The Snot Wheel

Dangerous Territory

2012-01-21T00:48:00.002-05:00

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Sorry for the brief hiatus, hope everyone checked in at least 3 times a day in our absence!

Back when Merrill, Lehman and Bear Stearns collapsed, we spoke to the CEO of a company which was hired to figure out what went wrong. We ask many people where they think the market "should" be. For some reason, his answer stood out... "on both sides of 11,000, but it will keep coming back to that number for years to come."

We've felt the same way for a long time now. There's no reason for the market to be as high as it was before the crash. Sentiment is nowhere near that level of euphoria. Nor is the economy. So that rules out us being able to sustain anything in the 13,000 to 14,000 range. Nor should we be at 8,000. We belong at 11,000. Maybe 11,500.

For anyone that's followed the basic teachings of this blog, the chart above shows three reasons why one would be lightening up on shares in the near future. The market is

1.) At the top of a trend channel, far from its moving average

2.) Near a very significant resistance level

3.) Blowing off at the top of an S-curve

Sure, it could go higher, and it probably will. But now would be a good time to be 80% in cash.

If someone were to buy into any one of the indexes on Monday, it's extremely likely that they will be back to break even in a few months time.

Without knowing what path the market will take to get back to Dow 12,700 in 3 months, we just take the easy route and let it tell us. We're 86% in cash. If it goes higher, it's a no-brainer short and hold. If it drops, we scale in. There's no need to predict anything. Well, anything other than that we're in dangerous territory now.

VECO

2010-07-27T08:51:00.008-04:00

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Piper Jaffray analyst Ahmar Zaman took over coverage of VECO on July 15th, reducing the firm's rating on the stock and slashing both its price target and EPS estimates. He cited "uncertainties around order momentum" as the reason behind his actions. On the 15th and 16th of July, VECO shares lost $5, or approx 11% following Piper's downgrade.

With VECO's report yesterday, we see that the company is doing far better than Zaman expected, and its guidance negates any of Zaman's fears.

But were they really fears at all, or is something else going on?

Ask yourself the following questions...

Is Zaman completely and utterly inept after years of expensive education and office experience?

Can Zaman do the third grade math required to make the right call on the LED sector?

We happen to think that Piper Jaffray (and all other Wall Street firms) know the deal.

They want lower prices.

So is Zaman incapable of conquering third grade math, or did Piper want to pick up shares of VECO as cheaply as possible ahead of its earnings report?

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To answer this question, we need only to look into Piper Jaffray's recent past.

In 2005, Piper agreed to settle with the SEC, NASD, NYSE, NASAA and the New York Attorney General in a landmark securities fraud case in which Piper had released "biased research designed to benefit its own business."

If you google "piper jaffray fraud", you will be astonished at the sheer number of these incidents.

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So what should we believe happened this time? Should we believe analyst ratings? Should we follow financial "news"? Is it designed to help the retail investor? Are they just being good samaritans, pitying the little guy and lending him a helping hand?

Part of the purpose of this blog is to expose how Wall Street really works, and leave you to draw your own conclusions.

CREE

2010-07-23T15:59:00.002-04:00

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CREE broke out from its multi-month consolidation, which bodes well for the LED sector, as well as for the broader market. This is not a guarantee that the market will begin a new leg up from here, but it is yet another sign that the bulls are coming on very strong in the tug-of-war for control of the market. Even though CREE is not near 52 week highs and is not posting the largest percentage gains of the stocks in the LED space, it still is the leader of the sector. What the leader does, the rest of the stocks in a sector will do.

Now that we're quickly closing in on LED earnings, (RBCN on Aug 5 & CREE on Aug 10), we're hoping to be blessed with some upside that allows us to exit all or part of our positions before the earnings are released. Lightening up on shares that rally ahead of earnings is a win-win situation. You make your profit and avoid the risk of an earnings miss. Only in rare occasions will you miss significant further upside. Over the course of an investing career, it is better to miss these rare upside moves than to repeatedly participate in 50% gaps to the downside.

APKT

2010-07-21T17:09:00.002-04:00

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Acme Packet is a company that provides border control solutions. It was started in 1866 by Wassily Wassilyevich Kandinsky. They currently own and operate over 14,000 lookouts along the US-Mexico border and an additional 12 along the US-Canadian border.

Actually, none of this is true, but it really doesn't matter. All we see is a stock that is above an uptrending moving average, holding its own despite a weak broader market, trading within a trend channel, at all-time highs. Both its quarterly and annual earnings show steady growth.

On a pullback to the bottom of the channel (below 29), which could happen tomorrow morning, it may make for a good short term trade on the long side.

We don't have the same confidence in APKT for the intermediate term as we have with the LED sector, but for a quick trade it makes little difference.

RBCN's Channel

2010-07-15T21:07:00.002-04:00

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Above we've posted a chart of RBCN now that its channel is becoming more clearly defined. We're using a 55 day moving average, because it best fits the chart. The fact that the average parallels the computer-generated linear regression line (shown in yellow) confirms the angle of the chart's ascent. It is at this point in a company's growth cycle (4 to 5 months in) where we start scaling into and out of our position based on the stock's position in its channel. With the stock at its neutral centerline, there is no reason to buy nor sell. If the stock drops to the green line, we add. If it rallies to the red line, we take some profits. In theory, when the stock is at the green line, you should have 100% of your intended position. This does not mean you should have no available cash. When the stock is at the yellow line, you should have half of your position. When it is at the red line, you should have no position. There are lines at the 25% and 75% marks as well, which we have not drawn. By scaling into and out of the position within the channel, one can increase profits and limit risk. We do not follow these rules verbatim. We like to maintain a 20% to 25% position in a strong stock even when it reaches the red line. Conversely, we only hold a 75% to 80% position when it corrects to the green line, allowing for intraday spikes below the line caused by the action of the broader market. However you choose to trade a stock, you should know that in most cases, it serves a trader well to coordinate their exposure with the stock's relative position in its channel, at least to some extent. We've many times sold entire positions in stocks blowing through the top of their channel, figuring we'll always be able to buy it back cheaper at some point in the near future. In over 90% of cases, this holds true. The top of RBCN's channel is at approx $37 right now. If it surged to $38 or $39 in the next few sessions, we would sell. Our money could be put to better use elsewhere while waiting for RBCN to come back to the yellow line, which it most likely soon would.

Crime Pays

2010-07-15T19:41:00.002-04:00

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The chart above is that of Goldman Sachs, which is rallying in response to a settlement on its recent fraud case. Goldman Sachs was accused of defrauding investors out of $1B, although many sources believe the figures are a lot higher. In true SEC fashion, Goldman is being fined half that amount. It is yet another shining example of how crime pays, as long as it's white collar crime. Throughout its history, the SEC has allowed companies to profit from their crimes. An incentive for fraudulent practice? Only on Wall Street.

RBCN

2010-07-07T14:21:00.002-04:00

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Ever wonder what would happen to the stock chart of a company whose top brass all liquidate their positions in unison, followed by a nearly 10% correction in the indexes in just 9 sessions?

The chart above is just that. RBCN is the perfect example of why you should listen to the chart and not the headlines.

We updated our performance on the left side of the blog today, and while we basically have the same amount of capital we had in mid June, the market has fallen approx 5% since then. We consider this a substantial gain for us, as all performance is judged relative to the indexes.

RBCN remains the relative strength leader in the LED space. There may be other companies with lower P/E's, higher EPS's, higher PS ratios, etc, but compared to the importance of relative strength, none of that matters. If you make your approach to investing as simple as Nick Darvas did, you will find that all of the information you need about a company is in its chart. Fundamentalists completely reject this thinking, preferring to live in an ivory tower of complex formulae and psychological theorem. Most of the strict fundamentalists that we know are no longer investing in the market. They just couldn't beat it on a consistent basis. Instead, they publish books on how to beat the stock market... go figure.

CREE

2010-07-01T10:15:00.002-04:00

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Has there ever been a more perfect descending triangle than this one? CREE has held its $60 support level in a textbook way, while putting in lower highs over the past 3 months. Triple and quadruple bottoms never hold, so we have to bet on the odds and say that it's only a matter of time before CREE breaks support. We happen to own it, but are holding onto it anyway. We're looking to buy more CREE, as we feel it's quickly approaching fair value. The confluence of events (falling share price and rising EPS) are shortly going to meet head on.

If the broad market (Mr. Market) continues to fall, it may even give us a below value price on CREE! We'd be backing up the truck if that happened, in keeping with our theory that the LED's haven't seen their highs yet.

The quick math on CREE...

CREE's EPS is somewhere around $1.68, soon to be $1.93.

A fair P/E for CREE is approx 25, in line with its 20% annual growth rate

25 x $1.93 = $48.25

So if CREE drops another 12 points, we could quickly see a rush of buying that brings it back into the 60's in just one or two sessions. Whether you're a day trader, an intermediate term trader, or a long term investor, you should keep your eye on CREE because it may soon offer the trifecta...

1.) Growth

2.) Value

3.) Popularity

Company Growth Cycle

2010-06-22T22:46:00.005-04:00

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The chart above is a random chart of a typical company's growth cycle. Unless you find the next AAPL or GOOG, you'll find that this cycle typically only takes about 2 to 3 years to run its course. The numbers on the chart do not correspond to the Stages (1,2,3 and 4) that we often mention when talking about what part of the growth cycle a chart is in. We just put them there to divide the chart into 3 phases to help explain what happens to the valuation of the stock as it makes its way through the cycle. All of the figures below are just a ballpark, and may vary widely from one specific stock to the next.

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In phase 1, a company hardly has a positive EPS. It may just be coming off of several negative quarters. Its market cap is low, and its volume may even be low. It's P/E, however, may be very high. This is the period when investors know that the company will be a huge success, but they aren't quite able to figure out just how large its potential really is. The stock may have an EPS of .17, but analysts are predicting that the company's EPS a year later will be anywhere from $1.10 to $1.45. Confident that the company will earn at least $1.10 during the next fiscal year, investors apply a P/E of 30 to this hypothetical future EPS, giving it a price tag of $40 or so. Of course a stock in this early stage with an EPS of .17 and a price of $40 appears to all of us to have a P/E of 235. This keeps all but the most daring of investors away, but it's actually a great time to discover the stock.

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In phase 2, enough time has passed that investors are better able to understand the size of the company's market, its competition, the potential for its technology, etc. At this point, the stock trades at a more reasonable valuation, as the future of the company begins to come into focus. Future earnings become more predictable. The company may be earning $1.50 a year, with prospects of earning $1.85 the following year. Its P/E may now be around 40, and it'll have a price tag of about $60. All of the math will now make sense, luring investors that seek a combination of growth and reasonable value.

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At the end of phase 2, when the stock hits about $75, something happens that makes investors realize that the earnings growth of the company is not sustainable. There are many reasons this may happen. The stock will start selling off strongly as investors start recalculating its valuation. During this phase, the stock is not only being valued with lower EPS forecasts, but a lower P/E as well. The company, currently posting an annual EPS of $1.80 may be forecast to make $1.95 the following year. Even though it is still growing, it will not be making the $2.20 investors had previously counted on. To make matters worse, its P/E now drops to 12 because it's expected that the company's annual growth rate will drop from 30% to about 10%. Consequently, the stock's price drops quickly to $23. From there, the company just becomes forgotten, and the stock slowly makes its way to 40 cents.

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This is what we can learn from the chart above...

-You should know that all of these realizations that investors have about a company come about 9 months before any of it is evidenced in the earnings reports or news reports.

-Ideally, you want to discover a stock when it's in the first phase. The P/E will seem outrageous during this phase, but the earnings will quickly catch up if investors are right about the company's prospects.

-If you find out about a stock during phase 2, you can still profit, but it's a more dangerous game. You must sell if the stock makes a simultaneous and decisive break of its trendline and moving average. This kind of explosive breakdown more often than not marks the start of phase 3.

-You should never fall in love with a stock. If you're one of the investors buying the stock after it enters phase 3 (thinking you're getting a great deal), you're in for a big suprise. When people say "buy low", they don't mean to buy a stock locked in a downtrend during a strong broader market. They mean buy a strong, uptrending stock during a selloff in the broader market.

-The time it takes for a stock to make its way through this entire cycle gets shorter and shorter with each generation. People do not have the attention span they had decades ago. Our guess is that all of the Ritalin-addicted kids today will soon control a market that completes this entire cycle in under a year's time.

-"Buy and hold" does not work. Unless you're lucky enough to find the next AAPL, holding a stock for the long term will destroy your portfolio, which leads us to a Snotism...

-All stocks eventually go to zero.

Relative Strength

2010-06-19T08:39:00.005-04:00

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There are a myriad of ways to calculate relative strength. Many software packages have their own formulas for scanning through charts and assigning relative strength values to them. Investor's Business Daily (IBD, also short for inflammatory bowel disease) includes a figure for relative strength in its listings.

But you really are better off without all of the fancy formulas and calculations. Because we're honing in on just one or two hot sectors at a time, we find it far more reliable to just watch the top 5 stocks in the sector/s on a daily basis. This gives you a feel for the stocks, which you don't get by relying on relative strength figures.

Relative strength, in its purest form, is simply a comparison of a stock's performance relative to a baseline. The baseline should be diversified, so the indexes are used. A quick glance at a group of stock charts is all you need to pick the relative strength leader. Times of broad market weakness are not only the best times to compare relative strength, they're also the times when you'll do your buying. So while you may not like market corrections, they are an essential part of your success, and you should eagerly await them.

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We've posted 4 charts above. The first is our baseline, the Nasdaq. You could use any index for this, but we chose the Nasdaq because its moves have been textbook, from its nearly perfect S-curve to its nearly identical double bottom.

The S-curve started off this whole "Big Fat Greek and then some BP worst environmental disaster in U.S. history" correction. Once we were in it, we had no choice but to use it as a way to ferret out the highest relative strength LED issue.

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In chart #2, the chart of CREE, you'll see that CREE's bottoms roughly align with the bottoms of the Nasdaq. That is, they are all kind of in the same area. CREE's relative strength is flat. In other words, it is just mirroring the moves of the market, nothing less & nothing more. Of course it will move at a higher percentage than the index, but relative strength does not factor in percentages, it merely distinguishes between which stocks have buyers and which don't.

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The chart of VECO shows a stock with weak relative strength. Each low was lower than the last, despite the broader market being able to hold its bottom. Once our top holding, we sold VECO when its relative strength came into question. With Friday's performance, VECO is redeeming itself. We will only know in hindsight if VECO's severe correction was just a panic, or company-specific problems. Its fundamentals still appear strong, but we feel that we're better safe than sorry... where there's smoke there's fire. We may repurchase VECO at some point, but are still concerned that its weakness during the correction may be a window into some "behind the scenes" issues.

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The last chart is a chart of RBCN, which swept us off our feet during the correction. Each low was higher than the last. Charts that exhibit this kind of strength during periods of market weakness are the first to make new highs when the market turns around. They also most often do tremendously well during the subsequent bull run. The mechanics of it are simple... there are few sell orders during the months of the correction. For whatever reason, people want to hold this stock. So when buyers return to the market, the buy orders overwhelm what few sell orders exist, and the stock rallies strongly. The reason people don't want to sell this stock (or any other stock with high relative strength) is typically not known to the retail investor for several quarters. We are not privvy to the boardroom discussions, factory visits, wildly complex formulae, and other shenanigans that go into determining which companies are poised for explosive growth. Despite being left out of all of this, they do inadvertently give us a very valuable treasure map... the chart.

"Professional" Performance

2010-06-17T09:09:00.004-04:00

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We feel like Andy Kaufman on the set of Saturday Night Live... "Do Latka, Do Latka!"

So here's your token chart of RBCN's breakout, complete with volume. Our guess is that as long as the market doesn't tank, RBCN will retrace a bit and then take off again.

But this post isn't about RBCN... it's about actual "professional" stock market performance.

The market has been flat over the past 10 years, trading at or about 10,450 in June 2000 and in June 2010. This makes it the perfect time frame to compare mutual fund performance, against an unchanged index. So here's what the "pros" have done with your money over the past decade...

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Vanguard Life Strategy Growth Fund

+ 1.48%

Vanguard Life Strategy Moderate Growth Fund

+2.75%

T. Rowe Price Growth Stock Fund

+.77%

T. Rowe Price Midcap Growth Fund

+5.94%

Fidelity Blue Chip Growth Fund

-1.84%

Goldman Sachs Capital Growth Fund

-2.20%

Goldman Sachs Strategic Growth Fund

-2.67%

Goldman Sachs Structured Large Cap Growth Fund

-5.29%

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So there you have it, a random sampling of growth fund performance over the past 10 years. Those burdened with the inclination of trusting the "professionals" to manage their money over the past 10 years have done exactly what the market has done, on average. These are the lucky ones. Others burdened with the same inclination found themselves invested with Bernie Madoff and similar cretins.

We don't have 10 year figures for our own performance, but using what we do have thusfar, we're up 17.9% over the past 2 years, for an average of approx 9% annually. If you believe it's not fair for us to compare our 2 year performance with their 10 year performance, you only need to look at what the market has done over the past two years. It's not flat as it was for their period. It's down about 17.5%.

So there you have it... the "pros" that haven't been caught are serving up flat returns and making huge fees for their "services". Those that have been caught are serving life.

Can anyone give us any good reason why someone would invest with the "pros"?

RBCN Breaks Out

2010-06-14T11:13:00.004-04:00

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All of the relative strength (resistance to decline) that RBCN has been displaying over the past several months has proven to be an overwhelming force, exposing itself in an incredible breakout to new highs today. To say the least, these highs are coming long before the market posts its own new highs. The theory we have that relative strength is the most important indicator of a stock's intermediate term success has been shown to have real predictive value with RBCN's breakout.

We bought more RBCN this morning at just under 29, putting our portfolio at a point where we're just about 50% invested. There's no guarantee that the broader market has seen its lows yet, hence the other 50% we hold in cash.

For those of you thinking you've "missed" RBCN... think again! Today's action is a very strong signal of the health of the stock (and the company), and bodes very well for its near term (3-4 month) performance. If we did not already own RBCN, we would buy 25% of our intended position here on the breakout and wait for a pullback (approx 50% of the breakout's magnitude) to buy another 50%. The last 25% would be bought if the broader market corrects to new lows, pulling RBCN back below resistance.

We may still buy more on the pullback ourselves. Conversely, there is a point at which we'd sell some of our shares if the stock continues to rally strongly over the next 2 to 3 sessions. This is unlikely, but it does happen.

In almost every case we've seen where a stock breaks out to new highs strongly while the market is just beginning a turnaround from a correction, it has been just the beginning of a very impressive bull run for the stock. It should be noted, though, that the breakout is almost always met by a retracement which can be substantial, as momo traders buy and sell the breakout without any intention of holding for several months, or quarters, the way intermediate term investors do. This retracement of the breakout is often reversed very quickly, as would-be buyers see it as a second chance to get on a train they thought they had missed.

As long as the broader market doesn't sell off significantly, it's our guess that RBCN will rise steadily for the forseeable future.

RBCN

2010-06-11T22:34:00.004-04:00

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RBCN looks as if it's inside an ascending triangle, perhaps at the top of a high-flying flag. We don't put much emphasis on recongnizing all of the several thousand various chart formations because people that do so lose credibility very quickly. There are really only a small handful of formations a chartist should be aware of, and the triangles are one of them. Even if you want to shy away from putting a fancy name on them, you should note when a chart is bound by resistance and support levels, particularly when either of the two are ascending or descending. These patterns are merely a map of current investor psychology (sentiment), which is why certain formations appear time and time again.

Right now, the chart of RBCN is telling us that each time the stock sells off, traders are hell bent on not missing the next bottom. So much so, that each bottom is higher than the last. In other words, they'd rather pay up for the shares than miss the train. Most ascending triangle patterns break to the upside. Not always, but most of the time this is the case. If RBCN shows signs of an imminent breakout, we may be buying more of it despite having to average up. This is because during this current period of great instability in the broader market, RBCN's performance has thusfar been unwavering. If everything we preach on this blog about relative strength is true, stocks like RBCN that resist the decline make the best investments when the market turns around.

Relative Strength

2010-06-03T02:35:00.001-04:00

Any questions?

Tony Hayward

2010-06-02T10:15:00.004-04:00

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BP CEO Tony Hayward:

"The overall environmental impact will be very, very modest."

"We will mount, as part of the aftermath, a very detailed environmental assessment."

_________________

Facts:

-The Exxon Valdez spilled 11M gallons of oil, contaminating 1,300 miles of Alaska's coastline.

-The BP Gulf of Mexico oil leak is estimated to have spilled anywhere from 20M to 175M gallons of oil thusfar.

-The coasts of Texas, Louisiana, Mississippi, Alabama and Florida are expected to be impacted by the disaster. This includes the Everglades, along with 7 other national parks.

-The BP Gulf of Mexico oil leak is already being called the worst in U.S. history.

Relative Strength

2010-05-19T17:50:00.002-04:00

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The graph at the top shows the relative year-to-date (YTD) performance of the indexes and the LED stocks we've been following. The chart at the bottom shows how far off each stock is from its recent highs. While the indexes are basically flat for the year, the LED stocks are still way ahead of the game. This may be little consolation to those who bought in more recently.

Another thing can be deferred from these charts, and it happens to be the most important thing going ahead. One stock stands out as the clear leader in relative strength... RBCN.

RBCN has not only outperformed the others on a YTD basis, it has also fallen less than any of the others from recent highs. This is spectacular when you consider how contradictory this is. The stocks that do very well (have the highest momentum) usually correct the most. RBCN has managed to post impressive gains AND resist giving them back. This leads us to believe that the stock is in strong demand, and will emerge from this correction with explosive strength, posting tremendous gains over the next several quarters. It is our belief that smart money is flowing into RBCN, giving it its incredible resistance to decline. In an ideal world, we would now be blessed with a few sessions of capitulative selling which brings RBCN into the low 20's or high teens, at which point we could back up the truck. Opportunities like this are rare, but in a nutshell, they are what the other 70% of our portfolio is for.

This all takes great patience, but in time it will all make perfect sense.

VECO

2010-05-18T18:24:00.002-04:00

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VECO & AIXG fell today, supposedly on "news" that Applied Materials and Samsung are going to enter the MOCVD market. We frankly don't care what the "news" is, or what it means to the company. All that matters to us is the chart and the earnings. The chart has been showing increasing signs of waning strength versus the other LED issues. We traded in almost 2/3rds of our VECO holdings for shares of CREE and RBCN yesterday based on this relative strength issue. We did not have advanced knowledge of today's impending "news". Approx 12% of our portfolio is still invested in VECO. So where do we go from here?

First we look at the chart. The chart is at a very critical point, resting on a fairly long term trend channel. This trend channel was reiterated by its moving average until its recent rally took it well above its normal trading range. So we don't have a moving average to rely on, but we do still have the channel. Either VECO will rally strongly from here, solidifying the support its channel has created, or it will break down hard. One of these outcomes could happen as early as tomorrow, or it may happen after the stock trades around this support area for some time.

Either way, our discipline is certain... we let go of stocks that break down hard and close at their lows (intraday spikes don't count, especially if brought on by a spike in the broader market). Regardless of what they do after decisively breaking down, we sell and never look back. We try to always look to the future rather than dwell on the past. Right now, until/unless they follow suit, CREE and RBCN look very strong relative to the market, and we will continue to buy them on dips instead of buying back into VECO.

The psychological aspect of this is as follows... stay focused on the goal. The goal is not to have made a good trade on an LED stock, namely VECO. The goal is to double the money you've invested in the LED sector during the craze before it's over... then find the next craze and do it again. Finding the stock that will make that happen is never easy. Nor is the discipline required to trade in a way that will make that goal a reality. Keeping your capital invested in the highest relative strength stocks in a strong sector is a sure way to beat the market. But you have to be flexible, and remain focused on what your bottom line will be in December, not what it will be next week.

We will continue to closely watch CREE and RBCN for signs of high relative strength, or waning strength, whatever the case may be. As for now, neither stock is disappointing on that level. Although both are off their highs, they are both higher than they were on April 1st, which cannot be said about VECO, MRVL, AIXG, or the indexes.

Relative Strength

2010-05-12T12:02:00.002-04:00

Periods of market weakness are the best times to judge a stock's strength, especially relative to others in its sector. Yesterday, VECO was the relative strength winner in the group. Today, CREE and RBCN are coming on strong. One day does not make a trend, so we'll have to keep an eye on this race. We feel that relative strength is the single most important characteristic a stock can have, and that it is therefore the greatest predictor of future performance.

If CREE & RBCN continue to outpace VECO (not in gains but in strength relative to the market), we may just shift our position from VECO to a combination of the two. It's too early yet, but there's no doubt at this point that CREE, RBCN and VECO are far outpacing their weaker counterparts, AIXG and MRVL. Now with only three stocks in the running for "highest relative strength LED issue", it shouldn't be too hard to choose which will be the top dog during the market's next leg up.

VXX

2010-05-09T07:41:00.005-04:00

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Some time ago, we predicted that the market would trade in a wide range for the next several years (something like 7,000 - 10,000). We still believe this, and given recent events, we believe that the market just put in the top of this range. Now to find out where the bottom will be!

We ran into two of our well-respected Wall Street hedgies this weekend and asked them both where they thought the market was headed. One is a long term thinker and his reply was, "over the next 4 to 5 years... much higher". He did not seem in the least bit concerned with what happens over the next few months. The other told us that he sees the market going much lower. He admitted, though, that he was on the wrong side of the trade during the market's recent upside. He said he's been a bear on the market for a long time, and continues to be. He suggested not choosing sides and instead trading the VIX.

Given that our chats were inconclusive (one bull and one bear), we have to rely on our own spidey sense. Our guess is that given everything the market is facing right now, it'll drop to about 8,000 or so (lows of last summer), to mark the low for its new trading range. But that's just another two days of trading, so why fret?

We probably should not be 33% invested at the moment, and we may trim that percentage a bit if the market rallies. Otherwise, we're just going to remain focused on the intermediate term (end of year), and use this time to increase our exposure in companies with great promise. We still stand firm on our belief that the LED stocks will double by year end from whatever lows they make during this correction. Perhaps CREE from 55 to 110, or VECO from 35 to 70, whichever it may be, that's too large a gain to miss out on. We still strongly believe that these stocks have not put in their tops just yet, and that belief is rooted in our theory that they will not top out until a few quarters (or a year) before their earnings growth tops out. Given the size of their market, we don't think they've reached that point yet.

That said, we're still not willing to pay up for these names. We want them cheap. If the market drops 800 points one of these days, we'll be buying, not selling.

Along with our focus on buying low, we're also going to take hedgie #2's advice and play with the VIX. For those unfamiliar with trading the VIX, you should know that you cannot but the VIX directly. Instead, there is an ETF called VXX which tracks it. The chart above is a chart of VXX.

After the market calms down for a few sessions, this index will drop. During market corrections, the VXX goes sideways in a broad range, making very rapid swings from its lows to its highs. This makes it a great trading vehicle. Buying VXX anywhere in the low 20's looks to us to be a sure winner over the next couple months, as we agree that market volatility is here to stay until at least the next quarter. Buying VXX in the low 20's (if possible), is perhaps the best insurance policy against a market crash. There is little downside, because for it to drop significantly, traders would have to reach a point of complacency. Given the events overseas, our own struggling economy, and the market's recent large gains, we just don't think traders are going on vacation anytime soon.

For better or worse, here's our prescription...

-Cash is King. (have at least 2/3rds of your portfolio in cash).

-Use this correction to get bargains on strong growth stocks that you plan to hold until year end.

-Hedge your portfolio with a bet on continued volatility by buying VXX on dips.

S&P & VECO

2010-05-05T18:00:00.006-04:00

Click charts to enlarge

The chart at the top is of the S&P index. The market has gone from one of "buy the dips" to one of "sell the rallies". If this is another healthy correction, then the S&P could retrace to approximately 1100. We believe this is just another healthy consolidation period for the market as opposed to anything more substantial. It's perfectly reasonable for the U.S. market to tread water for some time, given the uncertainty overseas. While we may see some dramatic 200 - 300 point one-day losses for the Dow, in our mind it's just treading water given the huge upside it's experienced lately. No doubt the next few weeks will offer some excellent buying opportunites. One thing we always remind ourselves during market corrections is that they are the best time to see relative strength, and that the strongest stocks will hit bottom long before the market itself. A strong stock could hit bottom next week, even though the market won't hit its lows for another month. This is often how investors miss the bottom, expecting that both the stocks on their wishlists and the market indexes will bottom out together. This isn't how it works. If you've chosen strong stocks, you should be starting to buy in very soon.

The lower chart is a chart of VECO. We're staying put with our position, although we know there may be more pain ahead. We're looking to buy more LED stocks in the days/weeks ahead. We'd like to get back into CREE, which we sold some time ago at around $76. We still feel it's overvalued, and will remain stubborn about not paying up for these shares. Stocks with low EPS's (high P/E's), such as RBCN and MRVL, are getting hit particularly hard because during corrections, stocks revert to fair valuations based not on forward earnings, but on current earnings. In this regard, we feel VECO is a bit of a safe haven, and any undue selling pressure will present a buying opportunity. We may be wrong on VECO, but we don't have enough reason to turn against it at the moment. With a P/E of 15, there's no reason for us to sell into weakness.
The only other trade we're considering is one in the Ultrashort indexes, like SDS, QID, or DXD. We are not looking to start this position at the market's current level, but if the market rallies strongly, we'll have to assume that it's a bear trap and buy into one of these. The current market downturn is not likely to end quickly, as macro-economic uncertainty such as what's happening overseas takes many quarters to work its way through. There is no reason, however, for the U.S. market to trade in sync with the overseas markets. The U.S. will likely pull out of the downturn quicker, with our strongest sectors eventually rallying so quickly that anyone not invested will have a very tough time getting in. It is our belief that the LED stocks will roughly double by year end from their Spring lows. These lows, whatever they may turn out to be, will be put in sooner than most traders expect.

Our Take On VECO

2010-04-29T20:53:00.002-04:00

Click chart to enlarge

It always amazes us how little patience some investors have. If you read the message boards, you'd think VECO is going out of business. What's wrong with a stock, or an entire sector for that matter, correcting after months of phenomenal gains? In our view, absolutely nothing. Volatility goes hand-in-hand with growth stocks. As long as a chart stays above its uptrending moving average and hasn't broken down below the bottom of its trend channel, then we really don't care what it does above those lines.

We see VECO as a company poised to experience significant growth through some time in 2012. If we didn't already own it, we would have bought some today. We fully accept that at some point these LED stocks will reach a plateau where their future growth is calculable, and that will end their 15 minutes of fame. But until you personally buy your first LED bulb, don't worry about the LED craze being over. It's already a foregone conclusion (not to mention a government mandate) that every lightbulb in the world will be changing over the next 4 years. It isn't until you're in some random deli overhearing people talk about LED stocks that you should fear their run being over.

The big-picture thinkers, like Peter Lynch, suggest that you should never look at charts with intervals of less than 5 days. That is, charts where each bar represents a week of trading. The logic behind this is that it keeps you focused on the longer term picture, where blips like this are hardly visible.

Buffett would tell you that if you liked the stock yesterday at $54, then you should love it today at $47. How true that is.

Let's stay focused on the big picture and not let the short-term thinkers and window dressers distract us.

VECO

2010-04-26T19:28:00.010-04:00

Click chart to enlarge

(This post has been updated to reflect VECO's latest guidance)

Time to re-evaluate VECO. The chart shows that it is either well above the top of its channel, or it has simply started a new channel. This is an arithmetic chart, so "going parabolic" is not unusual for the strongest growth stocks. It's when a stock goes parabolic on a logarithmic chart that you need to run for the hills. Going solely by the channel and moving average, VECO is overbought and ripe for a correction. It is only an immediate cause for concern if its fundamentals tell us the same thing, so let's take a fresh look at them...

Over the past four quarters, VECO has posted earnings of

-.15, .16, .41 & .49, for a current EPS of 91 cents. Next quarter, VECO projects to report earnings of 78 to 90 cents per share, well above the 59 cents previously expected by analysts. For the purpose of our calculations, we're going to assume VECO will report 85 cents per share next quarter.

No one really knows how well the LED companies will do, as the number of lightbulbs in the world is an incalculable figure. History has proven, though, that during their most aggressive growth phase, companies grow by approximately 20% to 30% annually for about 5 years at a time. Beyond that, growth at that rate is unsustainable. We therefore typically use 25% as our estimate for a company's EPS growth, so as not to get caught up in a Dutch Tulip bubble.

This number should be scaled up or down depending on the size of the company. For a company VECO's size, an estimate of 25% to 30% is acceptable. As an example, we might use 20% to 25% for a company the size of CREE, and 15% to 20% for a company the size of AAPL.

This estimate yields a P/E for VECO of 30 to 36, using a PEG ratio of 1.2. As we've said before, Buffett supports the use of a PEG ratio of 1.2, so who are we to play with that number?

Using VECO's current EPS, it should be trading anywhere between $27 and $33. If we had a broad market correction right now, this may be where VECO would retrace to. And it would be a steal at that. But who goes by current EPS figures?

Looking out 3 months, VECO's projected EPS ($1.91) suggests it will be worth anywhere from $57 to $69. Even if we go with a more conservative growth rate like 20%, we'd be looking for VECO to be priced at around $48. So we don't feel that there is a lot of downside in holding VECO here, despite how "nosebleed" the chart appears.

Looking out two quarters, the 15 cent quarter will be replaced perhaps by another 85 cent quarter, giving VECO an EPS of $2.61. At that time, VECO could be trading at around $80 per share.... maybe even higher if the market is surging at that time.

Our approach going forward is going to be to hold VECO and add on dips. Of course there is a number at which we would sell, but as long as it stays below $60 or so, we won't even be considering it.

In another note, we continue to believe that the market is blowing off and about to retrace significantly enough to give us good entry points on just about every issue.

CREE

2010-04-21T10:11:00.002-04:00

Click chart to enlarge

CREE is taking a small hit today after beating expectations. How many think it's going down because people expected better results? How many think it's going down because it was at the top of the channel? Of course we believe the latter, but it's just a difference in philosophy with no change to the actual outcome (the bottom line). We believe that if CREE had dropped to the bottom of the channel in the days or weeks heading up to the earnings report, it would have soared upon its release. So then is it good news or bad? Like all stock market news, it's neither. It just depends on where the market is when it's released. But we digress.

The point of this post is that we sold CREE a short time ago at 76 something, saying that there's little risk in selling near the top of a channel. Although we didn't catch the very top (you rarely will), we didn't exactly get locked out of the stock either. While it's tempting to buy back into CREE based on it having a bit more strength than we had anticipated, we still feel it's richly valued. We're no stranger to paying up for growth, but we'd rather wait for a really bad day in the broader market and steal the shares from someone standing on their window ledge. You're not getting a bargain buying CREE 6 points off its high.

Blowoff

2010-04-14T11:38:00.002-04:00

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.

LED Valuations

2010-04-06T20:52:00.003-04:00

We've had a great run in the LED stocks recently, and that calls for a fresh look at the numbers to see how they're currently valued, and where they may be headed. Let's put aside the events of the past couple months and focus on the only question that matters now... "Would we buy these stocks if we just discovered them today?"
First, we have to estimate their growth potential and earnings growth timeline. From this standpoint, the LED stocks are still attractive. People have not yet even started to buy these products, and government regulations are soon going to force people to do so... worldwide. This suggests that the LED stocks still have a way to go. But what do the numbers tell us?
Going on the assumption that the actual earnings growth peak for these companies will occur when people first start buying these items in quantity, it suggests that these companies may not hit the top of their growth cycle for another 2 years or so. This means the stocks will hit their peaks in about 15 to 18 months (6 to 9 months before the earnings growth tops out).
Being conservative, the LED companies can be expected to grow approximately 20% to 25% a year over the next 3 to 5 years. This gives them fair P/E's of somewhere between 25 to 30.

VECO
Current EPS= -.22 -.15 + .16 + .41 = .20
Current P/E= 47/.20= 235
EPS in 3 mos= .16 + .41 + .46 + .54 = 1.57
P/E in 3 mos= 47/1.57= 30

CREE
Current EPS= .13 + .18 + .30 + .38 = .99
Current P/E= 77/.99= 78
EPS in 3 mos= .30 + .38 + .43 + .46 = 1.57
P/E in 3 mos= 77/1.57= 49

The above numbers show that while their current EPS's suggest that these stocks are way overvalued, a very different picture will emerge just a few months out. These numbers also suggest that CREE is about 65% more expensive than VECO. This makes sense, seeing as how the 800lb gorilla always attracts the most investors, and therefore carries the highest valuation.
It is our opinion that CREE is overpriced at $77 considering that if it stayed at its current price, it's P/E would be 30 in approx 9 months. That means that it will go sideways for the next 6 months or so before it has room to move higher. Don't believe it? Watch. It may go higher and then drop, or lower and then rally, or just go sideways. Either way, you'll be able to buy CREE at $77 again later this summer or in the Fall. There's no rush to jump in at its current price.
VECO, on the other hand, will have a P/E of 30 in just 3 months if it stays at its current price of $47. We would buy VECO here if we were just discovering it today. Even better if it corrects into the low 40's. The closer we can buy it near a P/E of 30, the better off we'll be in the long run. We're currently looking for an entry point for VECO, and to a lesser extent a re-entry point into CREE.
So where will these stocks top out? There are too many variables involved to give an answer to this question. And truth be told, nobody knows. But from where we stand now, the numbers suggest that at their peak, CREE and VECO could both be trading at approximately $100.
(assuming a P/E of 40 and an EPS of $2.50) It won't be long after their EPS's reach about $2.50 that widespread talk of lower margins, cheaper LED's, expiring patents, newer products, etc, will cause these stocks to put in a top.
If you want to really prepare for the LED craze, we suggest that you get yourselves margin accounts. When these stocks top out, they are going to fall very hard. Any company making products that can easily be duplicated cheaper in Singapore will crash in the end. This isn't a Google where the brand is irreplaceable. This is cut-throat competition for cheaper prices.
When these stocks begin their fall from grace, we will immediately discontinue our love affair with them and reverse course. The LED stocks will be headed to zero like all other stocks. But until then, let's enjoy the ride to $100 by setting up sniper posts and picking off a few shares here and there on those days when people just sell with passion for no reason whatsoever.

Chart of CREE

2010-04-06T14:22:00.000-04:00

Click chart to enlarge

Snot sells CREE

2010-04-05T18:39:00.002-04:00

Click chart to enlarge

We sold all of our shares of CREE this morning, after a UBS upgrade put the stock up 7 points. We have nothing against CREE, and will likely repurchase it at some point in the near future. We just feel overexposed at the moment to stocks that are trading at or above the tops of their channels, well above their moving averages. The chart of VECO above illustrates this.

We chose to sell CREE rather than VECO today because VECO offers better value at the moment. Both companies are expected to report approximately $2.00 or better by the end of 2010. With similar EPS forecasts, we'll take VECO in the 40's over CREE in the 70's.

VECO announced that it will be releasing earnings on Monday, April 26th. If the stock surges prior to earnings, we may be selling it as well.

We feel that the broader market is not ready to run out of steam just yet. One of two scenarios will likely happen. In the first scenario, the market will continue its climb to about 11,600 or so. Then it will correct about 10% sometime this summer. In the second scenario, the market will continue to climb to about 12,500 or so, then experience a 15% to 20% correction sometime in the Fall (perhaps October). In either scenario, these LED stocks could easily remain bouyant for the next several months, possibly putting in some very impressive highs (CREE at $100 and VECO at $80?). We plan on being on board for the ride, but are also very well aware that at some point between now and October, people are going to remember that the reality of the current economy is in no way suggestive of anything more than Dow 12,000. The upside is limited from here for the broader market, and any fluff will quickly evaporate. Although we aren't looking to get back to 100% cash just yet, we are going to be more conservative going forward considering these stocks have already posted some very impressive gains. Our sale of CREE today marks a transition in our investing mindset from one of "everything's peachy, buy and hold" to "sell into strength, don't be caught overexposed".

Account 16

2010-03-25T11:03:00.002-04:00

This is the current allocation in account #16. It is owned by Jane Stewart, but for reasons of anonymity, we'll call her Ms. Smith.
Ms. Smith doesn't know that her account is the most aggressive of the ones we trade. All she knows is that she makes about 25% a year. There isn't a lot of capital in this account, so we trade it more aggressively than any other. Our other accounts have shares of CREE and MRVL, for reasons of diversification.

VECO

2010-03-23T19:10:00.002-04:00

Click chart to enlarge

What a tough call. VECO is at the top of its channel, and thereby triggers a short term sell in our book. On the other hand, the fundamentals make VECO look cheap, even at $43!

Here's the math...

If VECO grows at a conservative 20% a year, then we should expect its P/E to be approx 25, assuming a PEG ratio of about 1.2.

VECO's current EPS is 88 cents. This would make a fair price for VECO of .88(25) = $22.

Using its current EPS, VECO looks expensive. But if you look ahead a quarter or two, you'll see a whole different picture. In June, the 88 cents becomes $1.57. By December, it becomes $2.34.

Using the June estimate, a fair price for a share of VECO would be 1.57(25) = $39. So it's not overvalued at all. Looking out to December, we calculate a fair price of 2.34(25) = $59.

If VECO were to go from its current price of $43 to a price of $59 by December, that would be a 33% increase in just 9 months. We fully expect that VECO will reach $59, and perhaps even trade in the 80's by the end of the year.

So do you sell now because the technicals tell you to lighten up on the shares? Or do you hold because the fundamentals are telling you to buy more? We cannot answer this, as it's up to an individual's investing style (tolerance for risk). As for us, we're not heavily invested to begin with, so there's no impetus to run for the exits. If anything, we're looking to add to our LED positions. If we get a huge rally to impossible heights well above the top of the channel, we'll lighten up on the shares. In the meantime, though, we're going to let the fundamentals be our guide. If we were very heavily invested in VECO, we would lighten up here.

It should be noted that CREE and AIXG have higher P/E's than VECO, and a surge to the upside would therefore be more of a reason to sell those names. We're willing to hold a stock that is valued for the next quarter's EPS, but not one that is valued 9 to 12 months out. We continue to see value in MRVL, as well as strong technicals.

Diversification

2010-03-11T16:58:00.003-05:00

Diversification is preached by most "professional" money managers. For the record, it is not right to use the term "professional" in conjunction with the term "money manager" unless the word "professional" is in quotes. Although our dealings with Wall Street have unwillingly forced us to accept that crime pays as long as it's white collar crime, we have a hard time accepting that any criminal deserves to be called a "professional". The crazy part of it all is that if they name their firm "Bradstreet Wharton Wellington Financial, LLC", somehow it makes them feel as if what they're doing is "professional". Some of the more brainwashed among them have even been able to convince themselves that what they do is legal. But we digress.
Here at "Snotwheel Financial", our advice is different. If you look into studies about diversification, you'll find that owning just 3 or 4 stocks removes such a large component of the risk of not being diversified, that there's really no need to own more than that. We don't believe in diversifying amongst sectors at all. We like to buy 3 or 4 stocks in the hot sector and that's it. The reason we diversify within the sector is to remove company specific risk, which is always present. These risks vary from uncontrollable events such as natural disasters to creative accounting. The reason most "professional" money managers own dozens of stocks is because they have little choice. They have billions of dollars to invest, and do not want to own more than 10% of any given company. If you're a small investor, you're not bound by these requirements, and can therefore beat the "professionals" at their own game.

VECO

2010-03-10T00:27:00.004-05:00

Click chart to enlarge

VECO has been trading sideways for the past several months. This may be discouraging to investors who meanwhile watched CREE rocket to new highs. But we're not in the least bit discouraged by VECO's recent performance. We see a perfectly healthy chart that needed to rest after a long run from early Nov to early Jan. VECO is wedging itself into an ascending triangle, an extremely bullish formation marked by higher lows and horizontal resistance. (see lines drawn on chart above).

All of this is happening within the trend channel, above an uptrending moving average, and with the backdrop of a relatively bullish broader market. This all points to an impending breakout for VECO to new all-time highs. We're early to point this out, as the stock is likely to struggle for a few days at resistance (+/-38) before making its move. Not all breakouts from ascending triangles are the same. A lot of its power is derived from the action of the broader market. If VECO can climb to 38, then have the market drop for a few sessions while VECO manages to tread water, then the rebound in the broader market will translate into a powerful breakout for VECO. Conversely, if VECO begins to break out and the market then decides to sell off for a few sessions, VECO's breakout may be thwarted. Regardless, it's important to note that with each passing day, this chart is bottling up more and more potential energy. We feel that it's only a matter of time before it reaches 40, which is more than 10% higher than its current price. With this one trade alone, an investor could statistically outpace the yearly performance of 87.9% of mutual fund managers.

Cree's Channel

2010-03-03T21:19:00.002-05:00

Click chart to enlarge

With all of these growth stocks, there comes a time when it gets hard to even draw a channel on them because their charts start to look parabolic. If you switch from an arithmetic chart to a logarithmic chart, you can straighten the chart out and see it more clearly. The strongest stocks look parabolic even on a log chart. Any stock that looks parabolic on a log chart is a strong sell in our opinion. No company can sustain that kind of growth. The numbers just get too big.

CREE has not gone parabolic on a log chart yet, but has definitely done it on an arithmetic chart. We can only draw a trend channel going back about 5 months on an arithmetic chart of CREE, as pictured above. Regardless of how you draw the channel, you have to admit that CREE is a tempting sell. If we were heavily invested, we'd be lightening up a bit on these shares. Considering we're only partially invested, we're going to ride it out. Based on the trend channel, CREE could reach 75 before needing any kind of a pullback. At 75, we'd be very tempted to take some off the table in an attempt to repurchase those shares at a lower price within a week or so. There's only so far a stock can go before people start taking some profits, and CREE is definitely in the nosebleed section at the moment. We'd feel more comfortable with it if it were just running parallel along the yellow line. It's a double-edged sword because we like to see the relative strength, but at the same time we don't want the stock to overheat out of fear that a sharp drop could rattle investor confidence. The best thing CREE could do is go sideways for a month while the market goes lower. That would take a lot of the risk out of the picture.

New Highs

2010-02-17T12:39:00.002-05:00

Click chart to enlarge

VECO is trading at new highs today, long before the indexes to say the least. It looks like VECO can make it to approx $42 before hitting the top of the trend channel and needing a breather. It's unlikely it will continue at this trajectory and get there within a week. It's more likely that the speed at which these stocks are climbing will taper off and give way to charts that cling to the yellow line in the center of the channel, moving slowly upwards until a new catalyst comes along.

That catalyst may be another leg down for the broader market, but that remains unknown. The broader market, for the record, is not out of the woods just yet. It remains below its downtrending 50dma, and neither the S&P nor the Dow have taken out their early Feb highs.

What the market does over the next several sessions is critical to helping us determine whether we just completed a healthy 10% correction, or whether we're in the early stages of a larger selloff.

CREE

2010-02-16T10:51:00.005-05:00

Click chart to enlarge

The chart of CREE above exemplifies why relative strength is the single most important attribute for a stock to have. When the market was correcting, CREE managed to stay above the moving average. Now that the market is hinting at a possible technical recovery, CREE is off to the races. No doubt it will make new highs LONG before the market itself.

If the market is just gearing up for another leg down, CREE will be able to absorb that plunge most likely without breaking through its moving average or trend channel once again.

VECO shows similar strength, but AIXG has become a weak stock. If AIXG does not begin to show signs of renewed strength, we may have to let it go.

We bought some MRVL today after researching it more thoroughly. The company is posied to experience explosive earnings growth over the next year or two. Having the support of fellow "aggressive growth" investor, Ken Heebner, doesn't hurt either. We like the prospects for the stock, and will more than likely be adding to it so long as it continues to gain popularity among investors. Popularity is the one element that is hardest to quantify, as there is no fancy formula to plug it into. Yet, it has more influence over a stock's future than any other variable.

CREE has certainly caught the attention of the investing public, and we hope to see that interest last for another few quarters, provided it doesn't overheat beforehand. Stocks with this kind of "popularity" run the danger of getting way ahead of themselves, hence our use of trend channels to help us scale into and out of positions in companies based on how close they are to the reality of their earnings potential.

We are now 36% invested, holding CREE, VECO, AIXG and MRVL. Cramer, are we diversified?

Financials

2010-02-08T22:07:00.002-05:00

Click chart to enlarge

What better reason to believe that the market is headed lower than charts that look like this? The chart above of Citigroup (C) demonstrates just how fragile the financial sector is at the moment. The odds that Citi breaks support and heads lower are very high. We continue to believe that we'll see a full 10% correction in the market, and perhaps even 15%. This is one of the reasons we sold all of our Ultralong index positions at the end of December. We don't have any reason to believe that the market will continue to drop after completing this modest, healthy correction. We believe that Dow 9,500 (S&P500's 1020) is in line with the reality of the current health of our economy. In an ideal scenario, the market would capitulate in two or three days of massive selling, then have a strong intraday rebound after a panic selloff one morning.

If it unfolds this way, there will be value to be had across the board. We will be backing up the truck on the LED stocks, particulary CREE, which is demonstrating excellent relative strength considering what the broader market is doing. If the market does begin to peel off a few hundred points a day for a few days in a row, it will look like we're headed to Dow 6,500 again. You'll be forced to decide for yourself whether or not this is a healthy correction or another leg down in a very tiring bear market. We're sticking with the "correction" theory, but encourage everyone to do draw their own conclusions.

Please participate in our poll at the left hand side of the page. Thanks, Snot

AIXG

2010-01-29T12:38:00.003-05:00

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Charts don't get much more ominous looking than this. AIXG has spent the past several weeks forming a descending triangle. The odds strongly favor that this chart will break down into a new, lower trading range. We believe the market is not all that far away from doing the very same thing. This does not deter us from our plan, but rather has us excited that better prices may be just around the corner. The lack of buying interest in the broader market is becoming more evident with each trading session. Hopefully all stocks will capitulate in a fast and extraordinary selloff that marks the bottom of this correction.

Rubicon

2010-01-27T01:27:00.002-05:00

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We promised we'd ferret out the material suppliers of the LED market, so here's one stock for you to look into. Rubicon Technology (RBCN) makes innovative crystalline products for LED applications. Unfortunately, it's not easy to put a price on the stock, as the company is in the red. It is expected to become profitable sometime this year. We'll file this one as the most speculative one of our "4 horsemen of LED". We don't normally buy large positions in stocks of companies that aren't generating profits, but we wouldn't mind gambling on this one with a small percentage of our portfolio given the potential of the entire sector.

RBCN is currently trading near the bottom of its channel, making it attractive on a technical level. VECO is supposed to be reporting earnings on Feb 8th, with RBCN reporting on Feb 9th.

We'd like to have about 1/3rd of our portfolio in the LED stocks before these earnings release dates. It would not be suprising if these stocks sold off just prior to their respective earnings releases. When an uptrending high-momentum stock sells off strongly just prior to earnings, we see it as a rare opportunity to sneak on board the train.

Broader Market

2010-01-21T11:40:00.003-05:00

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The chart above is a chart of the Dow from 11:41am today. It's too early to say the market is going to have a down day, as it could well close up 200 points. But from its early indications, we may just get that broad market correction we've been looking for. To confirm that a correction is taking place, we'd need to see a simultaneous and decisive break of both the bottom of the trend channel and the moving average. If the market closed here (down approx 190), we would have neither just yet. Still, it would be a good sign that bargain prices may be in the near future. The financial news will tell you that the market fell this morning because Obama plans on further tightening banking regulations. This actually has nothing to do with why the market is selling off this morning. The financial news folks are the most frustrated individuals in the world. Every day, they have a stack of positive news stories in one pile, and a stack of negative news stories in another pile. Depending on which way the market goes each day, they blame it on stories from either the positive or negative pile. The real reason for the majority of the market's moves is just human nature. If the market goes in one direction long enough, people get bored. It's been going up for 10 months now, and is due for a correction. The "news" is irrelevant.

LED Stocks

2009-12-31T17:22:00.004-05:00

There was a time when our portfolio consisted of nothing other than fertilizer stocks. The pie chart above shows how little we diversify when the going is good. "Cramer, we own MOS, POT, CF and AGU. Are we diversified?"

In July 2008, the fertilizer stocks broke down, and we knew the market was done for. We got out and sat on the sidelines for a few months, eventually scaling into a few Ultralong index positions. We got into these positions a bit too early (never expected the market to drop 60%). Nevertheless, they became profitable, so we continued to hold. We let them go yesterday, putting us back to an all cash position.

Since we sold the fertilizer names back in mid 08, other than index ETF's, we haven't owned another stock since... until now.

We said we would wait for new innovation before investing again. We've found something that's piqued our interest, although granted it's not the next "internet" or "biotech" revolution.

This is a smaller innovation, but the size of its market is phenomenal. It is LED lighting.

Currently, the overwhelming majority of people still buy incandescent bulbs. They've been around for 126 years, so it's a tough habit to break. But this is about to change.

The 2008 energy bill has a section that phases out incandescent lightbulbs for residential applications by 2014. The phase-out begins in 2012. Everyone will be forced to buy CFL's or LED's. CFL's are in the running to replace incandescents, but they are less efficient than LED's, and most of them are not dimmable.

LED lighting has a bright future. But how to capitalize on this information? To do this, you'll need four tools. The first, and most important tool, is patience. This is not a short term trade. LED stocks should be bought and held for about 2 years. The second tool is a basic understanding of fundamental analysis. Right now, these stocks are all overpriced. More on that later. The third tool you'll need are the charts. Being that we'll be investing heavily in LED stocks, we'll be posting charts of the major players in the LED sector on this blog frequently.

The fourth tool you'll need is a basic understanding of the companies that make up this space.

We invite your commentary on which companies are playing "behind the scenes" roles in this technology.

Our understanding of it is that CREE is the largest pureplay in the space. While Philips (PHG) produces LED lighting, as a rule we avoid companies that are not pureplays. The basic concept behind this is that if 4% of a company's business doubles, you're not going to get much out of it. This precludes us from buying AMAT, which is involved in LED technology as well. They've got their hands in so many different businesses that even if they become the leader in LED, their architectural glass division (for example) will mitigate their success. Who needs that?

While CREE is the largest and most visible of the names, it isn't our favorite. We've had better luck in the past betting on the second or third companies because they often have more room to grow. Back when fiberoptics were heating up, we loaded up on SDLI, buying only a small stake in the 800lb gorilla, JDSU. Those of you who've been around long enough to know these names know that JDSU eventually bought SDLI.

You can also do well buying the guys down the chain... the material providers and such. If you look into the LED space, you'll find that Aixtron (AIXG) and Veeco (VECO) are two such names. Our favorite stock in the LED space is AIXG (see its chart above).

Ok, now back to fundamentals:

All of these companies are expected to have excellent earnings growth over the next 5 years. Hence the name, "growth stocks". Naturally, growth stocks come with higher P/E ratios because P/E's are a direct function of growth. As a rule of thumb, a fair value for a growth stock can be calculated by multiplying its annual growth rate by 1.2, then by multiplying that number by its EPS. The number 1.2 is known as a PEG ratio. Warren Buffett's stocks typically have PEG's of approx 1.1 to 1.2. Although your stocks as a growth investor will have higher P/E's than his, you should be content if you're paying the same PEG as he is.

So let's do the math for CREE:

Let's say it will grow by 25% a year for the next 5 years.

25 multiplied by 1.2 equals 30

CREE's current EPS is .79

CREE's EPS next quarter should be .96

30 multiplied by .79 is $23.70

30 multiplied by .96 is $28.80

A fair price for CREE right now would be somewhere around $27

Now let's do the math for AIXG:

Let's say it will grow by 25% a year for the next 5 years.

25 multiplied by 1.2 equals 30

AIXG's current EPS is .32

AIXG's EPS next quarter should be .42

30 multiplied by .32 is $9.60

30 multiplied by .42 is $12.60

A fair price for AIXG right now would be somewhere around $11

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Seeing as how CREE is currently trading at $56 and AIXG is currently trading at $33, it's tough to pull the trigger. Certainly if the market corrects, these "momo" stocks will get hit hard and fast, giving us a great entry point. Then they'll bounce back as quickly as they fell, making new highs long before the market itself.

So do we wait to buy CREE at $27 and AIXG at $11? No. Unless there's another economic meltdown and market panic, you won't be that lucky. Even if these stocks correct, they won't go that low. This is for two reasons. First, corrections take time. By the time the market corrects, we'll be further ahead in their fiscal year, giving them higher EPS's. The above figures would have to be recalculated. Second, the above figures are conservative. What if these companies grow by 30% a year, thereby deserving of a P/E of 36?

You can't be a value investor and a growth investor at the same time. You have to accept that you're going to pay up for growth and popularity if you want to ride the train. But that doesn't mean you have to buy at the very top. Wait for a dip and buy some. Then wait for a broad market correction and buy some more. Scale into your position as the market drops, and as the stock gets reasonably close to a price that you're comfortable paying for it. Then have patience. If you're going to hold it for a couple of years, then you have to believe in it. Your belief in it, according to Peter Lynch, can be a very simple thing. What intrigues us about LED lighting is the sheer number of lightbulbs that need to be replaced over the next 4 years. Basically every light bulb in the world will be replaced. Think about that. Then hold your LED stocks through thick and thin until they become a household name.

We waited to see if LED would catch on before deciding to start scaling into it. The reason is that the growth market is largely a popularity contest. Two companies with identical books can be treated very differently in the same market. Whichever one inspires awe in people will win the race. (Then go to zero, of course.)

We welcome any commentary about LED stocks or our investing methods, as always. If you know of any other new innovation that looks promising, please let us know about it as well.

Let's work together to triple our portfolio values!

S&P500

2009-12-30T11:07:00.002-05:00

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We may be seeing the first signs of slowing momentum for the indexes today. There has been no break of any trendline or average, but this is not how a healthy Stage 2 chart rallies following five weeks of consolidation. The horizontal line drawn at the upper left on the chart of the S&P500 index above acted as resistance for over a month. Once broken, the chart should have rallied strongly to new highs without any hesitation. This would be textbook of how a chart breaks out into a higher trading range. Today's backpeddling just days after a feeble breakout does not bode well for the broader market. If this market doesn't pick up steam quickly and follow through on the rally it started, we may just be right that it's in its early stages of forming a top. If this is a top forming, the market will drop, then launch a rally that fails to make new highs. This would be the next sign. Finally, after failing to make new highs, it would break through the bottom of the trend channel and moving average. This is the scenario we're hoping for, but it's way too early to call it yet.

We're Out!

2009-12-29T12:01:00.003-05:00

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We just sold the remainder of our Ultralong index positions, which we've been holding for just over a year now. The market is still in a Stage 2 uptrend, trading above an uptrending moving average, so there is no clear sell signal. Still, we see this end-of-year window dressing rally as an opportunity to exit the market and begin a new year. One of our New Year's resolutions is to use the S&P500 index (above) as our default index instead of using the Dow.

We feel that the market cannot go up forever at this pace (67% in under a year), especially in the face of rising oil prices. We just feel it's time to not get greedy and instead start to focus on our next adventure... LED lighting.

Indexes

2009-12-16T09:38:00.002-05:00

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The chart above is of OEX (the S&P 100 index). All of the indexes have the same formation, so this could just as well be the SP500 or the Dow, it wouldn't matter which. There is a clear ascending triangle forming on the indexes. Resistance has been well defined over the past 6 weeks or so, and the charts remain in a Stage 2 uptrend, trading above uptrending moving averages. It is our strong feeling that it will not be long before the indexes break out to the upside. We also believe that that final surge to the upside (the blowoff) will mark a top, for the time being anyway. But one thing at a time... let's wait and see if there's a blowoff rally first. If so, we'll be selling the rest of our index position and getting back to 100% cash.

AAPL

2009-12-14T09:41:00.002-05:00

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We recently voiced our opinion that AAPL was getting ahead of itself on a valuation basis. We now see deterioration in the strength of its technicals, too. It broke its trendchannel and 50dma. If this chart appeared at a time when the market was beginning to melt down, this would be a screaming sell. But considering the market remains bouyant and other techs (particularly GOOG) appear healthy, this is not a 5 alarm fire. Nonetheless, now is not a good time to back up the truck and load up on AAPL shares. This is one chart that will see $200 again sometime in 2010, so there's no rush to buy.

In our ideal world, the market itself would "blow off"... rally another few hundred points (maybe even to 11,000), then top out in a big way, possibly retracing to 8,500 or so before stabilizing. If this scenario plays out, then in hindsight AAPL would have been exemplifying investor's current true feeling about the market. And that is that we're at a point where stocks are getting overpriced. We've come too far too fast. But whether or not our feeling is the concensus remains to be seen.

Gold Corrects

2009-12-14T09:14:00.002-05:00

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It was exactly 2 weeks ago today, with GLD trading at $109 that we said... "We're not saying it can't go higher, but that if it does, it will inevitably return to its current price sometime in the next few months. In other words, it isn't about to get away from any potential buyers at this point. Don't chase it."

The concept behind that post was that stocks only move so far away from their averages before they return to them. There's no harm in selling when a stock moves far above its average. Or at least lightening up as it advances into the nosebleed section. If you have the patience, you'll be able to buy it back again at the same price, so there's no risk. If you're lucky, it may just drop the day after you sell, setting you up for a nice trade. Beware of tax consequences.

As for the future of Gold, it hasn't broken any trendlines nor averages. It's still in an uptrend, trading above an uptrending moving average, so it is not a short candidate. If it moves lower from here, support is in the mid 90's. But it has already corrected approx 10% from its highs, so the worst may be over for now.

AAPL

2009-12-02T20:47:00.004-05:00

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We think AAPL has gotten way overextended. Maybe it breaks down from here, with a significant and decisive break of both its moving average and trendline. Or maybe it manages to keep itself within the channel, wedging itself into the little triangle formed by the ascending trendline and the horizontal support created by its October and November highs. From there, of course it could break strongly to the upside. But there's no way of making either of those calls right now. Our warning on AAPL shares are more rooted in the company's size than anything else. AAPL is simply too large to keep growing at its current pace, and it has once again nearly maxed out how far it can comfortably push the upper limit of its valuation range.

Let's suppose you could accept that AAPL will grow by 20% annually for the next five years. We find this hard to believe, but let's give them the benefit of the doubt. In that case, paying a P/E of 25 for the stock would be reasonable. Not a bargain by any stretch, but not outrageously expensive either. It would just be a fair P/E for the stock. Let's give AAPL the benefit of the doubt and calculate its current EPS using what they project to make for Dec 09. That would give AAPL an EPS of approx $6 per share. With a pricetag of $196, that gives AAPL a P/E of approx 33. Looking out about 12 months from today, AAPL is expected to have an EPS of $8 per share. If it stayed at today's price of $196, its P/E a year from now would be 25. So there you have it, a stock that should go sideways for the next 12 months, if indeed it wanted to return to a level where its price matched its value.

Considering the stock "should" be at its current price a year from now, there's little risk in buying or shorting it at these levels. It may go higher or lower, or maybe just sideways. But either way, at some point about a year from now, it'll be back at $200 again. We posted similar comments about AAPL's valuation last time it reached the $200 mark. So how do you profit from this? What we like to do is plant this seed in our head, and then watch the chart. If AAPL continues moving higher, our interest in shorting it increases. Perhaps in a month or two, it'll be trading on 2011's EPS. That would make shorting it a whole lot easier. If we thought it was high at $200, then it'll be a screaming short at $250... with a P/E of 42.

We don't actually short individual stocks, especially ones that are trading above an uptrending moving average. But it's still worth keeping tabs on where the four horsemen of tech are trading. They give you valuable insight into how rich the market is becoming. AAPL strengthens our thinking that the market itself is in its early stages of an overbought condition. Each step higher from here, the market is playing an increasingly dangerous game of musical chairs. When the music stops, there won't be any buyers left to fill the sell orders of those who want to take a seat on the sidelines.

Gold's Top

2009-11-25T19:25:00.003-05:00

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Stock charts typically get a certain amount above their moving average before falling back to reality. For gold, an overbought condition exists when the chart is 40% to 50% above its moving average. It doesn't matter what average you use. The percentages will change, but can still be used as a basis for comparison against each other.

The chart above shows that GLD (gold) is quickly reaching an overbought condition. How far could it go? Every 9 points represents another 10% rise above the moving average shown on the chart above. Therefore, a jump of 9 more points to a price of 125 would put GLD at 40% above its average. A jump of 18 points to a price of 134 would put GLD at 50% above its average. We're not saying that it won't go there. Of course, we don't know. But we do know that if it does reach those heights, particularly if it happens quickly, the chart is setting itself up for a dramatic return to the average.

The last two times GLD corrected, it fell roughly 25% to 30%. A repeat of this kind of correction would put GLD somewhere between $80 to $100 per share. There are few people out there at this point that don't already know that gold is the new hot investment. In fact, infomercials are popping up which are selling gold as the new investment vehicle of choice. The guy at the corner deli just bought some gold for the long term. If that doesn't signal a top in the making, we don't know what does.

In an ideal world, gold would quickly "blow off" to an incredible height (like $134) . From there, the downside risk would be too great to ignore, and people would start heading for the exits, leaving the guy at the corner deli holding the bag. This will surely be a fun chart to keep tabs on.

Gold

2009-11-14T20:09:00.002-05:00

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The chart above shows the past 4 years of GLD, which tracks the price of Gold. We would never short a stock trading above an uptrending moving average, but we would lighten up on GLD at this point, and continue to lighten up on it if it advances from this point. We're not saying it can't go higher, but that if it does, it will inevitably return to its current price sometime in the next few months. In other words, it isn't about to get away from any potential buyers at this point. Don't chase it. Although very bullish, this chart looks ripe for a 7%-8% correction (at least to the low 100's).

The Dow

2009-11-11T19:49:00.002-05:00

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Is there anyone still reading this blog? We lost interest in the market for a while, but a recent glance at our account piqued our interest again. We're actually in the black since we started the blog in mid July. Barely in the black, but heck, flat is the new up.

Every time the market nears the top of the channel, we get tempted to drop DDM and SSO, but it never spikes high enough to tempt us that much. If we had a quick spike to the area of the red line, we'd sell it all and just wait. We still think that despite all of this recent strength, the market is just finding the top of a new sideways channel in which it will live for the next two years or so.

Before we have any truly sustained (multiyear) bull market, we need new innovation, which doesn't exist right now. When "the next big thing" comes along, this blog will be all over it. Finding the next leaders is what we do best. Well, that, and pointing out when they die.

But for now, the best we can do is stay long with a third of our stock portfolio and try to play the channel with some portion of those long holdings, all the while avoiding overexposure. At some point, the market will hit the top of its new sideways channel and then feel around for a bottom. Maybe sideways from 8,000 to 10,500 for two years? How does that sound? Your guess is as good as ours. We'd like to hear what others think the near term future holds.

More important than guessing the market's next direction is now trying to find that "next big thing." You won't find it any earlier than anyone else. You just have to understand it sooner.

We're most interested in any help we can get in spotting the next major phenomenon. Let's all work together and make the next bull work for us!

Bernie gets 150 years

2009-06-30T00:02:00.002-04:00

What a light sentence, just a year for every 27 million stolen... from charities no less.
Bernie should have gotten a year for each $20,000 stolen, much like "blue collar" criminals would have gotten. That would put Bernie behind bars for the next 200,000 years. But as a "white collar" criminal, Bernie gets a slap on the wrist like his other Wall Street peers.
Of course he'll die in jail, so it doesn't really matter what his sentence is from that standpoint, but for those of us doing the math, white collar crime is looking like a good way to make a living.
Perhaps the criminal system will redeem itself somewhat and lock up everyone who was in on the scheme, including his wife and his sons.
Nonetheless, Bernie's sentence restores some of the faith that we all lost in Wall Street over the past few years. Maybe just 1% of it, but it's a start.

Selling DDM and SSO

2009-06-15T23:50:00.003-04:00

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This may be a bold move, but Tuesday, June 15th, we're going to sell just about everything. If you look at the chart that we posted on April 8th, we extended the lines out in such a way that the Dow would reach the 200dma sometime in June at a price of 8400 to 8700.

That's pretty much was has happened. But the eerieness of the predictive nature of that line drawing is not why we're selling.

We're selling because we're in a bear market, trending lower below a downtrending moving average and we just rallied back to the resistance line. We're by no means calling for the kind of plunge that we drew on that chart posted on April 8th. This is not meant to be an apocalyptic post calling for the end of the financial markets. That ship has sailed. We're not saying that the market is about to crash, but that we feel we've gotten to a point where the risk outweighs the reward. People have become complacent, and the fundamentals do not support complacency.

Sure the market could continue its run to 9500. But if it does, it's coming right back. So where's the gain? It's extended to a point now that a further rally would be excessive. Not impossible, just excessive.

Economists are calling for growth by the end of the year. We feel they are being too optimistic and setting us all up for disappointment. Gas prices are on the rise again, talk of higher interest rates has curbed spending, and the job market has yet to improve in a significant way. So where have we gotten since hitting bottom in February? Did we deserve the last 2,000 points? We happen to think we did, as the selloff was overdone. We just don't think we deserve another 1,000 points. Or even another 500 for that matter.

People are treating this market as if we're setting up for the next bull. We're nowhere near the next bull market. A bull market is not just an uptick in the stock charts. It's a whole new era in innovation, creativity, technology. When Al Gore invented the internet we had a bull market on our hands. This is NOT a bull market.

We're not suggesting anyone should follow us in selling everything. We just decided that it's time we start making bolder moves with our portfolios, and letting our gut have greater influence.

We continue to believe in our earlier forecast that the market will remain rangebound between 7000 and 9000 for the remainder of the year, and only slightly improved (7500 to 9500) throughout 2010.

So here we find ourselves at Dow 8600 weighing 400 points of upside against 1600 points of downside with the tune "you gotta know when to hold 'em, know when fold 'em, know when to walk away and know when to run" going through our heads. Thanks Kenny.

Sorry for not being more active blog authors. We do read the comments that everyone writes, but time constraints keep us from posting more often. There's also no need, as one post pointed out, to keep reminding everyone on a daily basis that the market is rangebound.

After selling tomorrow, we will likely post more often, as we'll be looking to get back in soon enough. Good luck!

200 DMA

2009-06-04T09:49:00.003-04:00

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We just updated our performance for the first time in a while, and after one year on this blog, we are down 6.8%. The Dow is down 30.1% over the same time period. Not a great year for us, but we did manage to not lose big, and that's what 2008 was all about.

As for the market, we were hoping for Dow 9,000 as an opportunity to sell some shares, but we're hitting a major hurdle right now. We've run into the all-important 200dma. The 200dma is universally used to distinguish between bull and bear markets. It's the dividing line, so to speak. Technically, this would not turn into a bull market until we're trading above the 200dma and the 200dma is moving up as well. This takes time. For now, though, a significant break of the line would be a major milestone for technicians, and give hope to all that the market has finished its slide.

If we were more heavily invested at this point, we'd be lightening up on some of those shares right in here. However, considering we're only about 1/3rd invested, we're just going to wait and see. If the market does get rejected at the line and resume its fall, we'll just be adding to our position all the way down. It's hard to believe that we could possibly launch any kind of sustained bull market given there's no new industry or invention driving it. All we've really done over the past couple months is make up for a severe over-correction in the market. Hardly a bull. If we had to guess, we would vote that the market drops from this point. However, Government Sachs may have a different idea for the near term future of your 401k that we're not privvy to.

Looking Ahead

2009-04-08T09:10:00.002-04:00

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We've been talking to a lot of Wall Streeters about the near term future of the stock market, and telling them about the speculative activity brewing in the high end real estate market. Most of them are skeptical that we're out of the woods, saying that there are still a LOT of problems out there. Maybe we're being too optimistic, maybe not. Regardless, they all do agree that we've hit a bottom. They don't believe we're going lower, but are at the same time not willing to bet that we go much higher for a long time. The concensus of those we've talked to would result in a chart that looks much like the one posted above. Stage 1, if you have to give it a label. We're told that while the market should not plunge from here, it will not be a "V" bottom either. A long basing period that lasts a year or more is what many think is in store for us.

We're committed to doing very heavy buying anywhere in the lower part of the channel drawn on the chart, and selling near its top. There's little risk selling at Dow 9,000 given that the economy is unlikely to rebound without a long struggle. There's also little risk buying the indexes at or near Dow 7,000, or so we're told, as analyst expectations have already factored in armageddon. This guess is as good as anyone's, and we'd appreciate any commentary on why we should rethink this.

SPY

2009-04-04T04:55:00.003-04:00

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The chart above shows the S&P500 index (SPY) as of the close Friday. It broke and closed above both its 75dma and its 100dma. It's truly at an inflection point because the break is not yet decisive. If the market sells off from here, this will just look like another rejection at the 75dma like all the rest, despite exceeding it by a bit. It's uncanny how precisely it turned around the last 4 times when it reached the 75dma.

We believe that the market will move higher from here, but it all depends on the next session or two. If we have another big up day, then the market will have changed sentiment in a big way. In that case, we could make a run for the 200dma at Dow 9400, S&P 1000. Of course if we did actually get to the 200dma, it would be a little lower by then. The 200dma is the dividing line between bull and bear market. If we did get that far, we would have a very tough time breaking it. We would probably be rejected at that line 3 or 4 times.

We continue to be convinced that the market has bottomed and that the economy is showing signs of life that will hit Main Street in 9 to 12 months. This does not rule out a drop back to Dow 6500-7000, but it would be a gift. Our prediction for the long term is that the market will go sideways between 7000 and 9000 as it consolidates these recent great losses and puts in a solid base from which to launch the next bull market. This consolidation could take anywhere from 1 to 3 years. We believe that the 10 - 20 year consolidations of the past are not applicable today. Everything happens in a very compressed time frame today, although the basic principles haven't changed. We'd be very suprised if the next great, sustained bull market begins any later than 3 years from now.

The Stages

2009-04-02T05:48:00.002-04:00

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We bought some SSO when the market broke through the top of its downtrending moving average where indicated by the first purple arrow on the chart above. Somewhere there is a post or comment made at the time about this trade. We sold some DDM when the market broke the uptrending channel at the second purple arrow. There is a post or comment that mentions that, too. These were our only trades for the time period shown on the chart above.

The reason we mention this is because it seems there is some confusion on this blog about the purpose of the channels/averages and TA in general. We tried to sum it up on the previous thread in a comment to Anon, then realized that a picture is worth a thousand words, hence this new post. The bottom line is that since the market broke the channel and moving average, we're in no man's land right now. You must be cautious because the market does not have a clear direction as it did when it was in its downtrending channel or when it was in its uptrending channel. Until a new channel forms, the market is in limbo (stage 3).

Here is our comment to Anon on the previous thread...

Anon, there are four stages...

Stage 1- sideways after a downtrend - choppy, breaks the moving average many times in both directions

Stage 2- uptrend (price is above uptrending moving average)

Stage 3- sideways after an uptrend - choppy, breaks the moving average many times in both directions

Stage 4- downtrend (price is below a downtrending moving average)

These stages typically take months or years to play out, using the 200dma as the average. We've applied the concept to the current short term rally just to get a better idea of how to time it for ourselves. Right now, the market as a whole is no doubt in a Stage 4 downtrend. There's no disputing that. It is trending lower below a downtrending 200dma. If you zero in on just this little multi-week rally that we're having, then the market is in a little Stage 3. It is no longer in a Stage 2 uptrend. Nor is it in a Stage 4 downtrend... yet. Once it enters Stage 4, if it does, then you have to assume it's going to zero until it stops falling. It may just be resting right now, consolidating the recent huge advance of the past several weeks. We may start a new Stage 2 uptrend after this consolidation is over, or we may fall into a Stage 4 downtrend. Nobody knows. We sold some DDM when the channel broke because we had left the Stage 2 uptrend, making the market riskier going ahead. It isn't that we thought it would tank, it's just that once the channel was broken, the odds of it rallying further were much less than they were when the channel was intact.TA is not meant to give you foolproof buy and sell signals, although sometimes it does. What it really does is helps you put the odds in your favor over time.Right now, the market is less decisive than it was when it was in the channel. It could go either way. We buy the dips when the market is in the channel. Right now, we would not buy the dips because if one of these dips makes a new low, we may be starting a Stage 4. You see, the stages help you decide what mood to be in... bullish, cautious, bearish, etc.Right now, we're in a short term Stage 3, so our mood is neither bullish nor bearish, it's cautious.

Moving Average

2009-04-01T12:01:00.003-04:00

Click chart to enlarge

This chart of the Dow which goes back to the start of the recent rally shows a change of character for the index. It is now trading below its moving average, which is starting to turn down itself. This line which served as the approximate support level during the rally is now resistance. The one big drop we saw last week, which decisively broke the trend channel and moving average changed market sentiment... at least for the time being. This is no longer a "buy the dips, rally mode" kind of market. It's now a nervous "which way next" kind of market. It's too early to call it a "sell the rallies" market, but another lower high (rejection at the moving average) would change that.

Citigroup Fraud

2009-03-31T08:23:00.002-04:00

This is not the first time the question of fraudulent banking activity has been mentioned on this blog. We have a credit card with Citi. Last month's bill was paid in full, more than a week before the due date. This month's bill has a finance charge for the unpaid portion of last month's bill. Of course, there was no unpaid portion. So we called Citi and asked how they could charge a finance charge on a zero balance. They confirmed that we had paid last month's bill, and had paid it on time. They could not answer the question. Finally, they agreed to send us a check for $50.
We've had credit cards for over 20 years and have never made a late payment, and have never paid less than the full balance. Of course it's hard to believe that a company as large as Citi would be blatantly defrauding their customers. We began to wonder if in these desperate times, could Citi be resorting to desperate measures to stay in business? Has the government given them amnesty for minor "errors" to keep the failing bank alive? Of course we don't know what's going on behind the scenes at Citi, or any other bank for that matter, all we know is that this is the first time in 20 years that we've had reason to call them.
Check all of your bank and credit card statements more carefully than you typically would. Something just doesn't feel right.

Updated Chart

2009-03-31T01:15:00.002-04:00

Click chart to enlarge

Above is a chart of the Dow including Monday's action. Needless to say, there was a simultaneous and decisive break of the channel and moving average at the open on Monday. These short term chart patterns are not as reliable as longer term patterns, but if TA is any guide, market sentiment changed this morning. We should continue to sell off from here, but of course anything is possible. Today we sold the other half of what we bought at Dow 6700/6800. We were hoping for more upside, but there's a lot of risk now that we've been so blatantly rejected once again at the 75dma. We're more interested in buying than selling now, and are hoping for a return to the lows. If instead the market moves against us (goes higher), our next sell target is Dow 8400/8500.

New Channel

2009-03-27T14:39:00.002-04:00

Click chart to enlarge

We drew a new linear regression channel on the chart of DDM, beginning at the breakout on March 10th through today. The recent weakness has brought the slope of the channel down a bit, relative to the slope it had when the rally was only 8 days old. The longer a channel, the more significant it becomes. The bottom of the channel is running parallel to the moving average, increasing the chance that other traders will pick up on it. This is a 35 minute chart for no other reason than that all 14 sessions of the market's current rally fit on the screen.

75 DMA

2009-03-26T17:45:00.003-04:00

Click chart to enlarge

The chart above is a chart of SPY (S&P500). This way, we can't be accused of having a myopic, Dow-centric view of the market. The chart is virtually identical to the Dow in that both charts are flirting with their moving average. It happens to be the 75dma, but the actual number is irrelevant. All that matters is that it's the moving average that it hasn't been able to break for the past 8 months. The 4 small diagonal lines show the points where the index got rejected at this line. Needless to say, we're at a critical point. Do we break out or do we go for another test of the lows? We have no idea. All we know is that if the market drops, we're going to begin accumulating shares rapidly. If it continues to move higher without correcting, then we'll unload a small handful of shares at each resistance level. The next of these levels is at SPY 880 (Dow 8400), the Feb high. For the record, the 100dma is at SPY 840 (Dow 8125), within easy striking distance for tomorrow, and the 200dma (the important one) is at SPY 102 (Dow 9526).

Regardless of how you want to play it, it is important to take note that if the indexes break this moving average, it will be the most bullish move they've made since the start of this whole debacle. Don't expect fireworks, but do mark the day on your calendar.

12 Month Chart

2009-03-23T17:33:00.003-04:00

Click chart to enlarge

Above is a one year chart of the Dow. The moving average shown is the 75dma. It is not as significant as the 100 or 200dma, but it's what the Dow has been responding to (bouncing off of) all year long. In our minds, this makes it more significant than the 50 or 100dma. We're going to sell about 1/4 of our shares tomorrow, hopefully into strength. If the Dow should break the downtrending resistance line and moving average, it should be seen as the strongest move it's made for the past year. These lines are not set in stone. There is an art to drawing channels, it's not an exact science. The channel drawn could be off by a couple hundred points depending on its slope. Although we use a computer generated center line, the start and end points of the line can alter its slope. Nevertheless, the basic concept is sound. A significant break of the channel and moving average would suggest that sentiment wants to change for the better. It would not rule out a return to the lows, but would make it more likely that the recent lows will hold. If instead we start dropping from here, there would have been no change to market sentiment with this recent rally. In that case, it would just be another bear market rally, setting latecomers up for rapid losses.

Either way, this is our cue to become a little more defensive. We bought at Dow 6800 or so. Selling those shares here just makes good sense, considering we'll still be holding the majority of our stake.

Channel Break

2009-03-20T14:10:00.002-04:00

Click chart to enlarge

The chart above is a chart of DDM... same thing as the Dow for the intents of this post. The channel has clearly been broken. It's too early to say if this is the start of a return to the lows yet, but it's fair to say that the momentum has changed. This is no longer a dip within the channel, but rather a change of sentiment for the market. At least for the short term, there's been a shift from the recent "buy the dips" mentality to a new "sell the rallies" mentality. If we gap up on Monday, people will be looking to sell at the recent highs rather than buy into the upward momentum. Like we said in a previous post, when the channel breaks, it is a swift and decisive move. It doesn't just slowly go sideways through the support. It just drops.

Dow Update

2009-03-19T13:46:00.002-04:00

Click chart to enlarge

The Dow is just riding up the bottom of the channel today. Despite a triple digit loss earlier, it's an uneventful day as long as it stays within the channel. This channel is so well-defined and has been validated (tested) enough times that there's no doubt a chart like this is up on the computer screens of traders around the world. When the Dow finally does break down from this channel, the initial drop will be very significant. You'll know then that these channels are used by many. We'll post it here when it happens.

Intraday Dow

2009-03-19T09:39:00.002-04:00

Click chart to enlarge

The chart above is a chart of the Dow on an intraday basis. Each candlestick (bar) represents 20 minutes. The chart shows the entire recent rally from March 10th to present. We would recommend holding tight until this chart breaks support. If you want to sell at the top of the channel and repurchase as it returns to the bottom, you could theoretically increase your shares at no cost. We have no intention of selling any shares as the market rallies unless the top line is broken, or the Dow reaches the top of its larger, downtrending channel at approx 7700/7800. Other than those occurences, we will continue to buy the dips. We continue to believe that we have hit a bottom for the market, although the economy itself will not appear to improve for 6-12 months.

Updated Dow

2009-03-18T08:54:00.002-04:00

Click chart to enlarge

The chart above is an update of the Dow. We're nearing the top of the channel and moving average. When people ask should they buy or sell here, the answer is it depends on how invested you are. Which is why no one can really advise you. We're only 30% invested, with the goal of investing more into the indexes. If we were to sell any part of our holdings, it would only be tempting at 7800 or so. And in that case, we'd only be selling the portion of our shares which were bought at 6800. We're not focused on selling, but rather on continuing to accumulate shares for the long term. That is, until a new leading sector emerges. At that point, we'll shift from the indexes to the leaders of that sector. That shift could be a couple years away.

We have inside knowledge of the health of the high end real estate market. It is an excellent barometer of the health of the overall economy, and perhaps even a crystal ball. We find that after a two year lull, wealthy speculators are starting to buy land and build houses again. It may seem early, but these are people with close ties to the major brokerage houses in New York. Billionaire investors are scooping up land at firesale prices, and are beginning to revitalize the otherwise slumping local economy. This is the earliest sign that a major turn in the economy is brewing. It will likely be about a year before this spending trickles down into the pockets of the plumbers and electricians and such, but the turn is coming. Our guess is that 6500 will be the bottom. A return to 6500 should be seen as a great opportunity, as it will not be long before others realize that a major shift in the economy is just around the corner.

Dow Channel

2009-03-14T14:33:00.002-04:00

Click chart to enlarge

The Dow didn't quite reach the bottom of the channel, but we did at least buy a small amount of SSO on the dip. We'll sell that same amount if the Dow reaches 7600 or so. The top of the channel is currently at about 7700/8000, depending on whether you view a log chart or arithmetic chart. Either way, the line parallels the moving averages, giving its slope further validity. This resistance line connects points from September, January, and February, which we believe makes it long enough to be showing up on screens on trading desks everywhere. In this range (7700-8000) is where we think the current Madoff rally will pause. We may have a retracement of some of the recent gains before making it to the top of the channel, but the odds do favor a return to upper 7000's.

From there, it's anyone's guess as to whether we break out and move higher, or retest the recent lows. The poll we have in the left sidebar of the blog suggests that investors remain bearish. Of course this is a small handful of voters, but the votes are more decisive than in previous polls. The majority of our readers believe we're ultimately headed for new lows. We hope this is the case, as we've been looking for a washout move significant enough to convince investors that we've hit a permanent bottom, giving them confidence to re-enter the market for the long term. We think that when the eventual recovery happens, both for the market and for the broader economy, that the snap back will be fast and steady. Everything today takes fractions of the time it took in the past. The market may collapse faster, but if our common sense is any guide, the speed of the recovery will be equally unexpected.

Bought SSO

2009-03-10T16:13:00.002-04:00

Click image to enlarge

There now exists a piggy bank in the image of con artist Bernard Madoff. It's made of faux bronze, fitting for a faux money manager. The plug at the bottom is fused shut, so money deposited in the bank is lost. That is, until you smash Bernie over the head with a sledge hammer. Hats off to Palmer Murphy, the NYC artist who created it.

We bought some SSO today, enough to bring our long positions back up to 30%. They had deteriorated to just 24% of our account given the selloff of the past few months. We don't intend to do any more buying unless the market breaks down to new lows. The fact that Citi has been operating at a profit for the past several months is great news... if it's true. It would mean that we, as taxpayers, would no longer have to bear the burden of paying Citigroup's bills to keep them alive each month. When we were, it was costing us $15B a month, $3B more per month than the cost of the war in Iraq.

If today does turn out to be the start of the next sustained rally, then you're not too late to buy. We could potentially rally another 1,100 points to Dow 8,000, which is where the 75dma currently is. We're mentioning the 75dma because the Dow seems to keep bouncing off of this line each time it rallies. A break of this resistance would be very significant in that we haven't traded above it since last June. We returned to it in September and then again in January, but haven't broken through it. It therefore is the strongest resistance level the Dow has right now, despite being an "odd" number. It coincides with what once was support for the Dow, that 8,000 level that the market struggled to stay above for 4 months before finally breaking down in February. We would certainly do some selling near the 8,000 level if it turns out to be the next stop for the market. Until then, we remain focused on buying somewhere near the bottom of any major selloff.

Madoff Kills Two

2009-03-06T09:06:00.003-05:00

Bernard Madoff, now the most vilified man (if you can call him that) in America, killed two people recently. A plea bargain is being sought in the case in order to protect Madoff from serving justice for toppling investor confidence, bankrupting charities, leaving widows impoverished, and killing the two men shown above. Madoff will likely face a $75 fine when the swift arm of the SEC slams down on him.
At left is pictured William Foxton, who put a bullet in his head after learning that his family's life savings were wiped out after being invested (if you can call it that) with Madoff. At right is pictured Rene-Thierry Magon de la Villehuchet, who slashed his wrists when he learned that his family's life savings had vanished thanks to an investment with Madoff.
Meanwhile, back at the ranch, Bernie and wife Ruth are sipping margaritas, that we're paying for, in their luxury apartment, that we're paying for. The margaritas they're enjoying are costing each American taxpayer just fractions of a penny. Which isn't so bad. The apartment, however, is costing each American taxpayer 7 cents. We don't know about you, but it pisses us off that we're paying 7 cents to fund this guy's retirement. In fact, we feel he owes us. We used to love this country, but we're really on the fence now. Every day Madoff is free on bail is a slap in the face to the rest of us. We're spending the first 19 seconds of our work day working for Bernie and Ruth! That includes the cost of the margaritas, by the way. If everyone in America were to punch the clock 19 seconds late each morning in protest until Madoff is behind bars, it would send a message to Washington that we're not paying for this!
We think Bernie should be brought up on manslaughter charges and be behind bars on that basis alone. In all other aspects of life, if you contribute to a person's death, you're partly responsible. Apparently Wall Street has written its own set of rules, in which our role as the State has been reduced to just to paying the bill.

Ready to Buy...

2009-03-05T15:44:00.002-05:00

Click chart to enlarge

Here at the Snotwheel Group, we're getting geared up to buy the indexes, but aren't pulling the trigger just yet. We're under water on the first layer of index ETF's we bought months ago, so we've been waiting for a washout move upon which to double or triple our current number of shares. Remember, as it goes lower, it becomes less and less expensive to double your shares. In a sense, a falling market gives you leverage, provided you're not fully invested.
We haven't pulled the trigger yet because we're still eyeing the channel, waiting for the market to reach a position where it will be as oversold as it's been at its worst times since the start of this global depression. The market's level of "oversold-ness" can be determined by how far below the moving average it is, on a percentage basis. For example, on 10-16-08, the Dow hit a low of 8,200 while the 100 day moving average was at 11,300. In other words, the Dow was 27.4% below the moving average. On 11-21-08, the Dow hit a low of 7,450 while the 100 day moving average was at 10,423. At that low, the Dow was 28.5% below the moving average. The chart above shows a 90 day moving average, just fyi. It does not matter what moving average you use for this calculation, as long as it's the same one for each comparison.
It's safe to say that when the Dow is 27% below its 100 day moving average, it's as oversold as it's been over the past couple years. Today, the 100 day moving average is at 8,360. For the Dow to be 27% below this, it would have to be 6,100. For it to be 28.5% below it, it would have to reach 5,977. Anyway, this gives us a rough idea of where we would be looking to buy. Of course, there's no guarantees it will reach that target, no guarantee that it will stop falling if it does reach it, and no guarantee it won't just go slowly sideways or lower from there. Nonetheless, as a long biased retirement fund, this is where we will focus our next layer of buying.
It should be noted that if anyone wants to engage in such "risky" activity, it would be a good idea to check such numbers against the S&P500 index, as the Dow is the worst performing index of late. We intend to buy SPY and/or SSO, not the Dow this time around, so we'll be checking the math on a chart of SPY accordingly.
If the market does not reach those lows, then we just stay put. There is no rush to buy at any point that does not represent a severely oversold condition. If the market rebounds early, the next oversold condition will not be at 6,000. It may be at 5,000 or 4,000. We are not interested in buying at 6,000 per se, but at 28% below the 100 day moving average, whatever the market's level may be at that time.
Tomorrow morning we will get the all-important jobs report. This will determine the direction of the market, and if it is negatively received, we could easily hit 6,000 by early next week. If the market continues to crash over the next few sessions, and you intend to buy, it's best to turn CNBC off and just focus on nothing but the market's level. The media will be overwhelmingly negative, and it will appear that the bottom is falling out of the market. There could be talks of runs on banks and such, along with many excuses as to why the market is falling. Truth is, it is only falling because people are selling. And people only sell for one reason... they think it's going lower and they don't want to lose money. It's a self-fulfilling prophecy. If you intend to buy, don't get caught up in the emotion. Just pull the trigger when it feels most scary to do so, and then just walk away.

GE

2009-03-03T10:03:00.002-05:00

Click chart to enlarge

One of the more ominous looking charts is that of GE. Currently (10amEST), the Dow is up 50 points, and GE is down over 5%. Just judging by the chart, GE looks like it's in every bit as much trouble as C, BAC, and the automakers. With chart activity like this, it's very possible that we see GE drop to $2 and become the next big news story, complete with bailouts and talks of bankruptcy. Whatever is going on at GE, one thing is clear... investors are running for the exits.

Letter to AIG

2009-03-02T16:18:00.002-05:00

To Ed Liddy (AIG CEO),
I understand that you received $40B from TARP in November, and are now set to receive an additional $30B. More bailout money has gone to your company than any other thus far, and even more may be coming your way.
As an individual American taxpayer, I alone have sent you $700, effectively paying your bill for the amount of marble flooring visible in this photo of your office building's lobby. It just so happens that I was in the middle of renovating my bathroom when I received the bill for your marble, which means that I can no longer afford to finish my own project. I had set aside the correct amount to finish my bathroom floor, but did not count on having to pay for yours first. Thanks to your incompetance, I will be without a bathroom for the next year, and am therefore writing to ask that you leave your facilities open to me 24/7 until I can recover from the burden of having to pay your bills.
Thank you for your cooperation.
Sincerely, Al Smith
.....
P.S. - Considering your company lost $61.66B this quarter, don't your executives have anything better to do than hang out in the lobby posing for photos?

The Dow

2009-03-02T09:39:00.005-05:00

Click chart to enlarge

The chart above is a log chart of the Dow over the past 7 months. Channels are more reliable on the way up, but we've nevertheless drawn a downtrending channel to attempt to gauge how oversold the market currently is, relative to recent levels. We know that the slope of the channel is valid because it parallels the moving average, and roughly approximates the highs and lows of the market for this time period.
The slope of this channel is steeper than most bear markets. The oversold levels reached in October and November were very extreme. There is no guarantee that we'll reach such extremes again, but recent history is the best guide we have. If the market were to plunge over the next few days, we could reasonably expect it to stop at 6,300, with 6,000 being the extreme low. Of course, the longer the drop takes, the further the lines move down.
Although buying in a bear market is not safe, the further the market drops below its moving average, the better off you are. The best case scenario (for us, anyway) is a hard drop directly to the low 6,000's. At that point, we would at least double our long positions. There would be a good chance that from there the market would either consolidate sideways for many months, or move higher. Many are now calling for Dow 5,000. We don't need to see Dow 5,000 in order to tempt us in, we'll feel comfortable adding in the low 6,000's, no matter how scary the environment is if/when we get there.

CF Industries

2009-02-25T10:02:00.003-05:00

Click chart to enlarge

The chart above shows a chart moving from Stage 1 (sideways consolidation at the bottom, to Stage 2 (uptrend). It's a chart of CF Industries. Although this is exactly what the breakout marking the end of Stage 1 would typically look like, this may not be one of those times. Agrium placed a hostile takeover bid for CF Industries, causing the stock to spike.

Either way, it's still important to note that the fertilizer stocks are faring better than the broader market (demonstrating excellent relative strength). The takeover attempt is yet another healthy sign for the sector. First, it tells us that AGU has quite a bit of cash. Not bad, given the times. Second, it tells us that insiders see value in their competitor's stock price. What better vote of confidence than a vote from insiders themselves about what their stocks are worth? We normally only find out what the insiders knew after it's too late. Their vote to attempt to buy a fertilizer stock at this time suggests that they are fairly valued factoring in every metric including whatever corruption only insiders are typically privvy to. It's an inside peek into the health of these companies, both for CF and AGU.

Cramer

2009-02-23T11:22:00.005-05:00

Click chart to enlarge

We love Cramer's optimism and passion for his work, but it is nevertheless important to question his advice from time to time. Many blogs have been set up specifically to bash Cramer. This is not one of them, but we can't help but notice how his "recession-proof" stocks have fared.

In late 2007, Cramer warned that the market looked very ominous. He suggested that investors "stay in the game", but exercise caution. He chose a handful of "recession-proof" stocks that were intended to protect your capital while keeping you invested.

The two stocks we remember him choosing were FWLT (Foster Wheeler), and FCX (Freeport McMoran). FWLT is down about 71%, and FCX is down about 75% since that recommendation.

The chart above is of FCX.

On March 14, 2008, Cramer chose a new group of "recession-proof" stocks. Again, intended to preserve your capital while keeping you "in the game". This time, he chose AVP (Avon), HLF (Herbalife), and TUP (Tupperware). Since that recommendation, AVP is down 53%, HLF is down 60%, and TUP is down 56%.

Without being overly critical about Cramer's investing acumen, it's important to note that no stocks are "recession-proof". In a bear market, the best approach is to avoid ALL individual stocks. Make a note of that, because no bear market in history has ever rewarded stock pickers.

Here's a link to the article/video in which Cramer chooses his "recession-proof" portfolio...

http://www.cnbc.com/id/23638778

The stock prices in the text of the article are constantly updated, but if you watch the video, you'll see that the stock picks were made in March when the stocks were much higher.

(Please vote in our updated poll)

Long Term Dow

2009-02-19T22:44:00.005-05:00

Click charts to enlarge

The chart at the top is a chart of the Dow from 1969 to present. It's a log chart, wherein each vertical unit equals the same percentage as the others. This removes the parabola effect charts tend to have when viewed long term.

The way we see it, from 1964 (not shown) to 1982, the market went sideways (for 18 years). Then it expanded from 1983 to 2007.

2008 changed everything, and we've now entered a new stage for the market. Although we've drawn the trendline in such a way as to make it look like 2008 was the start of a whole new macro-trend for the market, there is another possibility. 2000 may have been the top, and we've been in a sideways market ever since. This certainly would jive with the 18 year cycles the market typically has, as shown on the lower chart.

This chart shows that the market goes up for 18 years, then consolidates for 18 years. If 2000 was the top, then 2018 will start the new bull market. Good news, we're halfway through the market's consolidation phase!

If we truly are in the midst of an 18 year consolidation which began in 2000, then the market's highs and lows may have already been carved out... more or less. Of course, 1000 points on this chart just looks like a blip. Nevertheless, a look at the market's last major consolidation (from 1964 to 1982) shows a market that moved in a 50% range, from 1,100 to 550. This is very similar to the range we're trading in now, from 14000 to 7000.

If you believe that macrotrends repeat themselves, then you would be looking for the market to bottom soon, rather than looking for the Dow to continue its slide to 5,000.

Eric & Shana

2009-02-19T11:16:00.008-05:00

The SEC has compliance officials whose job it is to make sure investment firms comply with the rules. In turn, investment firms have rules-compliance lawyers to prove their firms are in compliance.

Eric Swanson (top left) was a top SEC compliance official who worked for the SEC when they found no problems with Bernie Madoff's books over the past few years.

Shana Madoff (top right) was a rules-compliance lawyer at Madoff's firm, and is the daughter of Bernie Madoff's brother, Peter, who was head of compliance at the firm.

So on one end you have Eric Swanson, the investigative arm of the SEC, dealing with Shana and Peter Madoff on the other end, who both work to provide proof that the firm is following the rules.

The burning question is this... why are Eric Swanson and Shana Madoff looking so friendly in the picture at the bottom? Is it photoshopped? After all, they are opposing forces in the fight against corruption on Wall Street. These two, of all people, should be at arm's length. Our trust in the backbone of our nation's financial system, free trade, depends entirely on these relationships being kept strictly at a professional level. Would you be suprised to find that Eric Swanson and Shana Madoff are actually a married couple? One can only imagine what conversation must be like at their Thanksgiving dinner. Truth is stranger than fiction.

LDK

2009-02-18T21:10:00.003-05:00

Click chart to enlarge

After the bell today, LDK warned investors that it will post a loss for Q4 2008 when it reports earnings on March 11th. This will be the company's first quarterly loss. The loss comes amidst lower demand and falling prices... a lethal combination for any company.

We may be way off base here, but our guess is that the stock will stay in the single digits for all of 2009, and may even fall below $5 at some point. If the company survives this recession/depression, its stock will not show signs of life for at least another year. Bottom line... you should not look at tomorrow morning's gap down as a buying opportunity. For at least the next 12 months, your money will be better off under a mattress than in LDK.

We once owned and supported LDK, but jumped ship when the stock broke down from its uptrend on 10-03-2007 when an insider leaked rumors of an accounting/inventory scandal. At that point, we decided that Chinese business antics, although entertaining, were not something we wanted to expose our capital to.

Long story short, we'd seen similar tragic companies in the past, and tried desperately to warn investors that the company was a rotten apple, but found that for some unexplained reason, it had developed a cult-like following. Its investors did not approve of our warnings, which eventually led to us starting this blog. We continue to dislike LDK primarily because its CEO holds almost all of its outstanding shares. Now that we're in an economy where people are struggling to buy milk, plans to put solar panels on their roofs have been shelved. Meanwhile, oil prices have plummeted and now they've forgotten they wanted solar and yada yada, you get the idea.

Gary

2009-02-17T21:07:00.007-05:00

We haven't been checking in on Gary's performance lately knowing that many of his stocks reversed course and ruined his overall performance. Still, suprisingly enough, his approach is resilient enough to beat Buffett. Since Gary chose his stocks 15 weeks ago (on November 3rd), he has lost 5.0% compared to a 27.2% loss for Buffett's Berkshire Hathaway, and an 18.2% loss for the S&P500 index. For the record, we actually like Warren Buffett. He did not swindel investors out of their capital. Anyone working on Wall Street and not blatantly stealing from the investing public is a hero by today's lax standards.

Remember, Buffett is outperforming other big names like Icahn and Kerkorian. All in all, despite "Gary version 1" being a failure of sorts, his performance makes the experiment nonetheless compelling.

What Gary taught us...

Some of Gary's small caps made sharp reversals of trend, while his large cap names remained more stable and predictable. We knew this going into the experiment, and were told by readers that the imbalance was a flaw in the system. We took the stance that "Gary version 1" was allowed to be flawed. After all, he's a chimp. His performance will theoretically improve with human interference in later versions... or at least we hope.

Large cap 3M (MMM) was one of Gary's shorts. It did exactly what it was supposed to do, and probably will continue to. On the other hand, one of Gary's longs, LPHI, did the opposite of what it was supposed to do. It reversed course. LPHI trades approx 200k shares a day compared to MMM's 6 million.

Another lesson from "Gary version 1" is that short term timing is critical. Gary bought his stocks at all points in their channels, paying no mind to short term timing. He spent a long time treading water, or underwater, on stocks that eventually moved in his direction.

And finally, he taught us that when a stock breaks its channel and/or moving average, it should be replaced by a new candidate.

.......

Of course we knew these things going into the experiment, but at least now we have a control for future experiments. We're going to start up "Gary version 2" very soon so we can see if human intervention can get us closer to our goal. And what is that goal? The goal with the Gary experiment is not to create an environment in which we can all poke fun at the "pros" and feel better about our own performance, but instead to create a system that works over time, regardless of market direction. In our opinion, there is very little that is predictable about the stock market. Even fundamentals are sometimes thrown by the wayside, and therefore cannot be trusted. There is one thing, however, that seems to be true again and again. And that's the overall compulsion stocks have to continue in the direction in which they're currently headed. That is to say that stocks spend the majority of their time moving in one direction, and a small amount of their time reversing course.

Our Gary experiment is an attempt to harness some quantity of that phenomenon and package it into a simple system that can generate profits with little maintenance consistently over time regardless of the market's sentiment.

Can't Buy Here

2009-02-17T11:34:00.007-05:00

We wanted to buy some more SSO when the Dow reached its November lows, and now that it's happening, we find ourselves unable to pull the trigger. And it's not because of fear, or because we want a better price. It's because we strongly feel that investing in any stock or index fund at this time is a "yes" vote for a system that supports criminals such as Madoff. And now there's Stanford, another $50B investigation that surfaced this past weekend.
The government has demonstrated to the public that corruption and theft on Wall Street is an acceptable practice. How can we vote "yes" when we don't agree that corruption and theft are acceptable? We cannot in good faith support a system that rewards bad behavior. It simply goes against our principles.
So while we struggle with this crippling moral dilemna, here's something to think about...
Toyota, now the world's largest automaker, posted their first annual loss since 1980. Until now, the Japanese automakers were seen as bulletproof, at least compared to their domestic counterparts. If there was any doubt about this recession/imending depression being global, there should be no doubt now. Toyota (TM) actually makes a good short, as it's in a Stage 4 downtrend, yet close to its moving average. We have nothing against the company itself, it's just that with U.S. automakers selling at less than $2 per share, a fair price for TM in this economy is probably in the ballpark of $10 - $15. GE may even be below $10 soon.
With oil making new lows every day, you would think there would be some relief at the pumps. But then, you'd be wrong. Oil companies are getting rich, and the wealth is certainly not going to their shareholders. Well, except for Cheney and other high-ranking government officials. If you want to question Cheney in depth about his retirement package with Halliburton, we hear he'd be happy to take you on a "hunting" trip.
But it's not all bleak out there. Here's a silver lining...
There was a time when investors, in addition to doing all other fundamental research, faced the overwhelming task of trying to guess which privately-run company was being truthful. Now that the government is taking over our banks, insurance companies, automakers, etc, investors can look forward to a new era of truth in accounting practices! With the government at the wheel, we expect this new era to be corruption-free and completely transparent!
Ok, the Dow is down 280 now. Maybe other investors don't share our enthusiam about the new, government-run corporate America, backed by the full faith of a government that rewards criminal activity. Wait a second, we're back to where we started this post. So much for a silver lining, this country's going to hell in a handbasket! The only thing that could make us even have a sliver of hope in restoring our faith in America would be to see Madoff and his sons behind bars. From there, we could start to repair the psychological damage the S.E.C. has done to our confidence in Wall Street. Until then, it's really, really hard for us to pull the trigger.

The Dow

2009-02-11T09:38:00.003-05:00

Click chart to enlarge

We've been bullish for the past 4 months not so much because we thought the market was headed much higher, but because we figured it wouldn't crash again after its big drop in October. We were expecting either a snap back to the averages, or a long sideways consolidation to the averages. Either way, the market over any "multi-month" term is attracted to the averages like a magnet. In this case, while they didn't snap back to them in a single formidable rally, the gravitational pull of the averages helped keep the market bouyant for the past 4 months. This consolidation could continue for another few months, going by the support and resistance lines drawn on the chart of the Dow above. The resistance line of the triangle is actually getting pretty close to the 100dma. At some point, the market will have to make a decisive move one way or the other. We're hoping for another leg down, as we remain only 30% invested.

If you want to feel good about the market, you can seek solace in the fact that the Dow is the worst looking index chart. The Nasdaq and S&P are outperforming it. This may be due to the Dow's dependance on its financial stocks, which of course are weighing heavily on its performance. Some stocks in the Dow-30 do not even meet the criteria to be in the index at this point. Some have suggested that this makes it a broken index, and its performance is therefore not indicative of the health of the broader market. While there is some truth to this, we strongly believe that its psychological effect on investor sentiment cannot be ignored. Even if the Nasdaq and S&P were to remain above support, and just the Dow were to break down to a new low, the headlines would make it appear that the world is ending. A new low for the Dow could easily lead to a new low for the other indexes.

We will continue to watch and wait while the market remains in its consolidation phase. Only a return to 7500 would pique our buying interest. Maybe adding another 10% at 7500 would make sense. But we're saving the other 60% for the "big puke", if it ever comes to pass. Just our opinion, but if the market does break to new lows, it will be another one of those "taking out the stops" scenarios, where it breaks it quickly and not by much more than a few hundred points. In other words, a Dow bottom of 7,250 is more likely in our minds than a Dow bottom of 6,000.

S.E.C.

2009-02-09T11:24:00.003-05:00

Linda Thomsen, the head of the unit responsible for ferreting out securities fraud at the SEC, failed miserably in her multi-year quest to maintain what little confidence the public once had in the financial markets. Of course she cannot be blamed for the credit crisis, but she is at the center of the confidence crisis. By ignoring numerous credible tips about Madoff and other scam artists over the past several years, she enabled these opportunistic parasites to take control of our financial system, and determine the fate of our confidence in its future.

We understand that along with $50B comes hardcore politics such as, perhaps, the Russian mob, threats to personal safety, cash and prostitution bribery, inside plea bargains, etc. One can only imagine the intricate web of politics connected to a $50B scandal. Whatever the reason Thomsen chose to not do her job, we are left to deal with the consequences. The good news, and the reason for this post, is that a replacement is currently being sought for Thomsen.

It's amazing to think that during the years of one of our country's greatest economic expansions, CEO's, regulators and lawmakers were asleep at the wheel. From 2001 to 2006, the U.S. was on autopilot, relying heavily on the working class to pick up the slack. The guys banging the nails were on the job from 6am to 6pm every day, while the CEO's were out playing golf and drinking beers with folks like Linda Thomsen. And now they're asking for our tax dollars to bail them out!

We liked Obama's move to cap CEO's salaries at $500k for any company receiving Federal bailout money. That just makes sense. He makes sense. Another few years of good moves like that may just reverse some of the damage Bush has done. We have a lot of hope for Obama, because he did not grow up with a silver spoon in his mouth. Our country is long overdue for leadership that is grounded by the reality of hardship.

The Dow

2009-01-30T04:13:00.004-05:00

Click charts to enlarge

The chart of the Dow at the top shows the market's inability to break out of a 4 month trading range. Support is obvious, it's in the 7900 area with 7500 as the "last resort, must-hold or all bets are off" bottom. Resistance is not as obvious, but it is descending. That much is clear, hence the large descending triangle we drew on the chart. We used a 75 day moving average simply because it served as resistance in September and again in early January. If you want to use a moving average as resistance, start with the 75dma. A break of the 50dma is meaningless, as we've broken it several times with no great consequence. At some point, it is inevitable that the market will break support or resistance. The convergence of these lines suggests that one of them will be broken before April Fool's Day. Considering its a downtrending chart trading below a downtrending moving average, our guess would normally be that it will break down. As logical as this sounds, we have to take into account that the market is still grossly oversold (technically) from its crash in early October. The chart at the bottom shows the larger perspective.

The market "normally" corrects at the angle indicated by the channel. October's crash puts us into technical oversold territory. Our running theory has been that the market will "bounce back" to the averages before falling further. At least this approach carried little risk, considering another plunge following October's crash seemed a highly unlikely scenario. Unfortunately, there simply hasn't been enough buying interest to prop the markets back up. Hence this slow, painfully boring sideways market. Considering the likelyhood of a powerful, sustained rally is unlikely, it looks like only two options remain.

Option 1: A continuation of the same. A range-bound market which spends the next 12 to 18 months consolidating between Dow 7500 and 9500.

Option 2: A break of support. A new leg down. Dow 6,000.

We feel that while the market could make new lows, a substantial new leg down to a level like Dow 6,000 is unlikely. Dow 7,300 perhaps, but not much worse than that. We're going to take the approach of buying on dips below 8,000 and selling on rallies as close to 9,000 as possible. That's our game plan for 2009. If we're wrong and the market moves to 11,000, then we'll make a nice profit on the 33% of our account which is stubbornly staying in DDM and SSO through thick and thin. If instead the market moves to 6,000, America will be in such poor shape that our stock market losses will be the least our our problems.

Madoff update:

Madoff remains under house arrest after stealing $50B, free to distribute his stolen assets to his friends and family at his discretion.

A New Jersey toll collector was sent to jail for 3 years after stealing $11,000 from a safe, and has been ordered to return every penny of the stolen money.

The message is clear. In America, justice is served based not on your crime, but on the power of your legal team. If you plan on being a thief, just be sure to steal a few million extra to pay for the right representation. OJ was not available for comment.

Citi

2009-01-15T10:10:00.003-05:00

Click chart to enlarge

In our minds, the single largest concern for the market right now is Citigroup (C). The second is Bank of America (BAC). After flirting with bankruptcy in November, C was injected with $25B of TARP money and kept afloat. Now that the stock is back to its November lows, it's safe to assume (regardless of what you hear elsewhere) that Citi has already burned through that money. So it takes about $15B a month to keep Citi alive. That's $3B more than the cost of the war in Iraq!

Here's how we see it...

The government is dedicated to saving Citi no matter what. They are effectively gambling $15B of our tax dollars every month on a poorly run company with a stage 4 chart in a stage 4 market, and losing every dime!

It was bad enough when Wall Street gambled recklessly with our money. It was worse when the banks started doing it, and even worse when government-backed Fannie and Freddie did it. Now that our government is directly putting our tax dollars into the slot machine, we're starting to sign on to this whole "end of America" thing. Is America too big to fail? We're estimating the actual value of America to be somewhere near 14 cents if the government keeps printing money out of thin air and dumping it into Stage 4 wealth-destructing slot machines. Nowhere on our 1040 have we ever noticed a box labeled "Check this box if you approve of us playing roulette with your contribution."

It is said that all paper currencies eventually fail. History has proven this time and time again. It is entirely possible that the outrageous "spend, spend, spend" attitude of Bush and our government (and Americans in general) will lead to the ultimate demise of our financial system. Long gone are the days when companies were rewarded (by profits) for being well run, and punished (allowed to fail) for being poorly run.

Today, a CEO can bankrupt a perfectly good company, leave with billions of dollars in compensation, and stick taxpayers with the bill.

Today, a man can steal $50B and not even go to jail because he's not considered a threat!

Today, the government is allowed to gamble trillions of hard-earned taxpayer dollars on any stock regardless of its fundamental or technical merit.

....

If this isn't the trifecta that marks the end of a financial system, what is?

AAPL

2009-01-14T17:15:00.003-05:00

Click chart to enlarge

The chart above shows AAPL's after-hours breakdown after CEO Steve Jobs announced his leave of abscence. First and foremost, we hope that he is able to make a full recovery, and we wish him the best. Unfortunately, however, we are not optimistic about the situation. There are two reasons for our skepticism.

First, it was only days ago that AAPL announced that his health concerns were under control. This waffling suggests that the reality of the situation is both enormous and unprecedented for the firm, which explains their lack of preparation in disclosing the news to the public.

Second, a CEO like Jobs never leaves their post. They will do anything, literally anything, to at least create the illusion that they are in control. Only under very extreme circumstances will they leave their post. Whatever it is that's happening to Jobs right now, our guess is that it's out of control.

Despite bullishness on CNBC now that AAPL can be had below $80, we would not back up the truck on the shares just yet. There may be a strong rally (to low/mid 80's) very soon. Perhaps tomorrow. After this "denial rally", we expect the shares to continue to edge lower until the uncertainty surrounding Steve Jobs's condition is cleared up.

Support at $85 is now resistance, as AAPL takes its place in its new, lower trading range. Despite massive cash reserves, the bottom for AAPL is approximately 14 cents. The notion that the stock has a "floor" because it is sitting on billions of dollars in cash is absurd. If the company does fail, the cash reserves will be split between company insiders rather than be awarded to common shareholders.

The Dow

2009-01-13T01:23:00.003-05:00

Click chart to enlarge

The chart above is a chart of the Dow. The way we see it, there are three support levels. The first is at 8400, the lows of mid to late December. This support is not very strong, as it does not have much history behind it. The second, and more meaningful, support level is at 8100/8200. And of course the most significant support level is the market's November lows at approx. 7500.

We are still under the delusion that the market is in a short term uptrend, making its way toward the 100dma, and possibly even the 200dma. If we're wrong, and the market instead continues lower, then our guess is that it takes out one of the support levels by 100 points or so, and then reverses course. This concept of "taking out the stops" makes the market put in bottoms in unexpected places. When the market broke down on 11-20, few thought that a significant bottom was being put in. Most people were expecting another leg down. Instead, the market took out all of the stops that traders had strategically placed below its previous lows before rebounding strongly. Next time you place a stop loss just below support, realize that Goldman Sachs has their buy order 1/8 point below your stop. This ensures that they will buy at the low, just as you are selling.

We remain committed to our long positions. We're looking to sell QID very soon, and will add to the Ultralongs if the Dow breaks below 8000.

Has anyone noticed the weakness in C? Despite the recent rally (and bailout money), the chart hints that bankruptcy is not out of the question. Considering the government remains committed to preventing a Citibank failure, further bailouts may be in the cards. AAPL's chart continues to look very anemic. Its descending triangle continues to take shape, and our guess is that it is headed for a major leg down sometime over the next month or so.

Cox

2009-01-05T14:08:00.004-05:00

The rare image shown above is a photo of S.E.C. chairman Christopher Cox on Capital Hill explaining how the biggest pyramid scheme in history slipped through the cracks. Cox explained that the specific type of pyramid scheme run by Madoff was not covered in his text, "Pyramids for Dummies". His explanation had the crowd convinced that the S.E.C. is not at fault. In a press conference that followed the hearing, Bush commented that despite numerous letters outlining Madoff's scheme, the S.E.C. is only responsible for frauds covered by Federally issued manuals.

We obtained a copy of "Pyramids for Dummies", and found that Cox was entirely correct. The book primarily focused on pyramids built between 2,500 to 2,800 B.C. in Giza, but mentioned nothing about Wall Street. Bush further commented that when Cox is replaced, his successor has already been decided. Sponge Bob Square Pants will take over the S.E.C. when Cox steps down. This will likely not happen, commented Bush, until the prostitute he hired... Bush was muffled by his lawyer at this point who explained that Cox had hired a Protestant to help him understand the differences in religious beliefs over State lines. Money recovered from the Madoff scandal went to pay for the Protestant, so no tax dollars were lost, commented Bush's attorney.

In other news, 74 pound Apple CEO, Steve Jobs announced that his weight loss is due to a hormonal imbalance, not pancreatic cancer. The resulting rally, which has yet to take AAPL through resistance, provides an entry point for shorts looking to capitalize on the recent distribution of the shares. As expected, the market has hit resistance at Dow 9000. Our guess is that the rally continues after a short breather, as the indexes are still grossly oversold.

SPY & AAPL

2009-01-02T10:55:00.004-05:00

Click charts to enlarge

The chart at the top is SPY (S&P 500). It's still in an ascending triangle making another stab at breaking resistance, as are the other indexes. Most charts, particularly large caps, resemble the chart of SPY in that they are making an attempt to return to their moving average. In these charts, we've shown the 100dma, although the 200dma is really the milestone that helps distinguish between long term bull and bear markets.

The chart below SPY is a chart of AAPL (Apple). Unlike most large cap names, we see no buying interest in AAPL. It is not making an attempt to return to its average. Instead, it is resting on the support line of a large descending triangle. Overall, this phenomenon (this divergence from the action of the broader market) is known as relative strength, or in AAPL's case, the lack of it. We believe it is the single most important technical indication of where a stock is headed. Money going into tech, for one reason or another, is not being put into AAPL. It is very possible that the real reasons behind this have yet to surface. The action of this chart suggests more pain ahead for AAPL. When the current rally fizzles, we think that AAPL could very well break support and head for a new, lower "box" (trading range).

It would be our inclination to remain long the indexes and simultaneously short AAPL. We cannot short individual names, so instead we are currently at the mercy of the indexes, with a 30% long position and little to hedge it. Our only defense against another leg down in the market is that we're sitting on two-thirds cash. There is a saying that as goes January, so goes the year. It should be an interesting month.

Madoff

2009-01-01T19:04:00.003-05:00

Every time you hear of a hard-working person's life savings being wiped out, you can blame scumbags like Bernard Madoff pictured above. People like Madoff make life disproportionately difficult for the less fortunate. Back in the day, if you stole another man's horse, you were shot on the spot. Today, in the U.S., you can be put behind bars for years for stealing small amounts of money, but the penalty for stealing billions is almost nonexistant.
It is our opinion that if Madoff repaid every penny he stole from the system and spent the remainder of his life in solitary confinement, this would not be nearly enough to repay society for the damage he has caused. Economic systems rely entirely on trust. Without trust, a dollar is a worthless piece of paper. It's only because you trust that it has value that you're willing to accept it in return for your work. People like Madoff destroy this trust, and destabilize the economy and our nation's security in the process. In Madoff's case, this destruction was in the amount of $50 billion. That's nearly 10% of the government's $700B bailout package. The amount of destruction Madoff has caused to the public's trust in our financial system is unfathomable. It would only take 14 people like Madoff to reverse the entire benefit of the $700B bailout package, costing each American $5,000 in additional taxes this year.
Madoff stole $357 from each hard-working, tax-paying American, and for this he is confined to his $7 million Manhattan home (that we're now paying for), with the right to leave at any time with permission. Simply unthinkable. Just unthinkable. We reward these people. What the hell has happened to this country?

Gary's Performance

2008-12-30T16:40:00.002-05:00

Click chart to enlarge

Gary the chimp is doing a lot better than we are. He's up 5.2% as of the close today, compared with a loss of 8.0% for the S&P500 index. It's been 2 months since Gary chose his portfolio by throwing darts at 5 uptrending charts and 5 downtrending charts. Over the same time period, Buffett's Berkshire Hathaway is down 19.4%, Icahn's MOT is down 18.6%, Kerkorian's MGM is down 26.1%, and Adelson's LVS is down 63%.

Gary's performance continues to improve as time goes by because more and more of his charts are showing their true colors. The beginning was rocky for his portfolio, as many of the stocks were bought at short term inopportune times. But now with two months of momentum, Gary's underlying thesis that an object in motion remains in motion is being proven correct.

If we can prove (in real time) this simple concept on a little blog like this, then the burning question is why don't the pros know this? Buffett bought GS at 120 or so, and GE at 25. Gary would have shorted both of those charts.

Speaking of GS, it looks as if it is breaking through the top of its ascending triangle, which bodes well for the market as a whole.

We'll have to see how long Gary continues to outperform the market. His approach likely has a shelf life, as no chart goes in one direction for too long without reversing. The chart above is of EBS, one of Gary's longs. Even though his performance is impressive (leaving his more intelligent human peers in the dust), it must be understood that his performance will always be better relative to the market during bad times. In good times, Gary will still profit, but will underperform the market. He is most likely to make about 1% to 2% a month over the long run, regardless of what the indexes do. His approach is well suited for those who chose to accept a somewhat muted return during bull markets in return for far less anxious times during bear markets. We're hoping Gary can continue to maintain his current 2.5% monthly profit, which would give him a 30% yearly gain. It sounds too ambitious, considering this would mean his account would triple in value every 3 years.

Regardless of whether he makes 10% or 30% a year, your money would be far safer invested with this chimp than with Bernard Madoff. In a nutshell, this one statement sums up the reality of Wall Street, the scam that is the backbone of our financial system. Last we heard, Madoff may get the most severe punishment the SEC can give him... a very hard slap on the wrist accompanied by a $75 fine. He may also have to apologize to those he scammed. Surely this severe treatment will send a message to future scammers and make Wall Street a safer place for our grandchildren to invest their life savings.

Nasdaq

2008-12-18T18:27:00.002-05:00

Click chart to enlarge

The chart above is a chart of the Nasdaq, but it may as well be any of the indexes. Today's action was just noise. The indexes are still within their ascending triangles. Nothing has broken down yet. It is no suprise that they are struggling in here considering that traders have two reasons to sell the rallies (50dma and horizontal resistance). We always like when triangles form because they force the market to chose a direction quickly. We expect a decisive move to take place very shortly, ending the respite from volatility we've had over the past month.

We hope that move is lower, as we'd like to get rid of QID and SMN and load up on the Ultralongs now that the market is trading more rationally. Unfortunately, the next move is likely to the upside. Ascending triangles have a tendency to break to the upside, and after all, the market is still very oversold on an intermediate term basis.

Purely from a technical standpoint, we're not suprised to see oil carving out new lows every day. That's what downtrending charts do, hence our call for 14 cent oil. From every other aspect, though, we are shocked to see how weak it is. Even the recent 1,000 point rally in the Dow has not given oil a breather. Despite how much it has fallen, we continue to warn that there is absolutely nothing redeeming about its chart. It remains in freefall, much to the relief of those who cannot heat purely with wood come January and February.

As for the other commodity related stocks, despite recent strength, they all remain in downtrends. This is the strongest they've been since breaking down in July/August, but they are by no means in an uptrend. If you pull up a weekly chart of any of the fertilizer stocks and put a 100dma on it, you'll see that they are nowhere near being in an uptrend. You need to see the big picture without getting caught up in the day-to-day noise in order to appreciate how little their recent strength means in the whole scheme of things.

50 dma

2008-12-17T09:09:00.002-05:00

Click chart to enlarge

The above chart of the Dow shows that we've broken through the first milestone, the 50dma. As mentioned in the previous post, our guess is that we'll be hitting resistance at November's highs at the same time we're hitting the 100dma. This resistance level will likely give the market a very hard time. Staying within a wide trading range between 8,000 and 10,000 is our prediction for all of 2009.

S&P 500

2008-12-10T20:32:00.002-05:00

Click chart to enlarge

The chart above of SPY (S&P500) shows the 50dma (blue), 100dma (orange), and the 200dma (red). Back in the dotcom crash, every time the market returned to the averages after a significant selloff, there was widespread talk of a new bull market. People raced to buy stocks because the sentiment was that the market had sold off in error. Watching the financial news would make you want to sell your house and put everything into stocks. And each time this happened, it wasn't long before the market turned around and crashed to new lows.

It was a very frustrating time for investors. We put a rule in place at that time that we would never trust a rally below the 200dma. All action below the 200dma is typical bear market action, so there is no need to get giddy about any rallies for a very long time.

The closer we get to the averages, the more ripe the market becomes for initiating new short positions. Given the market's severly oversold condition (since its plunge in early Oct), we will keep our long bias until the market returns to at least its 100dma. At that milestone, we'll change to a net short allocation, increasing the short positions if the market continues higher towards the 200dma.

The market is currently toying with the 50dma. A significant break and close above it, if it happens, will be an important milestone for technicians everywhere. If we take out the 50dma, the next resistance is November's highs (the election rally). If the market continues to rally, there is a chance that this resistance coincides with the 100dma. In about 3 weeks, the 100dma will be roughly at November's highs of S&P 1000. If we reach it, that will be a very tough resistance to break.

Oil Prices

2008-12-05T09:28:00.003-05:00

Click chart to enlarge

Ever since they made a decisive and simultaneous break of both their trend channel and moving averages on July 17th, oil prices have been locked in a Stage 4 decline with no end in sight. Today, Merrill Lynch came out with a $25 oil prediction, an additional 40% drop from its current price of $43 per barrel.

On Oct 2, Merrill cut their oil forecast from $107 to $90

On Nov 26, Merrill cut their oil forecast from $90 to $50

So, why, then, didn't they just call for $25 oil on October 2nd? Or on July 17th for that matter?

We called for commodities to reach 14 cents, because we figured it's as good a guess as anyone else's. The CEO of Gulf oil, Joe Petrowski, says that oil could fall so low that it costs just $1 per gallon at the pumps. We're with him in that we're not willing to choose an artifical bottom on a downtrending chart. The bottom is always $0.

Merrill Lynch should have known this on July 17th, rather than change their forecast on a monthly basis based on momentum under the guise of advanced fundamental analysis.

Of course, it's a whole lot easier to sell investment advice based on sound fundamental analysis, particularly if the jargon used is not understood by the masses.

There is no fundamental analysis required to tell you that an object in motion stays in motion until bankruptcy, or an equal and opposite force (decisive and simultaneous break of downtrending channel and moving average) turns it around. We're not going to turn bullish on oil until this happens. Until then, we continue to predict that all commodities reach 14 cents per share.

Agrium (AGU)

2008-12-04T15:40:00.002-05:00

Click chart to enlarge

We're sticking with SMN given the weakness that still remains in the commodity charts. There is no bottom in sight for OIL, nor for some of the fertilizer charts like POT (at new lows today).

The descending triangle drawn on the chart of AGU above shows why we think all commodities have yet to see their lows. The odds of this chart breaking down are very high.

....

As a side note, we mentioned strength in biotech in the previous post. Perhaps we weren't clear in saying that we do not think the biotech and pharmaceutical ETF's are a buy yet. They are all stage 4 downtrending charts. We were just happy to find a small pocket of strength anywhere in this market, and felt it deserved to be recognized. The only way to play it is to buy one of those great-looking individual stocks on a pullback to the moving average or other substantial weakness. Even then, it's a risky bet, as they are small cap names with light volume. A single earnings report can cut them in half, uptrend or not. As a general rule, we never buy biotech or airlines. Both are extremely thankless businesses which spend the majority of their time on the brink of bankruptcy.

Biotech

2008-12-03T21:42:00.002-05:00

Click chart to enlarge

The chart above is the chart of Emergent Biosolutions (EBS). Normally we would think nothing of a single stock with a nice chart in this market, but this one isn't acting alone. It is among a group of smallcap biotech stocks enjoying their own little bull market. Others in the space include QCOR, CBST, and OSIR. It's exciting to find a pocket of strength like this in a market where it's difficult to find even one good chart. It shows that there is light at the end of the tunnel.

We figured that if there is strength in a sector, perhaps its ETF would also have a strong chart. Unfortunately, this wasn't the case. The biotech ETF charts (BBH,FBT,IBB,PBE,XBI) do not look bullish yet. Nor do the charts of the pharmacuetical ETF's (IHE,IXJ,PJP,PPH,XPH). Nevertheless, pockets of strength like this are the first step in turning a sector around, which of course is the first step in turning the market around.

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It is our feeling that based on the amount of time the market has been bearish without respite, we are soon due for a very formidable rally. Our time frame is longer than many on this board, as we have developed incredible patience for this game. When we say that we're due for a substantial rally, we're looking at the big picture. At some point over the next several months, we're looking for a rally that takes the market over 10,000. Anyone with a retirement account and a long time frame would likely be doing the right thing by buying into the indexes (in layers) on weakness. We just don't see the market as having much more downside below 7,500.

That's not to say there isn't money to be made on the short side. A return to 7,500 before the rally begins is entirely possible. Once we reach 10,000, we fully expect the market to lose a few thousand points again. We just aren't buying Dow 5,000 considering that all of the government's bailouts and rate cuts will start taking affect shortly. Stock prices will reflect the benefits of these actions 6 months ahead.

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A note on GS's earnings: We think the risk/reward ratio on their report is such that there is more downside than upside. They're a government-supported company with inside information that the SEC turns a blind eye to. They're playing poker with a full view of everyone's cards. So, of course, they are expected to do reasonably well. The upside is therefore minimal. If they disappoint, however, the market will be very shocked.

Fertilizers

2008-12-01T16:22:00.003-05:00

Click charts to enlarge

Of course there are many ways to play the short side of the market. Short financials may be the best bet (SKF), but not to be discounted are the recent descending triangles playing out on the charts of the fertilizer stocks. These triangles are not perfect, but the charts are bearish nevertheless. The chart of POT (top chart) looks like it's heading for a break of recent lows. The chart of MOS below it is only slightly stronger. Most of the other fertilizer stocks paint a similar picture. TNH is the least bearish of the group, but we're confident that if POT makes new lows, it will take the entire sector down with it.

Despite a rally in SMN (Ultrashort materials) today, we bought some near the close. It accounts for about 4.5% of our portfolio, but we'll add more if these stocks get to a point that they're just hovering precariously over their old lows. The chart of the sector's leader, POT, is simply too bearish for us not to act on it.

James River Coal

2008-11-26T02:13:00.002-05:00

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Above is a chart of James River Coal (JRCC). The chart may not look familiar because it's a log chart (each vertical box is the same percentage rather than the same dollar amount). The stock just went too far too fast, and is therefore being eyed as a potential short candidate.

We don't disagree, but just to play devil's advocate, there is arguement for additional upside, if not right away, then after some consolidation or a brief pullback. The stock became way oversold recently (as did the entire market), and is now just re-entering its channel. It remains about 40% below its moving average. In this case, we used the 40dma because the stock seems to find support and resistance here.

We're not suggesting that it isn't a good short here, but are presenting an arguement for layering into the position due to the potential for the stock reaching $14.

In the interest of diversification, we looked into finding a short ETF for coal, but had no luck. If anyone knows of one, please post it. The long ETF for coal is KOL.

For the purpose of comparing their charts, other coal stocks include ACI, CNX, ICO, FCL, MEE and WLT.

Mosaic

2008-11-25T20:12:00.002-05:00

Click chart to enlarge

The chart above is a chart of Mosaic, but it may as well be any chart for the purpose of this post. You can see the clear break of the trendline and moving average that occured back in late July / early August. That was the beginning of the end, so to speak. Since then, most stocks have been going down in a channel, with the exception of early October. They got so oversold in early October, that they've spent the last two months basically going sideways (consolidating). Now stocks are just making it back into their downtrending channels. Channels are not nearly as reliable on the way down as they are on the way up, because fear can accelerate a lot faster than greed. A better measure of how oversold the market is on the way down are the moving averages. On the chart above, we drew a 100dma, because MOS responds best to it. The 200dma is actually the most common moving average used by technicians to mark major multi-year changes in market direction.

It won't be until a good number of stocks break through their 200dma's that we can even consider that the bear market may be over. This isn't likely to happen for quite a long time. We thought it would be a good idea to remind people of this, because if the current market rally continues, it is easy to get caught up in the hype of the "new bull". There is no new bull, and there won't be for a long time. No matter how bullish the news gets, and how strong the market gets, and how tempted you are to go "all in", just be cautious, because we've seen some very convincing bear market rallies suck people in and then end in complete disaster.

This post may be a bit premature, as this warning should come when the market reaches a state of euphoria, after the bear market rally has extended itself considerably further.

The market remains oversold enough that a Dow rally of an additional 2,000 points is conceivable. Even with a run like this, we would still be in a bear market territory. We will continue to post updated charts such as the one above if the market continues to rally in order to keep the bigger picture in perspective.

Snot Field

2008-11-24T17:21:00.004-05:00

Dear Vikram Pandit,

It has come to our attention that your company, Citigroup, required a government bailout because your predecessor, Chuck Prince, was focusing on everything but banking during his tenure. Your company created $20 billion worth of Citi stock (out of mid air) to sell to the taxpayers of the United States. Considering there are 140,000,000 taxpayers in the U.S., we will each be paying $143 to help save your ass. Unfortunately, we had previously set aside this money for a present for our child to assure him a happy holiday season. Now that he will not be receiving a present, could you please rename Citi Field after our family? He would greatly appreciate the gesture in lieu of a gift.

By the way, what were you doing building a stadium again? Oh, nevermind, just please name it after us. Thanks, Snotwheel

Our Performance

2008-11-23T19:35:00.002-05:00

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The bar graph above shows our performance each month. Assuming it acts like an oscillator (which it may not), we're at an extreme right now. However weak an indicator this may be, it suggests that the market is not likely to extend its losses for the rest of November. It also suggests that December is likely to be a neutral or positive month, as we have not changed our net long bias for some time. The elusive return to the averages that has been a prevalent pattern in all bear markets to date seems to elude us this time around. As much as we expect the rules to be constantly changing, the market simply cannot go straight down for several quarters on end without the country slipping into a depression, and we don't think it will get that bad. A prolonged recession, a restructuring of Wall Street, yes, but depression no.

The wealth in the U.S. built over the past 10 years (computer and internet productivity, widespread real estate development, etc), still exists. It is tangible wealth. Market sentiment (fear) brought the indexes down to 10 year lows, but there's no way all of the past 10 years of the world's progress meant nothing.

Much of the market's plunge is, in our opinion, people voicing their disgust for Wall Street rather than a real feeling that we deserve to be back to 1998 levels.

SPY

2008-11-20T20:54:00.003-05:00

Click chart to enlarge

The above chart of SPY shows the breakdown from the descending triangle. We bought some SSO today figuring that once they took out the stops, the market might reverse. But considering the close we got, there's little question that a new leg down has begun. It's anyone's guess as to where this one stops. The horizontal line on the chart above is now resistance, and we'll be trading in a new, lower "box".

A few days ago, we posted a chart of SKF (inverse financials). We mentioned that the charts of the individual financial stocks looked like they had further to fall, but we couldn't imagine anyone buying SKF at 175. Today, it hit 275. Simply an amazing market we're in.

GE down to below $13 not much more than a month after Buffett invests $3 billion into it at $25... more historic action.

And Citigroup (C), need we say more? Despite Prince Alaweed's vote of confidence today, our guess is that Citi goes bankrupt. When a stock trades below $5, the odds of it returning to glory are very slim.

This is reminiscent of the dotcom bust when not only the obvious bankruptcies happened, but many companies "too large to fail" were also pulled down with the ship. At the time, we never thought that Tyco, Worldcom, or Aol would fail. This time around, we just expect the unexpected.