Where's the bottom?

Click charts to enlarge

The chart at the top is CF. All of the Ag charts are similar right now, so there's no need to post more than one of them. The chart below CF is a chart of OIL, and the chart at the bottom is a chart of DRYS (more on that later). We've long been predicting an end to the bleeding once OIL tops out, even if just briefly. One more spike in OIL, to 88, and we could get a capitulation day that puts an end to the current selloff (at least for a while).

The selloff today was focused on commodities across the board. Commodities have been the market's leaders lately. When the leaders finally give in to the selling pressure, it indicates that an end is near because fear is taking hold. Think of SMN as the VIX of the commodity sector. Today, it spiked. Look at charts of WLT, MEE, MTL, SID, and the Ag names to see where the damage took place today. Another day or two of this and SMN will be at 40. Warren Buffett says that you should be fearful when others are greedy and greedy when others are fearful. On this advice, SMN at 40 would indicate that it's time to be greedy.

We sold MTL and SID on a break of their channels and moving averages today. We did this mostly to raise more capital to buy additional shares of the Ag names as they drop. We lost a point on SID and 3 points on MTL, but these were small positions that we were not committed to which were more than offset by our hedge, SMN. We bought some MOS, POT, CF and AGU today, bringing our total portfolio to 45% Ag, 55% cash and SMN.

The question arises "What if the Ag names break the bottoms of their channels and plunge?" It's a very valid concern, and there is no guarantee that it won't happen. If we traded just one cycle, we would either make or lose 20%. We could not tell you which. If we traded 10 cycles, we would make 150%. The best we can do is put the odds in our favor over time. By focusing the majority of our buying in the leading stocks when they reach the bottoms of their channels, we profit over time. We do not profit every time.

When we do get into a trade that goes the wrong way, we approach it in the following way:

First, most of our buying is done at the bottom of the channel to start with. We have cash waiting just in case the stocks we own break support and drop hard. Case in point; we're only 45% invested and the stocks we're buying are near the bottoms of their channels. We also have some cash in hedges that can be sold (at a profit) to be invested in stocks that have broken their supports. At some point after breaking a support line, a plunging stock will bounce strongly. This bounce is the opportunity for you to do damage control on these positions. If you continue to buy into the plunge, at some point, your entire position can be sold at a break even price, or a small loss or gain. If we make an error large enough to put us in "damage control" mode, we quickly admit that we made an error, plan our escape, get out at an opportune moment, and await the next trade.

Look at the bottom chart of the three above. It's a chart of DRYS from back when the drybulk sector's run finally came to an end. In early November 07, it broke its moving average and its trendline. As scary as it is to hold a stock while it breaks support and plunges, look at what happened later that month. The stock was actually trading higher than where it was when it broke down. The best thing to do in a situation like that is to bail when you have the chance to break even. Stocks don't go straight down. Whether the broader trend is up or down, they are always fluxuating. Our current Ag trade may well turn into "damage control", but considering no one knows where the market will go next, we have to work our way back into the Ag names as they approach the bottoms of their channels because this discipline works over time.

Speaking of working our way back into the Ag names, it is times like this that you get the opportunity to see which stocks the pros aren't selling. Of the Ag names, AGU has been putting in the most resilient performance. The best stocks are always the hardest to buy because they never give you the opportunity. It will take a while longer to play out, but our guess is that AGU may be the best percentage gainer after this correction if the Ag names go for another run to new highs.

Intentional non sequitur: Does anyone find it odd how absent the government has been in the market's latest plunge considering how active they were earlier in the year? Isn't it time for some kind of intervention? Perhaps they've given in to just letting the market find its own bottom?