I mentioned on my radio show today that if the bulls could come back from yesterday’s nasty day and push the Dow Jones up over 200 today, we’d have ourselves a real battle.  After a couple of bad down days, the best things the bulls can do is push it up higher with some conviction.  We had the 200 point gain until late in the day when the sell off occured.  The major averages finished up about 1.5% but gave up half the gains.  The sell off  started when GM announced that they had told dealers that GM was 36% below their monthly new car sales goal.  Why would the market sell off because of that?  Because there are still active sellers selling on any negative news.  If that’s what causes investors to sell, then we might have more to fall.  Up until that point in the day, it was a pretty strong day.  Up 200 points and the volume was a little more than the previous two days.  But, the lack of conviction has to make you worry.  There are still some interesting looking charts out there that look like they have further to go.  I mentioned a few yesterday and will keep scanning the market for more.   

Radio

Many of you have asked has my radio show has gone of the air.  When I switched to the 10:00 a.m. time slot, I stopped being aired in Dallas/Ft. Worth.  However, those in the DFW area can still hear me streaming at www.bizradio.com  or you can hear the podcasts after the fact anytime on demand.  For those in Houston and San Antonio, you can still hear me on the local Biz Radio Network station. 

Television

I’ll be on Fox Business tomorrow morning at 8:10 a.m. & 8:30 a.m. CST.

We all have our thoughts on where we think the market is going.  They may be based on gut feelings or your mood or whatever.  That’s fine to have those thoughts because they are natural.  Just please don’t use them when you trade.  Take all the data that has helped you make money and use that to trade.  Even if you don’t like the answer.  Having a feeling about the market makes you begin to rationalize and rationalizing leads to losses.  Sometimes big losses.

Markets rally hard during bear markets.  15%-25% rallies are common.  The moves can be fierce.  The rallies can be convincing.  What we’ve done during this rally is not assume it’s a bear market rally just as we haven’t assumed it’s a bull market rally.  It’s simply a rally that has been pretty good.  Fundamentally, not much has changed.  But, there has been good participation, good volume, and a lot of demand.  But, that’s all we know at this point.  It’s been a rally.  Let’s not waste our time defining what type of rally.  It’s been a rally.  Our job is figuring out if the rally is over or not.  As of Friday, we had most stocks in pretty good uptrends.  In fact, there were too many stocks going up as a matter of fact.  That’s a contrarian indicator.  Secondly, we had the Dow Jones around 7900 which was the previous low for most of January and February.  So, a pullback isn’t a shock.  As I always say, we need to see the quality of the pullback.  So far, it’s been fairly sharp.  That doesn’t mean the rally is over.  But, when the market is overbought and it flinches, we have to jump.  That doesn’t mean running for the hills but I did sell some positions today “just in case”.  It’s called being prudent and not having a bias that the market will move higher. 

If this is just a pullback on the way up, there are plenty of stocks that still look good.  Raytheon (RTN) is a stock I’ve been watching for about a week and it held up very nicely today.  Also, I’ve been watching Baidu (BIDU).  If it’s really strong, BIDU will hold its 20-day moving average.  If not, you could see a move back down to $145. 

The good thing about sharp pullbacks is that it brings some fear into the market (also a contrarian indicator most of the time) and it brings overbought stocks back down to reasonable levels.  The percentage of stocks above their 40-day moving average on the NYSE has fallen back to 50% from 75% just a couple of days ago.  If it drops to 20% or so, we’ll be oversold again.  Markets nowadays move very quickly and you have to be nimble.  There are some positions I bought very recently that I had to sell today.  That’s trading.  That’s life outside the “buy and hold” world which is history. 

We’ll see what tomorrow brings but remain flexible and don’t have any biases.

More Government, Lower Prices?

Is it a coincidence that last week we rallied about 500 points on the Dow Jones after the government announced a plan that involved some incentives for investors?  Tim Geithner’s toxic asset plan involved getting private capital involved with such attractive terms, how could investors not want to get involved?  Is it a coincidence that today we dropped almost 300 points after the government announced it was essentially firing CEO Rick Wagoner from General Motors and putting in one of “their” guys?  Now, the government is running the automobile industry and the financial industry.  Just like we saw the market take a big leg down earlier in the year on government intervention, be prepared for another selloff as more of these types of announcements keep coming out.

For those of you who don’t understand the logistics of the Timothy Geithner plan to get the “toxic assets” off the balance sheets of the banks, see the link below.  He was on Meet The Press yesterday and there was a pretty simple explanation of how this will work. 

After you watch this, you’ll have to make the judgement if it will work.  I don’t believe he answered all the questions clearly.  But, I’m posting it because it was in pretty plain English.

http://www.msnbc.msn.com/id/29943746/

Just click on the link and then you can watch the interview.

Even though we had the sell off on Friday, the market put in another good week.  In fact, this is the 3rd positive week in a row.  It’s been quite a while since we’ve seen that.  Not a big shock that sellers came in Friday and took some profits.  There were a few times in the last couple of hours the bulls tried to make a stand and push it higher, the ultimately the bears won out.  I’m describing this fierce battle because that’s exactly what it’s been lately.  Late afternoon trading has been a battle.  Up 200, down 100, up 100. Those are the kind of moves we’ve been seeing late in the day.  The bulls have won most of those battles as of late but this is the time where the bears can take charge.  They might for a brief period but I still believe we’re going higher.  There are so many people doubting this rally.  I know that’s counter intuitive but doubters are what we need all the way up.  I’ve said it before.  

Today’s sell off wasn’t necessarily just profit taking.  The supply demand picture wasn’t real pretty today.  However, the volume on the S&P 500 SPDRS (SPY) was very low.  So, naturally, the bulls are saying there was no conviction by the sellers.  However, the bears have a few things going for them.  First, any way you slice it, we’re overbought.  Too many stocks are trading above their 40 & 50-day moving averages.  That simply means too many stocks are all going the same direction.  When that happens, you generally get a pause.  In addition, we’ve seen great demand during this rally but we still haven’t seen the supply of stocks going down.  There are still investors selling into rallies.  Mutual fund outflows are up and short interest is up.  So, there are definitely some pessimistic people out there.  Again, that may slowdown the rally but if the rally continues those people will come back in.  They always do.  

The market shrugged off some bad economic data this week pretty well as I think investors are becoming numb to all that bad data. We’ll soon be getting a lot of earnings reports from companies.  Could those be better than expected?  I doubt it.  But, again, we don’t know how investors will react to all that bad news.  We’ll cross that bridge when we get there.  Don’t let a few bad days scare you out of this market. It’s been a powerful rally that looks to have some legs.  As always, if I see something new developing, I’ll report it.  

Have a great weekend and enjoy the profits.

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After losing a 2oo point gain on the Dow Jones, the stock market rallied late to finish the day up almost 100 points.  We had some surprisingly good economic data this morning that really got things going.  The sellers had their chance to push it down and really deflate the bulls.  But, they failed.  I think this is yet another example of the stock market getting stronger.  It’s like Timex.  It takes a lickin and keeps on tickin.  There was a report last night showing short sales are rising.  Was that evidence the lickin would come in soon?  To me, this is bullish because it’s more people that can be converted and will have to buy at some point in the future.  There are a ton of people doubting this rally.  That’s like adding gasoline to the fire.  Doubters are people that don’t own stocks so when they change their mind, they buy.  Now, this certainly isn’t a perfect rally and a selloff would be healthy as I’ve said many times.  But, when it won’t sell off or let you in, you need to pay attention. 

If you are still sitting there with 100% cash doubting this rally, I’d be averaging in.  That’s a safe way to participate.  If it falls quickly and resumes the uptrend, you can add more.  If it keeps going, you just keep averaging in using some methodical process (i.e. so much every few days).

The financials were strong again today probably because maybe the economy is stabilizing.  In stabilizing, I mean it’s getting worse but not as fast.  In other words, the rate of decline is slowing.  In addition, I think investors like this PPIP plan and as I said on my radio show today, it’s the first plan that has some incentives and lets the public get involved.  We’ve gone over what public means but it certainly is attracting the big boys because it’s such a great deal for them.  Incentives.  Give us incentives and the stock market will react favorably.  If the administration would get this point, maybe we’d have an even better stock market. 

The internals were pretty good today but as always, don’t let your guard down.

Don’t forget to check me out on CNBC Asia tonight at 6:10 p.m.-6:30 p.m. CST.

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With about an hour to go in the trading day, the market battles back from a 110 point loss.  The Dow Jones is about even and the other indexes are off of their lows as well.  Even if we finish down 110, it’s a victory for the bulls.  A weak selloff is just what the doctor ordered if you’re bullish.  Very rarely does the market go up after such a huge day such as yesterday.   So, I’m monitoring this selloff and buying a little more on the dip today.  I found it most interesting that the market is battling back even with politicians on television!  Imagine that. 

Possible Head & Shoulders Forming?

In the day to day movements, we sometimes forget to just step back and look at the markets objectively.  So, I changed my bloomberg picture on the S&P 500 to a weekly chart.  And what I found was a possible bullish formation.  It’s called an upside down head and shoulders.  I’ve explained it in previous blog posts before, but essentially it’s a bullish set up where the market makes a low, then goes up and eventually makes a lower low.  The last leg is the right shoulder that isn’t as low as the previous low.  Confused yet?  Just look at the picture and you’ll see the formation that could be developing.

If the pattern holds, that would mean we’re going much higher in the short run and eventually the rally would run out of gas.  After a brief pullback, we could see an even bigger run.  Just keep in mind that this is a weekly picture so this pattern may take a few more months to fully develop.  That may coincide with the economy getting better as well.

Television

I’ll be doing a few television hits tomorrow.  Here’s the schedule below:

Bloomberg – 6:10 a.m. (CST)
Fox Business – 8:10 a.m. & 8:30 a.m. (CST)
CNBC Asia – 6:10 p.m.thru 6:30 p.m. (CST)

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I wasn’t the one that said expect a pullback this week, was I?  Ok.  Maybe that was me.  But, once again as has been the case during this bear market, the government changes the rules.  This time for the good.  Timothy Geithner unveiled his plan for “toxic assets” over the weekend.  The government will use $100 billion of the TARP money to start purchasing these assets.  It’s the PPIP (not picture in picture for those who are familiar with remote controls).  Public Private Investment Program will buy these bad assets from the banks, etc. Just what we need, another acronym.  Basically, private investors can buy these assets using their money and then lever up something like 6 to 1 and have a lot of this guaranteed by the government.  If done correctly, a lot of money can be made by various institutions.  Now, let’s be clear.  You and I can’t participate.  Sure, they say it’s public private.  But, by private, they mean the Blackstone Group and they mean Bill Gross.  Their rationale is that maybe our pension plan will get some of these assets.  Oh wait, you and I don’t have a pension.  Most Americans have 401-Ks that are down 60%, not pensions.  So, it’s not really private.

But, all in all, the market liked the plan and I liked the plan.  There are still some details we’re not sure about.  But, the rules changing caused an overbought market to become more overbought.  Nothing wrong with that.  I bought more today as a matter of fact.  Not much but some.  As the market proves itself to us, we have to respect the rally.  As I’ve been buying the past couple of weeks, I’ve been slowly diversifying as well.  Up until today, I’ve been pretty specific in commodity related purchases.  Today, I purchased some small caps as a basket.  As I wrote last week, I’d like to see a weak pullback, but without that I’m using time stops.  Buying a little as it goes up.  Methodically and carefully buying.  You have to still be prudent but the internals continue to improve.  In fact, we had almost all of the volume today consisting of up volume.  In fact, this is the 5th day we’ve had a 90% upside volume day in the last 10 trading sessions.  That’s strong.

However, please do not let your guard down.  The more violently we go up, the more violently we can fall.  Just remember how you felt last fall when stocks were falling 10-15% in a day.  That is still a possibility.  But, what if the market just keeps going up?  There are two plans.  The first is that we do get a much needed pullback that we can buy the dips and use even more cash to purchase securities.  The second one which looks like a bigger possibility is if we get a blowoff top.  That means volume increases and we keep getting days like we’ve had the past two weeks.  That market would have to be sold and all the positions we’ve been purchasing lately would be sold for profits.  

It sure felt like the train was leaving the station today.  We had plenty of opportunities for the market to sell off but as it went up, the rush of buyers came in pushing it higher. That’s the sign of investors not being invested enough.  Too much cash on the sidelines.  That’s the fuel for rallies.  We’ve had several tests in this horrible market.  Tomorrow will be yet another one.  We broke through the 50-day moving average today but we’re still at the top of the down channel we’ve been in since October.  In addition, if we can hold these gains or even add to them, there will have to be more short covering.  

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Since the recent lows in early March, the stock market is up about 20%.  A very typical bear market rally.  Sharp and fierce.  But, is it just a bear market rally or the beginning of something bigger?  The short answer is I don’t know.  It’s way too early to tell.  We were oversold, we covered our shorts, bought a few things, and we’re enjoying the rally.  But, is it over? As I mentioned in yesterday’s post, it paused in the general area where it should have technically.  

Here’s what we know so far.  The participation of stocks in the rally has been great.  A lot of sectors have participated.  A lot of different size companies have participated. Heck, the financials even participated.  So, the breadth has been just fine.  How about the volume?  That’s been pretty good as well.  Not explosive but much better than the December rally.  During that entire rally of December, volume was getting weaker and weaker.  A big red flag.  That hasn’t happened this time.  So, that’s encouraging. We’re also seeing some real demand for stocks unlike the November & December rally measured several different ways.  So, why am I not advocating running out there and loading the boat?  For a couple of reasons.  First, this rally has been quicker than the previous bear market rallies and that means it has moved too far too fast.  We need it to consolidate or pullback a little before resuming.  Secondly, even though a lot of stocks have gone up during this rally, not that many have advanced tremendously.  In other words, the points or percentage gains for all the stocks isn’t that impressive.  There have certainly been some big rallies in several stocks, but as a group they’ve lagged somewhat. Therefore, the rally hasn’t been perfect.  But, it’s definitely been the best one we’ve had since October.  And that’s something we have to watch.

Next week I’m looking for more of a pullback.  Nothing severe and in fact one that we can buy.  Buying the dips?  Has a nice ring to it. But, that may be where we’re headed over the next several weeks and maybe even months.  Again, too early to tell.  But, today’s selloff is exactly what the doctor ordered.  The volume was low and the selling was mediocre but we had pullbacks in the big winners on the week. That’s profit taking.  Right on time.  A few more days of this (perhaps 2-3%), and I’d get more aggressive on the long side.  I stressed patience earlier this week and I still feel that way.  We’ve had two down days in a row since that post and patience is paying off.  In this dangerous environment, any selling can snowball and become quite aggressive.  So, we can’t assume it’s just a small pullback.  That’s why we have to be patient. 

Buy Before The Economy Turns?

I hear a lot of people on television saying you need to buy stocks now before the economy gets better.  But, if you buy stocks now, you’re assuming the economy will be better six months from now.  We have no evidence of that and neither do those guys and gals on television. Could it be stabilizing?  Yes.  But, at very low levels.  This economy is still contracting and will for some time.  That will hurt growth and profits.  Without those two things, stock prices may be contained.  We’ll certainly get rallies and the economy will eventually improve.  I just think it’s going to take a little longer than the stock market is pricing in at these levels.  Even though I think it’ll take some time, I sure wish people would stop using the word depression.  We’re not in a depression and won’t be.  We’re in a very severe recession which may take a few years to get out of.  But, depression?  No.  But, let’s be realistic about what we are in currently.  A really bad recession that and there’s no evidence whatsoever suggesting an improving economy yet.  So, it’s too early to buy stocks for investments.  But, for trades?  Sure.  

Be Aggressive

We often hear the word aggressive used in the financial world.  It usually means you need to buy a bunch of stuff that vibrates a lot.  I think this is a time you need to be aggressive in your trading.  I don’t mean adding risk when I use the word aggressive.  I mean you need to control your portfolio instead of letting the market whip you around.  Get active.  Take advantage of extremes.  Take advantage of income. Sell when things are overbought.  Buy when they’re oversold.  Focus on making money and remove the emotions.  I know that’s easier said than done.  But, it’s true.  You hate this stock and love that stock.  Forget about it.  It’s all paper.  I don’t care if you have a 20% gain or a 20% loss, sell when you should and buy when you should.  If you attack your portfolio instead of letting the market attack you, you’ll have much better results.  It takes some work and much more attention than we’re all used to.  Unfortunately, that’s today’s market.

Have a nice weekend.

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