit the tops of their channels, at which point we would be out of them completely.
We were also only willing to go heavily into DDM if the Dow was down 500 points one day. You know, the old fashioned kind of bottom without the interference of the government.
As it stands now, we haven't done anything. Still 60% in fertilizer and we're holding some DDM and SMN. We'd like to close out this fertilizer trade before beginning anything else.
DDM could be bought here, but only as part of a position with the understanding that you may have to average down. Timing the broader market is usually a fool's game, so we avoid it other than to buy on major capitulation days.
Hey snot, finally a rally. We are still far from breaking the downtrend though. Also like the downtrend chart you drew on DJI was far more accurate than mine. I really got to get the telechart tool.
anyways, hope to see some pause days tomorrow. Don't know if we will get them because of OPEX and GOOG earnings.
The fertilizer trade is beginning to look stretched to me. As for iteration in its channel on the USO. This is not how an "iteration" should look like. This looks like the last stages, as I said earlier. I think USO will drift up for the next few days, but the next downdraft should take oil much lower towards its 50d.
As of today, I sold my QLD and UYG. Have AGU and SMN. Looking to pick up SSO/DDM in the days ahead. GLTA
Clarke,
Why do you link the fertilizer trade with USO?
Hey Snot,
I should have clarified. This is independent of the USO. I will write about it in detail in my blog sometime soon, as it is inconvenient here. I don't know if it will occur now, but things are beginning to look stretched.
As for USO, things were beginning to look stretched when USO has a breakout above 110.
Clarke, look forward to reading your post about USO and Ag. They may be getting stretched, but usually the stretch is accompanied by stretched valuations, which we don't have with fertilizer. Their p/e's are relatively low, especially when you consider their growth rate. We definitely think that the fertilizer stocks will break through the bottoms of their channels on one of these iterations, but even that may only be to consolidate sideways for awhile before moving up again. There is no reason for their earnings to slow down for the next 12-18 months. If after posting earnings next week, they all shot up to the tops of their channels, would you still feel they are stretched?
That is a nice question. I will probably have to rethink if these shoot up to the top of their channels. It is definitely possible. But the divergences don't get resolved so quickly. What I read is see is that the accumulation pressure is not what it was previously.
I totally agree with you that they will consolidate sideways. The long term trend is still up, but the strength is beginning to wane, meaning a gentler slope of uptrend.
Did the VIX really spike to 38.84 yesterday?
Not according to Stockcharts.
That kind of worries me because the previous couple bottoms sent the VIX up to 37 and 36. This time it only hit 31. It might just be that the market is used to the spectre of bank failures and the like.
Is this an accurate chart of potash prices?
http://www.bloomberg.com/apps/quote?ticker=FERLAMVA%3AIND
Steel & the ferts are certainly getting spanked today. Owie.
Hey snot, looks like the weakness is showing today. Thinking of adding another slice of Ag & SMN today, what is your opinion?
Hi Snot: Oil closed below $130 today. Is the oil bull run over? Thanks!
I think part of the reason that fert stocks are down is because they were the only strong sector to put money into besides oil. Now that money is moving out of fert and trying to catch the financial and airlines rallies that have happened in past 2 days.
Clarke, thanks for your oil call. I used DTO and made a ton
We may be way off base and this may all be wishful thinking, but here's our take on fertilizer now...
Of course at some point the Dow had to stop dropping and launch a rally. The fact that it has coincided with a drop in oil is no suprise. Also no suprise is that the rest of the commodities are taking a hit. Considering the severity of the drop in commodity prices, the fertilizer stocks are actually holding up pretty well. Our guess is that they will weather this storm and come out alive and kicking. Here's why... First, oil prices will not be down for long. It's only a matter of time before they spike sharply again. Maybe not back up to the high 140's so soon, but definitely back to the high 130's. Until Bush is out of office, oil will remain very costly. Second, the fertilizer stocks announce earnings next week. Their reports have always been a positive catalyst for them. In a time where most earnings reports are dismal, their stellar reports have brought a glimmer of hope to investors. We're looking for that trend to continue.
Lastly, all of this recent action in these stocks can all be seen as consolidation. If one were expecting the bounce off of the bottom of the channel to lead to instant new highs, perhaps they need to just exercise more patience. Buying at the bottom of the channel is not an instant ticket to billionaire status. Far from it. All it does is put the odds in your favor and give you some leverage over those traders that bought at the top. If there were one thing we think all traders/investors could benefit from having more of, it would be patience.
Until all of the fertilizer stocks break down decisively, all of this is just business as usual. Who cares where they go... as long as they remain in their channels, they are uptrending stocks.
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