Fall 2009: Stock Market Likely to Decline

If you have exposure to the stock market, you may want to dial it back to a money market fund or cash. Both the S&P 500 and the NASDAQ composite indexes pierced below important levels of support today. (their 50-day moving averages) This often happens when the market is going to decline for a period of time.

All in all, not a terrible run since March when the market turned positive: a 58% increase for the NASDAQ and a 45% increase for the S&P 500.

Several companies declined sharply this week after reporting earnings that just barely missed estimates. Some declined even though they beat their earnings estimates. This is typical behavior when the market is turning south, when even good news is not enough to keep stocks moving up.

I have sold all the stocks in my personal portfolio and am looking now for opportunities to make money on declines.

Remember - don't blame the government or your retirement plan company if you fail to keep an eye on your nest egg!

Well That Was A Short Nap

The stock market has come roaring back in the last couple of trading sessions from a mild downturn that only lasted about a month. Now, one or two up days does not a trend make. However, the volume of trade and the percent increase in the general indexes makes it pretty clear (to me, at least) that this is the beginning of something interesting.

I've re-entered the market with positions in travel, retail, rental car, and (I can't get over them) Chinese online gaming stocks. If you have been sitting on the sidelines with your retirement funds, I'd definitely encourage you to speak with a personal finance professional about re-entering the market at this time.

No-load index mutual funds for the S&P 500 and NASDAQ might be relatively stress-free candidates if you agree with me and wish to participate in the market's apparent upturn.

Disclaimer: I am not a personal finance professional and this information does not constitute an offer to sell investment products. These opinions are my own. You are responsible for your own decisions - Hell, I have trouble keeping my own shoelaces tied!

Taking My Measly 17% Gain

One of the Asian gaming stocks I bought at the end of March was up 30% two days ago. Yesterday, however, a sell-off occurred and almost half of that paper profit vanished.

I watched the stock intermittently through the day as I was working. Near the end of the trading session, I had a decision to make: should I sell it? (to lock in the 17% gain that remained) or hold on to it? (hoping for a recovery in the future) It was an especially tough call to make because the trading volume was essentially equal to the previous day's volume. If the volume had been lower, that would have indicated more clearly to stay in the stock. If it had been higher, indicating a "distribution" day, that would have indicated more clearly to get out.

4:00 PM drew ever closer. The volume was neck-and-neck - how to make the call? Well, I had recently listened to a podcast interview by Bill O'Neil on investors.com. He had made a casual comment about having good sell rules that stuck with me. He said, "Stocks are kind of like people, when they act strange there's usually something wrong at a deeper level." Dropping 13% in a day, even on equivalent volume to the previous day, qualifies as acting "strange" in my book.

At 3:56 PM, I sold my shares and confirmed that the order had gone through. 17% locked in. I slept well last night.

As these things sometimes go, the stock rallied this morning. It is up to what would be a 24% gain if I hadn't sold it. Due to the rules of trading in this account, I can't just buy back the shares I sold - three business days have to pass for my sell order from yesterday to clear the system. Did I get "shaken out"? Was I hornswaggled and bamboozled by superior market operators who manipulated me into doing what I shouldn't have done?

Nah. I'm just a lucky mug who got to enjoy what would be the ride of a lifetime for most people - a 17% stock market gain in two weeks' time. Can you see me grinning like the Cheshire Cat? That's my sad face for the profits I "lost".

Everybody - Back Into The Pool!

"People fear when they should hope and hope when they should fear." -Jesse Livermore

If you have investment money that you've pulled into cash or a money market account, consider putting it back at risk in the stock market. If you don't want to follow individual stocks, you could consider a no-load S&P 500 index mutual fund available through low-cost online brokers such as TD Ameritrade or Scottrade.

Stocks are now in a bull market and have been for about 3 weeks. This is not hyperbole, the fact is that the major market indexes have been climbing higher for the past 3 weeks. They have all crossed above their critical support lines (50 day moving average) and stayed above them with conviction. The past 10 trading days have been marked by the indexes rising on higher volume and falling on lower volume.

As I wrote in this article, it is very easy to miss what is happening today - now - due to fact that our news sources always lag truly current events. Pundits and analysts are still busy trying to decide which industry sector or government bureaucracy holds greater blame for last year's problems. (or greater credit for its triumphs)

I'm asking you not to get caught up in all that. Consider this an inviting you to take a closer look at the data for yourself, along with me, and make the decisions you may have delegated to others in the past. If you lost money in the recent bear market, do whatever you need to do to get the upset from that loss out of your system so that you can do today what is possible to make a better tomorrow.

Disclaimer: I do not currently work as a stock broker or professional money advisor. The views I have expressed are my own opinions. Investing in the stock market entails risk, including the possibility of losing all of your invested capital.

Market Update - Asian Gaming Stocks On The Rise

Analysts from Barrons to Forbes are asking the question, "Does the current uptrend have any legs?" Last week was marked by impressive gains in the Dow, S&P500, and Nasdaq indexes. Although Friday and yesterday were down days, partly due to uncertainty about the the Obama administration's intervention in the auto industry, the volume wasn't all that impressive. On the other hand, today's activity seems to indicate the market has digested the news and is continuing its recent ascent.

I am as concerned as the professionals about the specter of poor earnings announcements and higher unemployment projections for the second quarter. These dynamics could derail the current uptrend. However my stock investing mentor, William J. O'Neil, hails from a heritage whose only sacred mantra is, "Never argue against the market!". Therefore we say that the market is heading up because, well, it is in fact heading up. We can leave the wherefores and whys to the professional analysts while attempting to benefit from the facts of the matter.

One area of impressive growth of late has been in asian stocks that provide computer gaming/entertainment to that part of the world. This morning, I decided to load up on some shares in this sector, we'll see how that goes.

In case you're wondering how my market adventure into stem cells went, I have two words for you: "not well". But I learned a(nother) valuable lesson from Mr. Market about my own tendency to predict which industry groups will lead the market and when. Today's purchases were not about predicting, they were about following what is already leading. (which, when you boil it down, is the main difference between value investing and growth investing)

Late to the Rocket Launch

I'm a guy who likes to give advice. I'd like to believe that, over the years, I've mellowed from coming across as a know-it-all to becoming a person who gives advice back to pay off the good advice I've recieved.

Be that as it may, Friday marked an event that illustrates how easy it is for one to neglect one's own advice. I've been sharing a "hot tip" with the stock investing community for over four years regarding stem cell research companies. One of George W. Bush's earliest actions as president was to ban most stem cell research. It was as clear as clear could be to me that one day that policy would be reversed and a whole raft of companies specializing in this research would rise with the swelling tide of progress. On Friday, a West Coast company won FDA approval for the first-ever study of a treatment based on human embryonic stem cells. I have watched this company closely and have traded in and out of it several times in the last year.

When the announcement came out, the stock shot up over 50% between Friday and Monday. Was I already in this stock on Friday? No. Was I in any of the other stem cell stocks I've been watching for the last three years? No. I had recently moved my holdings to cash in the aftermath of the financial crisis, (a good move) but had unwisely allowed the other cares of this world to distract me from keeping tabs on the market.

This is a good lesson to learn: It's not enough to see an event coming, you have to be sure to set yourself up to benefit from it should your prediction come true. As Lao Tzu wrote in the Tao Te Ching, "People usually fail when they are on the verge of success. So give as much care to the end as to the beginning; then there will be no failure". How hard would it have been to bought on some shares in the days before President Obama's inauguration? Answer: not hard at all. So why didn't I take care of this in time? As my mentor, Jim Rohn, would put it, "It was also easy not to."

Luckily, I'm in on the secret that there is no lack of wonderful, exciting opportunities in life. I guess I feel the "missing" of this opportunity more strongly because I've been mentally invested in its eventuality for what seems like a long period of time. Practically speaking, the long term upswing for stem cell stocks in general will almost certainly dwarf the gains my favorite stock made on Friday and Monday. As the market would have it, the stock's price has pulled back on lower volume from it's lofty Monday highs and I have picked up a number of shares. All of this is well and good.

Nevertheless, I intend to be aboard the rocket beforehand the next time I forsee an inevitable blast off.

A Different Lesson in Stock Market Humility

From an emotional point of view, I shouldn't have looked, I really shouldn't have.

But I did.

In the three day period since I sold DUG, it rocketed from the 42% gain I locked in, to a 95% gain from my original buy point. And it's still not showing signs of weakness.

Dad's voice in my mind is asking, "What did you learn?" and I've come up with an answer. If I had held on to the stock into the last half hour of the trading day (instead of selling it mid-afternoon) I would have been able to see a clearer picture of its behavior for the day. In DUG's case, this would have shown me that there was no clear sell signal and it is likely I wouldn't have sold.

Jesse Livermore, a famous (or infamous, to some) stock investor at the beginning of the 1900s used to say, "People fear when they should hope, and hope when they should fear." I used to think this was a kind of indictment on those other traders who are somehow weak. But now I see that he was just making an honest observation about how we all act sometimes.

T. Harv Eker writes about each person having a financial thermostat that is defined by his or her upper and lower financial comfort zones. If the person's financial situation goes below or above that range, he or she tends to subconsciously "correct" it so that the comfort zone is maintained. Evidently, my upper comfort zone for stock trading profits is somewhere around 42%. Well worth noticing.

Not Too Shabby

Recently, I blogged about holding on to a security during the US economic bailout crisis. I can now reveal that I was holding shares of DUG, the ultrashort ETF for US oil industry stocks. I sold my shares yesterday and locked in a 42% gain.

I was confident enough in the weakening demand for oil (due to turbulence in the general economy) that I did not check up on my position while I was out of town last week on my retreat. Yet I knew the market might rally once the wall street bailout went through. It turns out that the turmoil in the European credit markets bought my ETF a little more upside Monday and Tuesday.

Stocks headed lower yesterday as well. But when the Fed announced a rate cut coordinated with rate cuts in Europe, the S&P 500 seemed to rally and at 2:30 PM, DUG was trading near the bottom of its intraday range on higher trading volume. In other words, it looked like more people who held DUG were starting to doubt its value than the ones who felt it would go higher. With all the uncertainty in the economy, I decided to pull the trigger and lock in my gain.

Maddeningly, the general markets turned bearish from 3:30 to 4:00 PM and DUG ended up right in the middle of its trading range today - not a clear "sell" signal after all. Nevertheless, I feel good about following the instincts I've developed as a result of studying the market over the past 10 years. That goes for holding it last week as well as selling it yesterday.

Playing Chicken With Wall Street During the Crisis

I've been a stock investor for 10 years and I personally trade the stocks that make up my IRA.

A couple weeks ago, I closed out a position in a technology stock after making a respectable gain.  Stocks in a different industry sector began to show some signs of weakness, so I used the money that was freed up from selling the tech stock to bet against that industry using what is known as an ultrashort exchange-traded fund (ETF).  This is like a mutual fund that goes up if the stocks it is following go down.  The beauty of these shorting ETFs is that it is possible to trade shares of them in an IRA, whereas regular shorting is not allowed in an IRA.

(No, it wasn't the financial industry I bet against, or you'd be reading now about how surprised I was that the SEC prohibitited short selling of financial company stocks last week)

My position in this ultrashort ETF has fluctuated from being up 20% just before the economic crisis was announced last Thursday to being down 10% today when congressional leaders anounced that there is basic agreement on the framework for an investment banking bailout.  I've asked myself a few times  why I didn't just exit the stock market when the crisis was announced.  After all, there is an old saying on Wall Street: "Bulls make money and bears make money, but pigs get slaughtered."

And yet, there is a reason why I've maintained my position in the shorting ETF.  Even though it has declined a good bit from where it was last week, it has done so on drastically lower daily trading volume than average.  So, far fewer people now think it's a bad idea to bet against this particular industry than those who thought it was a good idea when I got in.  This has intrigued me, and convinced me that the actual destiny of my investment will not become clear until the daily trading volume returns to normal.  

When I look at the basics - the fact that this industry's stocks peaked in price last month, that the recent strength of the dollar caused further erosion, etc - it seems to me that the fundamental reasons for investing the way I did are all still there.  So I'm not blinking yet.  Wall Street has certainly humbled me in the past.  But I feel that now is a good time to "keep your head when all around you are losing theirs..." ask Kipling mused.

A Test Of The Emergency Disappointment System

This morning I checked on my stock holdings only to discover that Biogen (BIIB) had dropped 25% from yesterday's closing price. Evidently their Multiple Sclerosis drug Tysabri has been found to possibly cause a deadly side effect. There was only one thing to do: sell my position and sell it quickly. Within one minute I had opened a browser window, logged in to my online trading account, and executed the sell order. When the trade cleared, I had lost 26% overall of the money I had spent on this stock.

A few years ago, I would have reacted to a development like this with anger, blame, and lowered self-confidence. I might have felt paralyzed, leading to hesitation about what to do. Yet today, I didn't feel any of these things. On the contrary I was serenely aware that the capacity for stocks to dramatically rise or fall in price is exactly the dynamic that attracts me to trading. It's merely the other side of the same coin that netted me a 25% gain in a short period of time from the market's recent downtrend. (using ultrashort exchange traded funds for real estate and technology)

It certainly helps that I didn't have all my investment eggs in this basket. By the way, I'm not a big believer is diversification as it is commonly practiced. (or "de-worse-ification" as some pundits put it) That can lead to a scattering of focus, especially for the individual investor who has other things to do with his time than keep an eye on the market all day long. I follow William O'Neil's system (outlined in his classic book,How To Make Money In Stocks) which suggests buying a few of the very best growth stocks when the market in general is moving up. (using his rules, it was a judgment call as to whether the stock market had turned around to start heading upward again in the past week - which is when I purchased Biogen)

What happened in my stock account today was only a test. As is everything that ever happens in life. I don't expect to win them all anymore. In fact, it's the building of a foundation of increasingly more enlightened responses to these kinds of events that really matters to me now.