Click chart to enlarge The chart above is a chart of the Nasdaq, although the S&P and Dow look similar. We're not sure if we've ever posted about the S-curve blowoff in the past, but it should become a familiar pattern for readers of this blog. We've seen this pattern many times, and it always marks a top (at least a short term one). The trouble is finding the exact top, because the last few days of upside on this pattern can be explosive, leading to excellent gains. The general rule of thumb is that an S-curve has a centerpoint, and its lower half roughly equals its upper half. Using this concept, the market has a bit further to climb before it rapidly returns to earth. When it returns, it will typically go to the 3/4 mark, or halfway mark of the S-curve.
We sold CREE a bit early, and are suprised by its continued strength. We cannot, however, justify its valuation, and therefore feel safer invested in VECO at the moment. If the market is experiencing the kind of blowoff rally we believe it's in right now, we'll be picking up more shares of VECO when it retraces. Although a quick buck may be able to be made by buying into the current hype, it's a dangerous game and will typically end in a loss when the dust settles. Euphoria has set in to the market, but will only last a short time. We feel that now is a time to be cautious. Not fearful, but cautious. Others are getting greedy, and markets that run on greed are always short-lived.
34 comments:
Oil is shooting up once again. I was just stopped out of my DNO position this morning for a small gain. Snot, I have been trying to look at the channels of some equities along with stochastics, Wm%, etc., and the charts are completely different over a one year time frame depending on whether it is a weekly versus a daily chart. The weekly chart thoroughly smooths out the undulations. What are the best ranges to work in, weekly versus daily, and over what time frame? For example, UUP is at the bottom of the channel on a daily chart, but it is still in the top half of the channel on a weekly chart. UUP is on the oversold list of ETFs today.
link
Joe,
If UUP has a channel, it only goes back to December, and is currently at the bottom of it. It may even be breaking through the bottom of it now. In order to have some validity, though, a channel should be at least 6 months long. We almost always use a daily chart because we're only concerned with the past 6 months to a year. Using a weekly chart would give us a few years of data, and channels rarely, if ever, last more than about 2 years.
Thanks. That helps.
UUP
FMO
EVV
Joe, there's an S-curve in that chart of EVV, too.
Just because UUP broke down doesn't mean that it'll tank. It could just be entering a period of sideways consolidation.
Snot,
Is it possible your trend lines on VECO are a little off? I'm by no means a TA expert, in fact I don't really know anything... But it looks like you can draw the channel in more than one way. If you draw the top of the channel starting back in Nov, connecting the peaks, and do the same from the bottom in Feb it would be parallel and also would place VECO in the middle of it's channel.
Or does drawing charts not work that way. I noticed your chart seems to be just slapped on there without connecting very many candles
Thanks!!
Anon, TA is an art rather than a science. Any lines or patterns that work for your individual investing style are valid.
Our method is not to draw lines to connect the "dots", but rather to let the computer generate the center line (the linear regression line) and offset from there. We feel a certain validation when the moving average parallels the linear regression line, because neither of these indicators have a fudge factor. They are unemotional. Right now, the market is surging in a euphoric way. The charts are not staying within their channels and are making everything look askew. VECO and CREE are especially guilty of this. In this case, the channels are simply telling us that the market (and these stocks) are short term overbought. It does sometimes happen that a very strong stock will create a new trend channel with a higher slope. This could be happening to the LED stocks right now, but given the strength of the broader market, we are attributing their strength to it. It's not fundamentally driven, company-specific success that is driving them, but rather pure, unbridled momentum & greed. Everything will correct soon. We have no intention of selling any VECO shares, as we still feel that its valuation is compelling, even at $50.
Actually I'm not planning on buying UUP this time around like I did last fall. UUP moves very slowly. I'm looking at buying DNO again, because when the dollar is strong, commodities go down. I've traded DNO twice in recent weeks. Both times it was for small profits. Fundamentalists say the range on oil should be between $60 and $85. Anything above that is speculators. For the sake of my portfolio and for the sake of everybody filling up their gas tanks, I hope my next purchase of DNO pays off much better than a couple of percent. I put in an order for it today, but it didn't drop quite enough. I may try again tomorrow. The overwhelming bulk of my portfolio right now is USA dividend bearing large caps that I hope will do well if the market mostly goes sideways for 2010. Thanks for all the advice.
I also sold CREE a bit early due to valuation but have kept VECO and AIXG. In hind sight, I probably should have hung on to CREE until it broke the 50 day MA. Would like to get back in after a pull-back but it looks like it might get to $100-120 soon based on all the recent news and potential earnings blowout. Are there any near term competitive, execution or other factors that could slow down the momentum?
Ever try reading Snot's posts Bob? That might prevent you from asking questions that have already been answered.
Just sold MRVL. Still like the stock and its fundamentals, but it is nearing the top of its channel (which is not very well-defined to begin with), and is nearing the top of an S-curve blowoff (also not very well-defined).
We don't feel that it would be risky to hold MRVL here. We just wanted to clean up the portfolio and concentrate on VECO for the time being. VECO's recent surge increased its value such that it is now 1/3rd of our portfolio.
MRVL served us well and if it corrects, we'll likely buy another small stake in it.
Somehow it feels as if this market is too good to be true. We're up approx 14% YTD, and considering we're only 3.5 months into the year, that's a big gain. It's making us leary of being overinvested, as nothing goes up at that rate forever. (well, except AAPL:)
Snot, are you considering purchasing any DXD, SDS or QID?
Snot how are you up only 14% YTD? VECO only has gone up far more than 14% alone since you've starting talking about it on the blog. You've also had winners with CREE and MRVL.
Are there other holdings that are dragging you down?
I think he "they" only invest a small portion of the total so 14%YTD is really good.
Anon, anon is right, at any given time, we're only about 33% invested. If you pro-rated that 14%, it would be comparable to 42%.
Being partially invested may not seem to make sense when the market is going up, but no one faulted us for it when it was going down!
Since inception in mid 2008, we're up 18.6%. Meanwhile, the S&P is down 14% over the same time period. It's never been our goal to make a killing within a short time frame, but rather to grow our portfolio consistently over time. We view the market as a very dangerous animal that needs to always be treated with respect. As soon as you let your guard down, you can lose big. Keeping a large cash reserve and still averaging 20% a year with as little stress as possible is our goal. As part of this discipline, we are rarely more than 50% invested.
VECO- hit that psychologicial 50 area for first time and now dipped off of that.. today is 2nd day of dip. If you follow VECo when it makes a decent run it usually dips and flops around for a while. 4-7 trading days then busts out higher again.. Time to accumulate some shares today on this weakness and if more on monday add a few more and sit..
Look at UYG. Some deep stops got taken out. Oh the pain. Are you buying more VECO here Snot?
Snot,
For someone who's down big on a certain stock, what would be your advise/strategy to recover?
Is it better to sell at extreme loss and recover slowly with better stocks or is it better to sit tight and wait for a reasonable rebound first?
I know the question is very hypothetical but I would greatly appreciate your input or point out what would be important to consider in this case.
Thanks
Anon-4
I wonder how long it will take Cliff Clavin to post that he somehow saw all this coming? (After the fact of course, as always).
He already has in the previous postings below on LED Valuations.
A few months ago I posted that I would not buy GS, no matter how well they would do. This is why.
Added more shares at $47 on Friday.... I now have s terrible feeling where this might go. Snot are you worried the CEO keeps dumping shares?
Anon-4,
Your money should either be in cash or in Stage 2 uptrending stocks (stocks trading above an uptrending moving average) all of the time. Any money that you have in a Stage 4 downtrending stock should be moved to a Stage 2 stock. There's no sense in trying to get your money back from the same company you lost it in. The only purpose that serves is psychological, not financial. You're more likely to keep losing money in the downtrending stock rather than to recoup it. It's important in this game to know when to cut your losses and move on to the next investment.
The market isn't going down because of GS. It's going down because it just completed an S-curve blowoff and needs to correct from it.
Every day, there is good news and bad news in the market. The market moves whichever way it's going to move (irrelevant of the news), and then the news is reported after the fact based on which way the market went.
We didn't know that the GS news would hit the market, but we did know that it was about to drop. The actual bit of bad news, regardless of what it would be, was irrelevant to the movement of the market. If the market had just corrected substantially and were oversold, it would have soared despite the GS news because Citi's earnings were better than expected. The market moves, then the news is attributed to the move. It's not the other way around, no matter how much it may appear that way.
Anon,
Insiders sell all the time. You'd be hard-pressed to find a stock in which this weren't the case. This is how they pay themselves.
If you look back at VECO's insider transactions over the past few years, you'll find that the insiders sold throughout the whole time, often getting prices for their shares that are substantially lower than the prices they would get if they sold now. Using your logic, we would have sold the stock a year ago because the insiders were selling. Or maybe 2 years ago, as they were selling then, too. They sell all the time.
Snot, Thanks for your knowledge and contributions. What does someone like yourself get in return for your suggestions or analysis to someone like me (the uneducated but learning)? I've never have seen you ask for donations or get blinded by annoying flashing ads all over the place.
Anon,
Don't sell yourself short. You probably know more than most market "professionals".
The stock market at its very roots is the largest scam going. We are among a very long list of informed individual investment groups who feel obligated to expose Wall Street for what it really is, and to hopefully help the average retail investor in the process.
For every individual that chooses to invest for themselves rather than hiring a Madoff or a Piper Jaffray, we feel as if we're helping keep money in the hands of honest, hard-working individuals rather than in the hands of hardened criminals.
That's reward enough.
The old "the market doesn't react to news" line again, eh? Your line saying "all stocks are going to zero" is an exaggeration that serves a psychological purpose. The "new is irrelevant" line is an exaggeration so ridiculous that it doesn't seem to serve any purpose. So everyone should ignore the news and only look at charts. The charts are a reflection of the news and fundamentals, even if some of the news is "market sentiment." When the GS announcement was made, the market tanked within moments. Yes, there is good news and bad news every day, but sometimes one outweighs the other.
http://finance.yahoo.com/q/ta?s=^DJI&t=5d
Generally speaking, I agree with Snot that the market does not react to the news. For all we know, the market has been reacting to the GS vs SEC story for the past 2 weeks. Insiders opening up short positions can initially drive up stock prices. (See JPM sept 2008 peak.) Bottom line; not everyone gets their news at the same time.
But last friday I think was a rare example of the market actually reacting to some shocking news. The market could probably care less about the SEC. But it is the possible precedent that must have worried some traders. The market is deathly afraid of what can only be described as a "cascading explosion of conscience", where people all the sudden, against all odds, decide not to take any more looting and robbery. That is the only thing this type of market fears.
Snot, thank you so much. You consider stage 2 stocks as above 50 or 200 day moving average?
What are the different stages and how many total? Sorry if you have mentioned this before.
Stock stages:
URL one
URL two
Isn't Google wonderful? That took about one minute.
Anon, there are 4 stages. Read Stan Weinstein's Secrets to Profiting in Bull and Bear Markets... great book on the stages. You can apply the same stages to any time frame depending on how long term an investor you are. The stages are even very visible on intraday charts.
Snotwheel, thanks.
Anon-4
I see a convergence on CREE which indicates strong support at 74.80 (+/- 25 cents). I guess you're buying back in at around that level Snot?
75 only brings CREE back to the middle of it's channel Cliff, so it's doubtful Snot will be buying back in at that price.
Post a Comment