Click chart to enlargeWe've posted the chart of the Dow above to illustrate where it is in its channel, which should make it obvious why we began accumulating it. DDM is basically identical to this chart, and because it is Ultra (2x the percentage of the Dow), we are focusing our buying there.
The Dow (and DDM) are very near the bottoms of their channels. Another 200 points or so and we're at the bottom, even if our channel isn't perfect. It could spike below the channel as it did in January, but that is not predictable.
The best we can do is start buying now, and add as it drops, hoping we see 9600 within the next few days. The further the Dow gets from its moving average (100dma shown, but 200dma works better), the more potential it has for launching a substantial rally like the one we had from March to May. This bottom-fishing strategy works for the indexes because they eventually bounce back. We do not recommend anyone try this with an individual downtrending stock. Downtrending stocks often never recover. Only a handful of the thousands of tech names survived the Nasdaq crash of 2000. The odds are not favorable if you're trying to bet which ones will survive.
You could apply our logic to the S&P if it suits you better. SSO is the double long ticker for the S&P. We generally avoid the Nasdaq because it does not always move with the broader market.
What we're doing by buying DDM here is not at all a bet on the House vote. We frankly don't care if the market goes up or down from here. We're simply playing the chart, and allowing the market to decide our next move. Up, we sell. Down, we buy.
What we're doing by buying DDM here is not at all a bet on the House vote. We frankly don't care if the market goes up or down from here. We're simply playing the chart, and allowing the market to decide our next move. Up, we sell. Down, we buy.
Even though we don't let our predictions decide our trading, it is still fun to guess at the market's next move. We may be totally wrong about this, but we think the Dow will drop 600 to 800 points from here before recovering. We think we'll see 9800-9600 before rallying strongly to over 11,000. A "nay" vote by the House could certainly provide the catalyst. If not that, then we don't know what could cause it. But our gut says we're going lower short term. Don't bet on that prediction. We certainly aren't.
23 comments:
Snot, do you manage money for private party or any funds? If you do, could I send you my email to look into it more?
We manage money for private parties in a retirement fund. It is very exclusive at this time, although it did not start out that way. We have only added one new account in the past 3 years. Who we accept has mostly to do with how well they play golf.
Hi there,
First of all, I just wanted to say how much I enjoy your blog. I've only just discovered it and like the way you proved cogent rationale for the decisions that you make. I feel as though I'm learning.
Now for my question. What makes you decide that a stock is in a confirmed downtrend? For example, what do you think of AAPL and RIMM right now? Thanks.
Of course I meant provide, not proved.
Snot, do you think that when the short selling ban expires it will have much of an effect?
Linutor, welcome to our blog. A downtrend is not confirmed until the stock's moving average itself begins trending lower. Any stock trading below its downtrending moving average is in a downtrend. As for which moving average to use, you just use the one that the stock best conforms to over its history, regardless of what number it is. This approach works well to define major changes in trends for stocks that are prone to trending in the first place. A stock should break its moving average and change trend only once a year or so, if that. Avoid the ones that break it every month. They are unpredictable.
AAPL and RIMM are both definitely in downtrends, even on a long term basis.
Lifting the ban... It all depends on market sentiment at the time they lift the ban. If the bill does not pass, and the market is in complete turmoil, lifting the ban would bring a surge of short sellers back to the financial shares, possibly leading to more bankruptcies and a run on the banks. Of course this is the very thing they want to avoid, so they will only lift the ban in a favorable environment. Assuming they time it correctly, it should more or less be a non-event.
Hi Snot,
Regarding the market, do you think we will go up from here? I think even we have BAIL OUT, the market already PRICE IN. And base your chart what the lowest DOW could be if we are in recession. Thanks so much!
If we get the bailout, we'll be up about 500 total today. We'll sell half of our DDM if that's the case. It isn't completey priced in because it is not guaranteed that it will pass.
No one can tell you where the market will ultimately bottom out. We suspect we won't see less than 9,000, with 9,500 as a more likely bottom. But that's just one opinion.
We just did something very out of character for us, but with a very small amount of capital. We bought some GE at 22.4
It's just too compelling to pass up. It is in a downtrend, and could very easily move lower. We bought it as a very long term position for four reasons:
1.) It has retreated all the way back to its bottom in 2002/2003.
2.) Buffett bought it at 25.
3.) The dividend yield just exceeded 5% a year.
4.) It will likely survive the recession and still be a viable company in 10 years.
TA says it's headed lower and dividends are not guaranteed, but the risk/reward ratio is acceptable, and we did not bet the farm. We bought it for the long term, but of course if it rallies too far too fast, we'll take the profit and move on.
I guess in terms of the bailout, investors are regarding it as a but on the rumor sell on the news type of thing.
We're suprised they're selling the news only because we didn't go into the news from that high of a level to begin with. We'll have to see how the rest of the day goes. Anything can happen.
Snot, your arguments for buying GE sounds like all the arguments I was making suggesting that all companies are worth more than 14 cents -- e.g. dividends, the viability of the company, buy outs (Buffett) -- although I now realize you were using hyperbole. My, my -- Snot trading on fundamentals? Hope it works out for you. Following Buffett probably isn't too big of a risk.
This market is crazy, though. Congress passes the bill and the DOW flops 250 points. Thus far the bill has done about as much good as viagra does for a 100 year old man.
Ed
I would buy MOS before buying GE. The military industrial complex is going to collapse from its own weight.
I bought some UYM at $35.
Amazing... you can buy near the bottom of the channel in this market and still find yourself underwater in a matter of days. Guess that's what the other 70% of the account is for. We aren't adding yet, but perhaps next week we'll get the real capitulation we need to put in a tradable bottom. Maybe we'll even get the Black Monday or Black Tuesday we've been waiting for. Our channel may not be drawn perfectly, but the Dow at 10335 is now resting right on the bottom line. Seems like nothing can help these markets at this point... amazing times we're witnessing. Maybe we shouldn't count on that dividend, lol!
Ed, we've been down the fundamental road many times, and we understand it inside and out.
We pick stocks based on fundamentals during bull markets, which is how we found out about the ferts to begin with. Over the years, the charts have given us far greater predictability than the numbers ever have. We still use a techno-fundamental approach during bull markets, but we abandon fundamental calculations during bears. They don't seem to help on the way down. The best thing to do is wait on the sidelines, unless you're like us and feel compelled to futz around with everything.
I think DDM will be trading under 35 or under around December 25. Mark my word here! DOW will break the channel and go under 9000.
The way things are going, you may be right! There is almost no buying interest in this market at all.
Hi Snot,
I understand that we are in a bear market and probably in a depression like era, But it is irrational and unreasonable for the market to punish everything and every company in any sector and guessing that everybody will make less or no money.
There are a lot of great deals out there which I doubt you can call them "$0 stocks". What do you think of VCP, ACH (current stock value is less that their cash value), STO or TNH the last one w/ a divident yield of 15%.
Do you think is a good time to get in and hold for 1-2 year. Look at VCP (current P.E. is 4.65).
It must be a bottom for individual companies even if there isn't one for the overall market yet.
hk22,
We definitely see some values, too, but even the stocks that are at or below intrinsic value can go a lot lower if people panic. It's truly amazing how cheap you can buy something (anything) when its seller becomes fearful. That's why we say that fundamentals don't matter on the way down. The strong stocks are like Gold medal Olympic swimmers in a tsunami... dead regardless of qualifications.
There's nothing wrong with picking up some stocks for the long term, but you really have to keep a substantial amount of dry powder for that one day where stocks are severely discounted.
haha! the ways of the market are strange. It ducked even with a bailout. Well, almost everyone here was looking for a rally, so I decided to short when the bill passed and I am quite happy.
While I agree in general with you about oversold markets (and especially your pretty convincing english, I enjoy reading :-)) I don't understand your rationale of buying now? Yes, the market is very oversold and a large multi-week bounce is on the horizon. Why do you want to be scaling into a position now? Why not just wait for it, let the market prove itself. I am not saying short it. But wait, is that really so hard? The market action is very enjoyable, a bag of popcorn should do just great.
You're 100% right. That's the best advice anyone can give in this market... just wait it out. We just find it hard to resist getting back in considering we've been on the sidelines for the past 2 months.
hmm, I would expect you be the proud owner of SMN, I have been following this blogspot since the past 6-7 months. I saw the calls for loading up of SMN and getting out of steel/commodities/oil way back on july right at the precipice, in the comments here. I would have expected you to load up on smn. As for me, I am waiting. My gut feeling is the banks will turn the market around by options expiration week. This is going to be the mother of all windfalls for them if they can do it, and I just think they will. These surely are interesting times. More popcorn?
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