Dow 36000 or Dow 6800

Isn't it ironic that the bears who called for Dow 6800 by end of the year are out denouncing the author of Dow 36000. Both set of people are spectacularly wrong as of now. Both set of people made outrageous predictions based on some fancy theories. A good example of the pot calling the kettle black.

The mass media loves these kind of predictions and people who make such predictions.They are a constant present on the media everyday pouting out such extreme scenarios. It is good strategy to market books, newsletters and advisory services. The oldest trick in the mass media business is to make outrageous predictions. It gets attention. Paris Hilton knows it well. More outrageous her behaviour the more she gets attention. As a trader it is much better to stay away from such wild attention grabbing predictions.

My first earnings trade

US Laboratories (USLB)

This company has now been bought over by Bureau Veritas.Over the weekend I will write about how serendipity lead to me to finding this company at the right time. Till then like most others I was also lost in the technical analysis jungle.

RIMM (RESEARCH IN MOTION LIMITED )

RIMM is up 20% or so today morning post earning. Last night there was lot of excitement about RIMM earning. Day traders and option traders made some killings. Now even though I trade earnings based breakout, RIMM is not the kind of stock I am excited about. In fact I think those chasing RIMM here may be in for lot of pain.

On large caps earnings is anticipated. If you see RIMM price performance since August, it had already started moving in anticipation of good earnings. So is today's earning such a big surprise. Analyst are busy raising estimates and price target but I will let this pass. It is large cap and has over 186 million shares outstanding. That makes it unlikely to make a triple digit move from here in short period.

Not every earning surprise is worth playing. Only a handful of earning surprises in any quarters have legs.

Waiting for Godot

Waiting for Godot

This will go down as one of the most torturous breaking of all time high by Dow Jones Index. The market seems to be in a state of suspension in anticipation of earning season. Volatility in individual stocks should pick up as the earning season hits in full force in next couple of weeks.

The earning season and pre announcement season is a good season . It is a season of opportunity for all kinds of traders be it day traders, swing traders or long term traders. Future prospects of companies get reevaluated during this season. Those who surprise or beat sometime find a good rally for six to 8 weeks. Sometime they launch multi month, multi year rallies. Those who disappoint find the market severely punishing them . Many of them go in to multi month or multi year funk.

Earning momentum and price momentum as strategies have statistical edge and much of growth investing is about identifying such opportunities. Most people believe that market are too efficient and things like these do not work. It is very good thing that people believe in that myth. That creates opportunities for those who can understand and operationalise strategies based on earnings.

During the course of the day I will talk about how I discovered earnings based strategies and about my first trade based on it . I bought the stock on earnings day and it tripled in next two months. It was in the midst of severe bear market. So stay tuned.

TRT -Trio-Tech Int'l anatomy of a trade

TRT -Trio-Tech Int'l

Now this is a trade I just closed when it spiked up by 1.80 today. I got in to this micro cap on Friday . It had blowout earnings and gapped up, I entered the moment I saw the earnings. I alluded to this stock in my post on Friday.

Noticing some good moves in telecommunication. China related stocks are also on fire. A good earning play is up over 40 % today

Look at the earnings.
Trio-Tech Int'l TRT 6/30/06 9,500.0 61.0% 705.0 1037.1% 0.22 0.02

It had a blowout quarter. Extremely small float and completely neglected stock. That is a potential mix for a blowout move. Every earning season there are plays like this. You have to be very quick in spotting them and getting in. When they move, they really move big time.

My bread and butter play is these kind of earnings plays. The earning season is a season of opportunity and I am looking forward to finding few more plays like these. If you focus on earning season you will find completely neglected companies with great earnings and then the market discovers them and they make significant moves. Over the last 5 years this is one strategy I have mastered and fine tuned in microscopic detail. Bulk of my profit come from such earnings related breakouts.

Another way to find these kind of plays is by using one of the ideas in the book I talked about last week- How Charts Can Help You in the Stock Market by William L. Jiler. The original genesis for this idea came from one of the chapters ( Chapter 6) in the book. While working on developing a scan for it I discovered most of these stocks make these move because of earnings.

Oil stocks may not be the best shorts now

A reader has asked my opinion on shorting oil stocks after this bounce. In my opinion they may not offer a good risk reward at this stage. The ideal time to short was a quarter ago. Now many are down more than 25% from their quarter ago level. Most likely they will spend lot of time in range. Alternative energy plays, ethanol, solar energy might be a better play probably on the short side.

A Case for Inflation Targets in the United States and Japan

The American Enterprise Institute for Public Policy Research has a free monthly newsletter about Economic Policy. It always has a good macro view on the economy. Because it is monthly, it does not suffer from the problem of trying to interpret every release of economic data. As a result you get a very good perspective.

The central banks of the world’s two largest economies are both worried but hopeful about inflation. The Federal Reserve is afraid inflation will increase, but hopes it will decrease. The Bank of Japan is afraid it will decrease, but hopes it will increase. Ironically, the Bank of Japan says it would like to tighten monetary policy more, while the Fed says it would not.

Clearly, the world’s leading central banks are struggling with what is happening to prices in their respective countries, what they should say about it, and, more importantly, what they should do about it. Inflation targeting may be a desirable approach to addressing these questions.

Keeping inflation low and stable is the primary goal of the world’s central banks. Virtually all have been strongly influenced by the “Great Moderation” whereby low and stable inflation rates have been associated with higher rates of growth and better overall economic performance. The basic reason for this association is the fact that high and volatile inflation rates are disruptive and empirically linked to poorer economic performance.

Amaranth is amongst top 10 queries on Google

The top ten queries on Google are always dominated by celebrities and sports figures.Scantily clad females have the highest probability of making it to this list. So it is a surprise to find a hedge fund making it to this list. Hedge funds have gone mainstream. Too bad there is no hedge fund ETF!

Gaining Search Queries: Week Ending September 25, 2006
1. elin nordegren
2. ryder cup
3. deal or no deal
4. america's next top model
5. tmx elmo

6. Kari Ann Peniche
7. grey's anatomy
8. talk like a pirate day
9. rachael ray
10. amaranth

Furious sector rotation

Sometime reading the market is tricky. One of the prominent feature of the current market in last few weeks is the furious sector rotation. Money has flowed out of sectors like commodities and energy in to retail, restaurants, technology and software. Every day a new sector is attracting attention. In recent weeks the transport and biotechnology are finding a bid. Lot of money flow is concentrated in the large cap. Many stocks after breaking out have just hung on to gains but not gone in to rally modes.

Now this kind of scenario creates a bit of dilemma. Large caps lead in the later part of the bull move. But at the same time speculative sectors like biotechnology and technology are also attracting buying. So the message of the market is mixed. It possibly points to a protracted sideways move.

A range bound market presents special challenge as many breakouts do not go very far off either on upside or downside. Such challenging markets are the playground for certain kind of strategies. While we would like to have a market making a strong move in either direction, one has to adopt to the given condition.

I continue to find opportunities on both long and short side, but many of them are giving lesser profit than what I like to get. Over the years I have learned that these kind of market environment are cyclical and bad times are followed by good times. Such market environment is when you need good risk management strategy. I am using time stops on lot of my positions in this environment. So if a stock is not making an expected move in a desired time frame, I am out of it. I am also aggressively moving stops to protect profits.

Note: Some of you have requested that Friday is not a good day for the chat on "developing a good market feel". So I am planning to re-schedule the online chat sometime next week. If you are interested please send an email and I will let you know about the time and other details.

Bulls may get ambushed once quarter ends

Over the years I have learned to be wary of strength after 8-12 weeks move. For short term tactical swing trades it always helps to have your strategy aligned with the anticipated market direction. Mid July is when many of the stocks stabilised after a brief and vicious correction. Since then the DOW, S&P and NASDAQ have creeped higher. Along the way there were many good opportunities for trades lasting months to weeks.

It always helps to buy on negative sentiments. In July the sentiment was extreme. Now many of the thesis's on which the July correction precipitated have proven not to be necessarily true. Now there is a gradual realisation that things are not as bad as proclaimed by the bears predicting doom.

The home builders is a classic tale of how you should discount news and look at the tape to make your decision. Everyday the bears come with more dire predictions for home building stocks, but the stocks have not budged and in fact rallied. A clear lesson in how trader should think differently from TV pundits, analyst, and newsletter writers. That is the kind of case study one should write down in a trading journal for future reference. You will find same things repeating in other sectors again during your trading lifetime.

The energy sector offers another good lesson on how to think like a contrarian and trader. This time it is on a bullish side. There was not even one analyst who was predicting a drop in oil prices a quarter ago. Now they are falling over each other to explain why oil is down.

Now we are at an interesting juncture. There is the quarter end, there is an upcoming earning season and there is the last quarter of year with the tax related issues for many institutional investors as well as individual traders. Analysing them correctly is the key to anticipating the likely market direction. Many times the quarter end strength is deceptive. Somewhere waiting is an ambush. So I have trimmed my positions and will start positioning for shorts sometime soon. At the same time I am willing to go long some selective earnings/momentum plays.

Whether you are a Macro trader or a micro trader, developing a skill in anticipating the possible market direction can pay rich dividends. Many of you have asked how to develop the skill of anticipating the market direction. I have replied to many of these emails. I am planning to schedule a online chat sometime on Friday with some of those who sent emails. If you are interested please send an email and I will let you know about the time and other details.

Don't trade based on this analysis. This might be completely wrong.

Market ripe for a fall

The party is over. Too much divergences, small caps are lagging big time. Market is creeping higher, no major thrusts or second set of breakouts or follow ups in stock. I am using current strength to liquidate. The quarter end mark up might be good time to move to cash. Not finding anything exciting now, milked all the opportunities in last 4-6 weeks. Positioning slowly in to low risk shorts. We might be headed for a major correction post the quarter end period.

The BusinessWeek Market Survey

Businessweek had a issue on 2006 investment trends at the beginning of the year and with nine months over, it is good time to see where exactly the market stands as against the forecast of experts and analyst.

This kind of forecast sells magazine but I am not sure how much it helps investor.

Earnings revision point to trouble ahead

Zacks earnings trends are in recent weeks giving hints of weekness. To profit from this kind of analysis you need to get in to specific sector likely to top out or breakdown. I have around 30 stocks which I am watching for poosible low risk short entries. So even if the market tumbles I want to be ready for the move. Ultimately piccking the right stocks can give you better return on short side also.

The total number of 2006 earnings revisions over the past month stands at 1,042, which is markedly down from the 2,702 reported four weeks ago. Over the last four weeks, there were 460 upward revisions and 582 downward. This makes for a total revisions ratio of 0.79, a clear red flag. Three weeks ago the ratio was 1.35 and has since declined every week until finally dropping below one during the last two weeks. If this ratio persists as the third quarter earnings season gets underway, and total revisions start to pick up, it will be very serious indeed. The strong forecasted earnings growth is perhaps the single most important piece of evidence pointing to a strong economy in 2007. The low revisions ratio is the canary in the coal mine indicating that this pillar is perhaps not as strong as previously thought.

However, the overall earnings picture still remains quite strong, regardless of how you measure it, double digit growth is still expected for both this year and next.

Oil down 23%

At market top there is always a tendency to believe in wild projections. If you read the newspapers or listened to analyst just a few weeks ago, there was no way oil was going to go down. The oil was headed to USD 100 was firm belief. No one was willing to listen to a possibility of different scenario.

As regular readers know, I have been bearish on oil and oil stocks for over a quarter now and repeated that call several times. Keeping a close watch on how commodities trend and how the trends in commodities end can help you a lot. The commodity market behaves differently from stock market and the participants behaviour is different. Everyday I keep a close watch on commodity markets and sometime it helps in analysing the stock markets.

Oil's rapid fall reflects a range of factors. Geo-political tensions have eased as both George Bush and Iran's president Mahmoud Ahmadinejad back off from recent posturing. "Talks are much better than threats and confrontation," Mr Ahmadinejad told the Washington Post.

Weather worries have receded, too. Last year, Hurricanes Katrina and Rita wreaked havoc in the Gulf of Mexico and the market was priced for a repeat performance this year. So far, the winds have steered clear of the rigs.

As the timing of the two most recent corrections suggest, there is also a seasonal factor at work. The period between the American summer "driving season" and the Northern hemisphere winter is a time for building reserves. As the Department of Energy indicated last week, stockpiles are full to bursting.

"The markets will be unable to ignore all this crude and product sloshing around the world. There's not one iota of bullish news out there," said one American trader.

Demand is easing too, as the US economy starts to slow on the back of a weakening housing market and the Chinese rein in their runaway economy. The final reason is the growing influence of financial investors. The rapidity in the pull-back since August reflects the weight of speculative money shifting from long to short.

In part, that has been triggered by the oil price crashing through technical support three weeks ago. According to John Noyce, a technical analyst at Citigroup, when the oil price dived through its 55-week moving average, it set up a target of $55 a barrel. Failure to consolidate there could send oil down to the 200-week average, expected to be about $50 by the year end.

Tony Dolphin, director of strategy at Henderson Global Investors, says: "The two most important effects of lower oil prices, if they are sustained, will be to boost spending power in non-oil producing countries and help lower inflation expectations."

Rangebound

The market continues to be range bound. 18 of the 30 Dow Jones stocks are up 10% or more in this quarter from their low. The headline news does not reflect that. The market has failed to live up to the bearish hype. Expect the market to continue trading in range.

End of month and end of quarter

The end of month and end of quarter dynamics should keep the market in bullish mood for sometime. Over eager shorts are learning a lesson in why profits on the short side should be booked fast. Last week there was a lot of chatter about this or that stock is breaking support. Today many of those stocks have rallied violently.

If you look at the sector trends it is apparent where bulk of the selling at quarter end is concentrated. Yesterday there was a news item about how Fidelity has lost more money than Amaranth in Energy sector. The sector trends are also showing clearly where large amount of buying is concentrated in anticipation of good moves ahead.

Individual stocks continue to offer some good opportunities and as I said on Friday, the rush to write obituaries about market is premature. It is currently a stock pickers market. There are number of good breakouts like DJO, KNOT, CROX, TWX,etc.

Good Christmas for retail

If you have been watching the retailers, it is crystal clear that the upcoming Christmas shopping season is going to be a good season. Every single retail group is witnessing excellent accumulation. If you are looking for opportunities on long side keep a close eye on retail group.

Some retailers are breaking out after multi-month consolidation. Many retail stocks are just starting out their rallies and excellent opportunity for low risk entry exists in many of them. If the consumers are about to fall off the wagon why are retail stocks rallying.

Market on pause

• The market continue to correct after a multi week rally. Nothing seems to be as bad as the bearish commentary suggests. Some markets are poised to take out their high.

• The oil prices continue to drop. Gold is being taken to the cleaners. Commodities bull market is dead and unlikely to find bid for many months.

• The housing stocks continue to defy the sky is falling analysis of the bears. If you read some of the blogs/ commentators on housing, it seems like every home owner has panicked and is selling his house. It a crisis of untold proportion. Run, run, run for your life. Sell your house today, if it is not selling just keep lowering the price. Now ask yourself, is that what is happening in your community. The so called experts on housing crash have no idea of consumer behaviour and how markets for high ticket items work. Houses are not stocks that because prices are falling people will sell. If the bearish commentators are willing to sell house at discount, I am a willing buyer.
  

• If you are ready, one of the best season for finding good trades on both long and short side is around the corner- The earnings season. More about it later.
  

Contrarian analysis concludes that the path of least resistance for stocks is upward

Mark Hulbert is editor of The Hulbert Financial Digest says market is headed higher.

MANY investment newsletters have been fretting about the stock market — and that suggests that the market will rise.
At least that’s the conclusion you would reach if you followed the market-timing theory that is known as contrarian analysis.

Let the bears double down during this correction.

Other than concluding that the market is likely to rise, contrarian analysis does not try to forecast the size of the rally, or how long it might last. But the analysis does focus attention on what is likely to signal the eventual end of a rally: a sharp rise in optimism and, even more tellingly, bullishness that is stubbornly held even as the market starts to decline.

Neither of these early warning signals prevails today. So, for now at least, contrarian analysis concludes that the path of least resistance for stocks is upward.

Dr. Doom turns bullish on U.S. large-cap stocks

Marrc Faber the author of Tomorrow's Gold: Asia's Age of Discovery is now bullish on US large caps and technology stocks. He has an excellent credential as a conrtarian. So you know where the market is headed. Listen to commentators outside of USA, they have better perspective than the US based analyst. Often too close a proximity creates lack of perspective.

Famed contrarian investor Marc Faber, better known by his self-appointed nickname "Dr Doom," has temporarily shed his preference for emerging-market stocks for two out-of-favor asset classes: large-cap U.S. industrial and technology shares.
The main reason for his upbeat view: the U.S. consumer may be more resilient in the face of a slowing U.S. housing market than widely thought.
While housing prices may be easing around the country, Faber says there's little evidence a catastrophic drop in home values is imminent. Abundant liquidity and a Bernanke-led Federal Reserve that appears inclined to cut interest rates if the housing market were to dip more than 10% bodes for "a slowing and not a collapse" in the housing market, says Faber.
Faber, author of the Gloom, Boom & Doom Report who gained notoriety for his market insight after he turned bearish on Asian assets before the Asian financial crisis in 1997, said there are plenty reason consumers can ramp up their discretionary spending, considering homeowners haven't slowed their pace of borrowing against home equity, employment is high, wage inflation is picking up and falling commodity prices are taking the heat off retail prices.
"If the price of oil and other commodities declines for a while, it leads to something like a tax cut for the consumer," Faber said, speaking at a recent Hong Kong conference.
Chart of $SPX
"Whereas I am very negative in the long run, and I believe that the U.S. economic imbalances are not sustainable, for the next few months the investment community is too negative on the U.S. economy which is more likely to surprise to the upside than the downside."

Noticing some good moves in telecommunication. China related stocks are also on fire. A good earning play is up over 40 % today.

I notice a rush to write market obituaries. The market has a surprise in store for them. The market will most probably make another run for the high. The high short interest being established currently might help the matter.

Watching some longs

At some stage in next couple of days a bounce will again take the market higher. Many of the over eager bears may again learn a lesson in the mysteries of markets mechanism. There is a bearish fantasy of crashes and rapid moment down, but in reality that happens very rarely. More common phenomenon is market goes down, thickens at next level, bounces and the cycle continues.

Sometime it helps paying attention to stocks showing extraordinary momentum at such times or stocks just beginning a fresh moves. Many time it is an indicator of sector rotation. I am nibbling at some small positions in some stocks. You get a much better entry during downturns sometime. Some of the stocks I am watching or nibbling at are LFC, UAHC, LFG, BIOV, BITS, CRM, FRNT,AUXL, QDEL, etc.

Free stock trades

This will be interesting concept. The brokerage commission is trending down for many years. This should shake up the industry if it takes off. But I have my doubts whether this will succeed. Most people base their decision on stock brokers on number of factors besides the price of trade. Reliability is the key. So lets wait and see.

Morten Lund, the guy who was the earliest backers of Skype is at it again. He has financed Zecco, a start-up that will allow consumers to trade stocks for zero commissions, versus $10 to $20 that many online brokers charge today. Other investors in the company include former Dutch Coca Cola CEO Pier Baarsma and Soren Kenner former chairman of McCann Erickson MRM Europe

CEO Jeroen Veth, a 37 year old entrepreneur and former Merrill Lynch Vice President is heading up the company and contends that most of the old school online brokers spend too heavily on marketing and thus have to charge higher prices. Lund and crew believe that the actual trade costs about $2 and if they can lower the cost of marketing to near zero, they can offer zero commission trading. They will make money with what else - advertising.

Markets under pressure

Markets will continue to be under pressure. I am expecting a nasty correction before the market again stabilises. Not all stocks and all sectors will be equally impacted by the correction.

Finding short candidate is never an easy exercise, but if you anticipate correctly probably there are some good short set ups. The problem with shorts always is availability and high volatility. It is easy to find short opportunities for few dollar kind of move, but if you are looking for 10 dollar plus kind of moves then it requires lot of patience and systematic approach.

Earning slow down and miss can sometime get you good short candidates if they happen at top of the range. Recent examples of these are CHS and JOYG. When a stock tops out it does not necessarily start going down immediately, most of the time it spends considerable amount of time going sideways sometimes for years before it starts sliding down.When I hear use exactly opposite of what you do for longs on shorts, I am always skeptical. It simply does not work that way.

Deflation chatter

Don't miss out on the deflation chatter, it is still below the radar. So is inflation bigger threat or deflation? The metals seems to be hinting deflation.Should be fun to watch copper stocks for a down move. Now I don't know, it might be one big conspiracy. Only grandma knows for sure.

Professor Bennet Sedacca is on fire with his recent musing as relates to the intensifying risk that a return to a disinflation-dominant macro-environment might be the end-result of the utter collapse in the US housing market.

Chasing the bull

Going by the emails I am getting, I see lot of people have started to chase this move at this stage. Some who were on sideline are becoming cautiously optimist. Some were married to the bearish hypothesis and are regretting not getting in and missing. Some were following the wrong gurus( never follow a guru even if his name is Easyguru).

I see a high risk to those late to party. The best thing is to write down the lesson learned and remember it for next time. Buy strong trends( in individual stocks)when down trends in Indexes start losing momentum. Wait for the market to set up again. It will again offer low risk entry points. Nothing changes much in the market. Same thing repeats again and again. I have seen the same gap and trap move many times.

In fact you may want to keep your list of short candidates ready, in anticipation of the next likely move.

Now my this view or hunch on market does not prevent me from taking a long positions in stocks like EVST today.

This gap up will be aggressively sold. Excessive bullishness and chasing a bull move always ends in a trap. Watch the small caps for aggressive action. Do not trade based on this prediction.

Henry Blodget thinks Google is toast

Henry Blodget has a very good analysis about likely impact of Yahoo warning on Google. He is back blogging after a long hitus and his analysis is top quality on the internet sector.

Stubborn bull

The market continues to defy the bears for the time being. It is the nature of bullish or bearish moves in the market to go further and faster than most analyst predicts.

Having a very long term view on market has its own peril. The kind of long sustained moves in one particular direction are rarity. What is more common is moves of short duration which can be anticipated with fair degree of certainity. Also the bullish drift in equities is a confirmed fact, so long focused strategies have better probability of suceeding.

I am completely congnizant of the negative factors most bearish analyst talk about. Yes there are structural problems in the economy and the economy is not perfect. Lot of these negative factors have a high probability of impacting the market. But when I see a rally coming and find stocks with high probability of making a move I am willing to act on them.

The path of least resistance is down. The correction lasted less than one day. So expect a down move. But some good trades like SYX may still work..

I love hedge funds!

Hedge funds are the favourite pinatas of most people. The trouble at Amaranth has everyone out in full force beating up the hedge funds. The media loves these kind of scandals. Bad news always sells in media. Soon the politicians will join in. It is such a tempting target and you can always spin it as a class struggle because hedge funds are for rich people only.

Some are blaming investors, some are blaming regulators, some are blaming the big banks, Paul Krugman will blame George Bush, some are blaming the markets. Some are even blaming the US constitution for this! Lot of this is envy. Lot of it is vicariousness. Like the way we enjoy Hollywood gossip we like hedge fund scandals.

Even before the full details of what happened have emerged the race to bit the pinatas is on. Hedge funds and hedge fund managers who can not raise capital or can not make money for their investors are out justifying their own failures or mediocre performance. Day traders and sundry other traders are offering advise to hedge funds on risk management. Newsletter writers are quickly touting magical risk management strategies.

The fact is that the pool of investable capital remains constant. The money in hedge fund would still be in market invested by someone else in some other form. Besides that the simple fact is that simply there is a need for high returns by several investors. The hedge funds are just capitalising on that need. Hedge funds exist and are prospering because the markets needs high return vehicles. Needs pre exist marketers. But it is always the marketers who get the bad reputation.


Be a contrarian. Hug a hedge fund manager today. I love hedge funds!

Euro break-up

If you have been reading newspapers outside of USA, you should have noticed the rising chatter about imminent Euro break up. Now this is the kind of macro theme most of the analyst in USA are not talking about. It will have significant impact on worldwide markets. The country most likely to benefit from such a move is USA.

The disintegration of the euro may be drawing closer. Warnings of an EMU bust-up were once confined to a handful of euro sceptic journals: they have since spread to City banks such as Morgan Stanley and HSBC, and are now moving perilously close to the EU core itself.

"Will the Eurozone Crack?" is the latest missive from the Centre for European Reform, a pro-euro think-tank with close ties to the European Commission.

"The single currency was supposed to bring Europe together, but it risks becoming a source of economic dislocation and political division," begins the report, a 59-page demolition of EMU by the centre's business chief, Simon Tilford.

"Italy is the country most likely to trigger a crisis. It is not far-fetched to imagine a scenario in which the country is forced to quit the single currency. It could easily force other members to quit the eurozone and could even precipitate the unravelling of the single market," the paper says.

The market correction/ pullback is playing out. Yahoo or no Yahoo, the market was due for a correction and so there is correction. Sometimes corrections are very scary, late bulls get butchered, shorts get over confident and then the market resumes in the intended direction.

While I watch and anticipate major Index moves, I make my money from individual stock plays. The individual stocks and sectors have a different rhythm and cycles and sometime when a correction get going a new set of of stock start their march forward or downward. So I have no hesitation in buying some stocks if they meet my criteria.

At a given time I have fewer than 25 stocks on my active buy list. Here is a small sample what I am watching currently IHR, MIG, CPY, MIGp, GEO, MEH, AEOS, SNTS, NRMX. I do not necessarily buy breakouts, most times I have buy stops on some stocks selected based on my criteria. That way I can go about doing other things while the market takes care of itself.

Are you lost in the technical analysis jungle follow up

A reader has asked why I think How Charts Can Help You in the Stock Market by William L. Jiler is better than the three of the most popular books on technical analysis:

Technical Analysis of Stock Trends by Edwards and Magee

Technical Analysis of the Financial Markets by John J Murphy

Encyclopedia of Chart Patterns by Thomas N. Bulkowski

I have read all three and can say with great amount of conviction that Jiller book is hundred times better than these three tomes. Now that is my opinion you can test it for yourself. The book is less than the cost of commission you will pay on a trade. It has 200 pages and you can finish it in few hours. It is more geared towards trading. Popularity of a book does not mean the ideas in it will be profitable.

The markets are witnessing much needed and much anticipated correction. At individual stock level there are some good opportunities. Even if the market turns negative from here, it will take some time for the momentum to play itself out before that happens. I am finding lot of ideas in my scan. Two new positions I opened today are GSTL and MFRI and I have some retail plays also on the radar.

Are you lost in the technical analysis jungle

There are hundreds of way to make money in the stock market, but the one which has the largest following is technical analysis. If you search Amazon database on investing, you will notice more books on technical analysis that any other topic. There are hundreds of newsletters dedicated to the art of technical analysis and chart reading. Most of them offer a very simple way to interpret the market and offer promises of riches.

Most traders and especially beginner traders are completely lost in the technical analysis jungle. It is difficult for them to accept any other interpretation of market. I know of people who everyday evening go through over 2000 charts or more in search of their esoteric patterns. Most beginner traders get hijacked by technical analyst and some of them are lost forever to the dark arts of technical analysis.

If you have noticed much of the Wall Street big money houses have over last 5-6 years retired or sacked their technical analyst heads. Much of the work is being now done by quantitative tools. But the cult of technical analysis continues to grow.

If you want to escape that trap look at some of the quantitative approaches to making money. Even if you have to follow technical analysis, use a quantitative method to select stocks and then apply your chart reading patterns.

Now if you want to understand technical analysis there is no shortage of books on it. I have read most of them. I can identify most of the common and some very esoteric patterns but I seldom use them in my trading. If I have to recommend only one book on technical analysis, I would recommend, How Charts Can Help You in the Stock Market by William L. Jiler. One of my very profitable quantitative scan idea is based on one of the ideas in that book.



I will also talk about a entire trading and scanning approach in my next post in the series on How to narrow the number of breakouts. It is a completely quantitative approach to trading and uses quantitative scans to find good patterns and if you trade it you might beat the best trained technician by a wide margin. But for that you will have to find your way out of the technical analysis jungle first.

Market themes

• Markets next big theme will be upcoming earnings season. Expect many stocks to start creeping up in anticipation of good earnings.
• Brokers/ retail seems to be the developing theme. Every single retail group is experiencing money flow.
  
• Tobacco may not be injurious to your portfolio.
• The long written off Radio sector may be gearing up for some sound action. Number of other media sectors are stirring up as well.
  
• The technicians are discovering Google ( GOOG) now after 35 point rally. But they can not agree on whether it is coiling, forming quadruple top, hitting resistance, has falling wedge, or it has a cup with double handle. It is good that I am not a technician.
  
• The Apple share fans think I am an idiot, part of the naked short selling conspiracy, Microsoft fan etc etc. The largest number of hate mail I have received so far for the post-Apple may be ready for a fall. The housing stocks long was the previous record.
  

Steel and Iron finds a bid

It should not have been a surprise for many of you to see the steel and Iron sector rallying today. For a week or so I have been anticipating the turn in this sector. Some of the stocks in this sector have very good earnings and some of them are setting up for a further up move. Keep an eye on this sector.

Scan 2 year growth

In my previous post I talked about Apple and how it showed up on my short scan. If you want to set up a similar scan here is how you can set it up easily in TC2007.

C >= 3 * (MINL540 + .01)
Today's close is 3 times the minimum price in two years. The assumption is there are 270 trading days in a year. The .01 is added to avoid error in calculation if a stock has not traded for a day or traded at 0.

The additional conditions are :
1 Price>10
In reality I prefer stocks above 40 for short selling.

2 Float is above 70 million.
I prefer stocks with very high floats. When the large tankers start rolling over there are large number of holders to accentuate the move. As a general observation they have a smoother ride down.

This is the basic outline of the scan and the central idea behind it. My actual scan has few more bells and whistle and some tactical tweaks to narrow this down even further to less number of candidates. As of Friday data it showed 37 candidates. Not all of them make good shorts but there are 5 good ideas in that list which might offer good set ups if the market takes a tumble.

AAPL,Apple Computer Inc
AKAM,Akamai Technologies Inc
AMLN,Amylin Pharmaceuticals
AMR,Amr Corporation
AQNT,Aquantive Inc
ARRS,Arris Group Inc
ATI,Allegheny Technologies
BMRN,Biomarin Pharmaceuticals
BWNG,Broadwing Corp
CAL,Continental Airlines B
CBG,Cb Richard Ellis Svcs
CELG,Celgene Corp
CRM,Salesforce.com Inc
CVA,Covanta Holding Corp
CWTR,Coldwater Creek Inc
DO,Diamond Offshre Drilling
FSL,Freescale Semiconductor Inc
FTO,Frontier Oil Corp
GLBL,Global Industries Ltd
HANS,Hansen Natural Corp
HUM,Humana Inc
JOYG,Joy Global Inc
LCC,US Airways Group Inc
MDR,Mcdermott Internat Inc
NDAQ,Nasdaq Stock Market Inc
NIHD,NII Holdings Inc
NVDA,NVIDIA Corporation
PWR,Quanta Services Inc
SBAC,Sba Communications Corp
SWN,Southwestern Energy Co
TIE,Titanium Metals Corp New
TWTC,Time Warner Telecom Inc
TXU,TXU Corp
USG,Usg Corp
VLO,Valero Energy Corp
VRTX,Vertex Pharmaceuticals
WFR,Memc Electronic Material


Even though I am illustrating some of these ideas inTC2007, my actual scans are on my own software. I use TC2007 more as a market data source and a good programme to store my watchlists. There are certain shortcomings in most programmes. One of the problem in the scan I illustrated above is that it requires 540 days of data. Now stocks which have less than 540 days of data also have 300 plus moves. These stocks do not get reflected in this scan. My software avoids all these kind of problem, plus it is lightning fast. If you run this scan in TC2007 it takes lot of time and slows down the process.

Now this same scan you can use to find long candidates.( That is how I found AKAM and GOOG recently) As they say the trend is your friend till it bends.

Apple may be ready for a fall

Keep an eye on Apple. There was nothing new in the recent announcements.Nothing with must have or buy it now appeal. Future products are not coming in to the market today. All the good news is priced in. Apple may be set for a fall.

Now this stock came from one of my scans. The scan looks for mean reversion based on price growth in large cap and large float stocks. It basically looks at large cap stocks up over 300% in last two year. Apple is up about 500% in last two years. The other recent short signals from this scan were VLO and TXU. In my experience trading on short side is tough and comparatively lower expectancy game. Plus there is always the problem of availability of shorts. This scan has a good track record and it avoids the liquidity problem.

How to narrow the number of breakouts- Part 2

Warning: Mostly for beginners and those asking for specific picks. Most of the discussion relates to TC2007. The advanced traders might want to skip it.
The earlier discussion on this is here.
How to narrow the number of breakouts- Part 1


Investor Business Daily CANSLIM method

There are many other ways of doing this same thing. If you compare the result of the Relative Strength vs S&P scan in TC2007 to Investors Business Daily Relative Strength or RPS you will find it does not exactly match. The exact IBD formula according to them is proprietary, but in some of the early books there are lot of hints that it is a weighted average of 1/2/3/4 quarters with different weightage. Now here is a formula to get similar RPS ranking.

IBD style RPS scan:
0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260)

Here is what you will get with a top 2% sort. (MWRK, SWHC, IIP, AKAM, TAR, SVVS, RICK)

The Investors Business Daily CANSLIM methodology is basically a combination of Earning momentum and Price momentum at a conceptual level. There are other element to it like market direction filter but why it works is basically it buys stocks with earning and price momentum. If you want to use it you can use the IBD EPS ranking feature to reduce your universe of stocks further.

There is also a way to do a IBD kind earning+relative strength momentum scan in TC2007. ( Note: The earning data in TC2007 has certain deficiencies and it is not to best of my knowledge updated daily. There is a batch update). Here is a scan idea which you can experiment with.

Set up a Easyscan with following conditions:

1. Watchlist: All stocks
2. EPS percent change 4 th quarter back value> 25%
3. EPS percent change 3 rd quarter back value> 25%
4. EPS percent change 2 nd quarter back value>25%
5. EPS percent change latest quarter value>25%
6. IBD style RPS scan rank ( 0.4 * (C * 100 / C65) + 0.2 * (C * 100 / C130) + 0.2 * (C * 100 / C195) + 0.2 * (C * 100 / C260))>80
7. Long scan ( V >= (2 * AVGV30.1) AND C >= (C1 + .25) AND AVGC20 * AVGV20 >= 2500 )= true


Here is what you will get with this scan. (PZZA, CACB, GRC, AB, NPK). Everyone loves pizza!

The EPS ranking you see in IBD is also a weighted average of past earning growth. With some sleuthing (hint use Google) you can find out how it is calculated. Alternatively use the IBD 200 list which appears on I think Thursday. So in simple term when you see large number of breakout, narrow them down by a fundamental criteria like EPS rating. So you might decide to only look at IBD EPS rank above 80 out of the breakout you get.

Now if you believe in the IBD logic, you can take this entire approach further. Build your own earning database . Once you have that, you may not wait for a breakout, you might be able to anticipate them. You will have less than 100 stocks to watch. You will know in advance which stocks are going to be in IBD 100 list before the newspaper hits stand. Imagine tomorrows newspaper delivered today or days in advance. What else do you want with it-free fries or pizza?

In part 3 we will see another more powerful method to narrow your breakout list to just a handful. You may have to wait for it till next week as I am going to enjoy the beautiful New Jersey weather . We are having a barbecue picnic at the Mercer Park. Join in.

How to narrow the number of breakouts- Part 1

Warning: Mostly for beginners and those asking for specific picks. Most of the discussion relates to TC2007. The advanced traders might want to skip it.
The earlier discussion on this is here.

Last week we looked at the long and short breakout in TC2007. If you used that scan on Friday you would get 342 long and 179 short breakouts. Now you have too many ideas to play around with. Now the question is which one should I take. The obvious answers is that which will make the highest profit in the shortest possible time. We will look at couple of approaches to reduce the universe and scans for them.( Note: When I see 300+ breakout, I always feel correction is due. When you start using this scan daily and backtest it over long period you will understand why)

The simplest method to reduce the trading universe is by sorting the stocks based on momentum. Investors Business Daily calls this Relative Strength. Relative Strength basically tells you how a stock is performing relative to an Index. The simplest calculation involves dividing the price performance by an index like S&P for same period. Now this kind of indicator is already built in toTC2007. You will find it under 'System Sorts'(Relative Strength 1-yr(vs S&P500)). You might decide to take only the top 20% or 10% or 2%.

For example if you used top 2% for Relative Strength 1-yr(vs S&P500)you will get only seven breakout to work with. MWRK, IIP, AKAM, RICK, FMD, SWHC, TWTC. (I am sure 99% male will like RICK breakout!! Who doesn't like Cabaret?)

Now there are many other way to find momentum. You can improve your results dramatically by finding a right momentum sort. Now here are some more you can try within TC2007 pre packaged sort. All examples in bracket are taking top 2% and from Friday 15th Sept 2006.

• 30 day price trend vs market (SWHC, TAR,WLM)
  
• Price-1 year range (MWRK, IBKC, PNFP, PZZA, NWN, AKAM, WEBX, IOSP, FMD)
  
• Price-3 year range (MWRK, IBKC, PNFP, PZZA, AKAM, WEBX, PSA, UIL, UMBF, NETC)
• Price as % of 52 week high (MWRK, IBKC, PNFP, NWN, PZZA, UMBF, BUSE, CNF)
• Price as % of 90 day high (MWRK, IBKC, NHI, ALFA, VGR, FFH, SMTS, TNCC, PHI, PNFP, NWN, SKP, HMN)
• Price Growth Rate 1-yr (MWRK, IIP, SVVS, AKAM, RICK)
• Price Growth Rate 2-yr (TWTC, SWHC, PRLS)
  
• Price Growth Rate 3-YR (LNG, RIV)

• Price Growth Rate 5-yr (AKAM, RIV, CRDN, RIMM, LNG)
• Price vs 200 day moving average (SWHC, MWRK, CRVL, TAR, IIP, AKAM, FMD, SUNH, AUXL)
• Price vs 40 day moving average (SWHC, MWRK, CRVL, IIP, FMD, AUXL, IIVI, FFH, ARDI, LBY, CAMD, WLM)

All these scan are some way of using momentum to reduce your universe. Now if you use any of these scans consistently and use little bit of gray matter you will find ideas every day. I am even willing to challenge that if you rigorously use any of these scan over a year and marry it with a good risk management you will beat the street. Anyone for a USD 100 wager. Much of the discussion after this is how to look at some more advanced momentum based ideas. It will focus on finding the very best of the best stocks and buy them on or before breakout. Caution, it might be dangerous for your portfolio returns!

I am in the process of shifting office and computers so the next parts may get delayed. I have been preparing this post in Writely and I like that programme a lot.Not a bad idea to keep an eye on Google.

I just noticed the increased traffic is coming from BannRonn. They have added this blog to their list. Looks like a good contrary signal! Short Easyguru.

Market is headed higher

This is my ahead of the curve analysis.

We are at an early stage of an up move. The first stage was marked by sector rotation out of commodities and energy sector in to sectors like Retail/consumer, financial and technology. Some stocks have moved too far to fast. The market will have a correction, it will scare most bulls and embolden many bears.

Once the correction is over the market will resume its up leg. This correction will create good set ups for entries in to number of stocks. The correction will create bull flags and cup with handles. There are also lots of double bottoms and triple bottoms kind of setups forming.

New set of stocks and sectors are already in the process of assuming leadership. Sectors like brokers, restaurants, retail,software/technology have had broad based break outs. So these sectors will have further set of rallies. Market is anticipating good earnings from these sectors. If a market is about to break down, these sectors
will not be rallying.


Post earnings there will be lot of good breakouts. Many of the stocks are setting up for post earnings breakout.The best performing stock during this phase will be again the good earnings/sales play. There will be more sectors breaking out. Once momentum gets going, it takes many months for it to reverse.

The market is a discounting mechanism. It has fully discounted the possible bearish scenarios and probably sees no risk of immediate breakdown or plunge. The rally which started in 2002 may have some more legs. The markets may top with a bang.

Every pullback is a buy opportunity. I am keeping my list of top 25 opportunities ready. Three cheers for the resilient American economy.

Do not trade based on this scenario. This is all part of the Fed/ Bush/Cheney/Rove/ Republican/Democrats/Martian/ left wing/right wing/billionaires/ Goldman Sachs/Gold haters/credit card companies conspiracy!!!!! Sales of Head and Shoulder are set to rise as bearish analyst are left scratching their head.

If you want good analysis head outside of USA

There is no shortage of analysis about what is happening in the economy and the market. Newspapers, TV channels, Magazines and blogs have so many analyst and op-ed writers offering their take on market and economy. But if you are looking for good insights head outside of USA.

The USA analyst and market commentators suffer from overdose of marketing think. Most analyst are salesman first ( pitching their books, newsletters or consultancy services). Analysis is just a tool to market themselves.

The other big problem is that the media is so polarised now ,that most of what you read is propaganda. I can summarise a Paul Krugman column on any topic in one line- Bush is evil. No matter what the topic is it all boils down to that. Most other newspapers are also in the same league. Most of what passes as economic analysis is big harangue about how Bush is evil or how America is doomed, how an average American is incapable of making any correct decision, how America is losing its competitiveness and so on. In short everything is wrong with America. That is an opinion not an analysis.

If you want good analysis read some of the British and international publications. They are more balanced and offer different perspective. Every day I read the British newspapers, they have some of the best commentary. The Economist in my opinion is one of the best magazine to read for getting a global view.

My daily reading list:
FT
Guardian
Telegraph
The Times
The Moscow Times
The Australian
Business Times

Market Guru Marc Faber feels Nasdaq100 has upside potential

Marc Faber the author of Tomorrow's Gold: Asia's Age of Discovery is one analyst I track regularly. He has a good grip on the long term trends in market. He is also ahead of many analyst in terms of making market calls on key sectors or country economies.He had a free monthly analysis of market on his site, which has now become paid. I do not subscribe to that newsletter, but you can get most of what he has to say for free as he is a frequent commentator in Asian media. The easiest way, I have found to keep track of some of these non US analyst is by using the wonderful service from Google Alert. Here is his latest take on the markets.

We had the dot.com boom 10-15 years ago and now we have seen a sort of resurgence in interest in technology, people are actually making money with the net business proposition, do you think it is here to stay?

Yes, I think so but I have to point out that I am not positive about technology from a fundamental or long-term point of view. I think what we have in the market is a strong group rotation at present and we have a lot of momentum playing.

The most attractive sector of the market right now, technically speaking, is the Nasdaq 100, which looks like it will break out on the upside and it is also the Index that has performed the poorest so far this year. So I would look at that as a trading opportunity. But as I said, I wouldn't now have a very high level of confidence in anything and that's why I am kind of standing on the sidelines for now.

Should you buy Gold stocks

A reader has asked whether I think the Gold stocks are a good buy here.

I have little experience in Gold stocks. I am willing to buy anything as long as it meets my EPS/sales or momentum criteria. Currently I do not see those stocks on my scan. I have no great fascination for Gold stock.

One thing I understand well is how to buy Gold. Every Indian is expert in this. I think the worlds largest buyers of Gold are Indians. No wedding in India is complete without large quantity of Gold being bought. Every major festival, every major event like birth of child is an excuse to buy gold. You will be astonished at the amount of Gold people in India have. They may be wearing torn clothes and have very simple house and lifestyle but may be having kilos of Gold at home. Go in to a small town and you will find at least couple of goldsmith shops.Rich or poor everyone has fascination for gold.

There are many housewives in India who buy Gold every month by forming kitty clubs called bhishi. So everyone will contribute every month say Rs 500 to 1000 and then one person will pick up the kitty and buy Gold next month next person will get the kitty. Some people buy just 2 grams or 3 grams per month. So when it comes to Gold they follow dollar cost averaging. It is a lifelong passion and everyone is an expert at buying it.

When I started my advertising career post my MBA, one of the clients I handled was Mehra Di-hatti one of the largest and the oldest jewellery shop in Delhi . I spent many days watching people buy gold in that shop. Everyday I used to be astonished by the amount of Gold people bought.

Market heading for correction

Too much of froth. Many gap ups. This market needs a serious scary correction. I am actively watching for signs of market hitting an air pocket.

Two weeks ago no one wanted to listen to possible bullish scenario. Now everyone is talking of Goldilocks. The obvious low risk bounce from bottom for many sectors and stocks trade which worked so well for couple of weeks is over.

Notice how the bearish commentators for past week have been scratching their head as if they had bad bout of dandruff. Some even talked of deflation (Grandma talked about it weeks ago). No more 20 posts in day scaring you about impending collapse, crash in housing, inflation, oil to 100 USD and so on.

It is time for rest and retreat for market.

Conspiracy theory summary

The site Nobooyahzone has neat summary of all the conspiracy theories. Some of the top 40 blogs on Instantbull have daily news conspiracy theories. That might explain why they are so popular!


Tuesday September 12th, 9 PM

* Conspiracy theory: market ramping up to draw in more money to Wall Street so Wall Street can make more money managing it.
* Conspiracy theory: market ramping to offset the loss in wealth due to the deflation of the housing bubble.
* Conspiracy theory: market ramping to improve Republican chances of a win in November.
* Conspiracy theory: oil and gas plunging to improve Republican chances of a win in November.
* Conspiracy theory: oil and gas plunging to stick it to Iran that doesn't make a dime doing anything other than selling oil.

Long and short scan

Some of you are having problem with the TC2007 scans I talked about yesterday. Most of the time it is due to gap between formula when you copy and paste it. If you remove gaps it should work. Otherwise send me a mail. There is also a very helpful TC2007 forum on Yahoo. You will find tons of information/formulas/trouble shooting information there and some very helpful members. If you go through the archive you should find ready made formulas for most of the well known systems. Lot of these are sold as newsletter picks by gurus for a price. Be careful you may end up the entire weekend digging through it. That stuff is addictive.

If your formula is right you should get following results for long and short scans.

Long Scan:
V >= (2 * AVGV30.1) AND C >= (C1 + .25) AND AVGC20 * AVGV20 >= 2500

AGR,Agere Systems
AKAM,Akamai Technologies Inc
ANSW,Answers Corp
ANZ,Australigen Idec Inc
APCC,American Power Conversn
APN,Applica Inc
ASFI,Asta Funding Inc
ASH,Ashland Inc
ATCO,American Techology Corp
BBBY,Bed Bath & Beyond Inc
BJRI,BJ's Restaurants Inc
BKR,Michael Baker Corp
BLUD,Immucor Inc
BOKF,Bok Financial Corp
BRG,Bg Plc
BSC,Bear Stearns Companies
CBJ,Cambior Inc
CCRT,Compucredit Corporation
CETV,Central European Media
CHIC,Charlotte Russe Hldg Inc
COT,Cott Corporation
CSB,Ciba Specialty Chem Hldg
DIOD,Diodes Inc
DLLR,Dollar Financial
DST,Dst Systems Inc
ELOY,Eloyalty Corp
EMIS,Emisphere Technologies
ENDP,Endo Pharmaceuticals Hld
ENSI,Energysouth Inc
EZEM,E-z Em Inc
FADV,First Advantage Corp Cl A
FDO,Family Dollar Stores Inc
FFH,Fairfax Financial Holdings
FSL.B,Freescale Semiconductor Cl B
GD,General Dynamics Corp
GENZ,Genzyme Corporation
GEOI,Georesources Inc
GGY,Compagnie Generale De Ge
GLYT,Genlyte Group Inc
GYI,Getty Images Inc
HANS,Hansen Natural Corp
HAUP,Hauppauge Digital Inc
HW,Headwaters Inc
IEX,Idex Corp
INPH,Interphase Corp
IRBT,iRobot Corp
ISIG,Insignia Systems Inc
KNDL,Kendle Internat Inc
LCRD,Lasercard Corporation
LVLT,Level 3 Communications
MBI,Mbia Inc
MOGN,Mgi Pharma Inc
MSM,MSC Industrial Direct Co Inc
MTD,Mettler Toledo Intl Inc
MWRK,Mothers Work Inc
MWY,Midway Games Inc
NFLD,Northfield Laboratories
NMRX,Numerex Corp Cl A Pa
NSANY,Nissan Motor Co Ltd Adr
NURO,NeuroMetrix Inc
NWK,Network Equipment Tech
NXL,New Plan Excel Realty Tr
OIIM,O2Micro International Ltd
ORH,Odyssey Re Holdings
OTT,Otelco
PATR,Patriot Transportaion
PENN,Penn National Gaming Inc
PLCE,Children's Place Rtl Str
PLL,Pall Corp
PPC,Pilgrim's Pride Corp
PRGX,Prg-schultz Intl Inc
PRXL,Parexel Internat Cp
PSPT,Peoplesupport Inc
PSYS,Psychiatric Solutions Inc
QUIK,Quicklogic Corporation
RWC,RELM Wireless Corporation
SAFM,Sanderson Farms Inc
SBSI,Southside Bancshares Inc
SHW,Sherwin-Williams Co
SOV,Sovereign Bancorp Inc
SWKS,Skyworks Solutions Inc
TALK,Talk America Holdings Inc
TAM,TAM S.A. ADR
TAP,Molson Coors Brewing Co
TCB,Tcf Financial Corp
TNH,Terra Nitrogen Co L.P.
TRU,Torch Energy Roy Tr
TV,Grupo Televisa Sa Gdr
TWGP,Tower Grp Inc
UCTT,Ultra Clean Holdings
UIL,Uil Holdings Corp
UU,United Utilities Plc
VIVO,Meridian Bioscience Inc
VLTR,Volterra Semiconductor Corp
VRGY,Verigy Ltd
WITS,Witness Systems Inc
XLNX,Xilinx Inc
XMSR,Xm Satellite Radio Hldgs
ZZ,Sealy Corp

Short Scan:
V >= 2 * AVGV30.1 AND C <= (C1 - .25) AND AVGC20 * AVGV20 >= 2500

ACI,Arch Coal Inc
ACV,Alberto-Culver Cl B
ACXM,Acxiom Corp
AHD,Atlas Pipeline Holdings LP
AIN,Albany International A
ALFA,Alfa Corp
ALO,Alpharma Inc
ALTH,Allos Therapeutics Inc.
ARC,Affordable Residential Comm
ARXT,Adams Respiratory Therapeutics Inc
ATW,Atwood Oceanics Inc
BBG,Bill Barrett Corp
BN,Banta Corp
BOBJ,Business Objects S A
BRC,Brady Corporation Cl A
BRS,Bristow Group Inc
BTU,Peabody Energy
BYI,Bally Technologies Inc
CBL,Cbl & Assoc Properties
CKEC,Carmike Cinemas
CLB,Core Laboratories N.V.
CMLS,Cumulus Media Inc
CMZ,Compton Petroleum Corp
CNQ,Canadian Natural Res Ltd
CORE,Core-Mark Holding Company Inc
CRH,CRH Plc
CXG,CNX Gas Corp
DGICA,Donegal Group Inc Class A
DOM,Dominion Rsc Blck War Tr
ELK,Elkcorp
ESL,Esterline Technology Cp
FLI,Chc Helicopter Cp Cl A
FNET,FortuNet
FRT,Federal Realty Investmnt
GFI,Gold Fields Ltd Adr
GLO,Clough Global Opportunities Fund
GME.B,Gamestop Corp Class B
GRB,Gerber Scientific Inc
GW,Grey Wolf Inc
HAN,Hanson P
HELE,Helen Of Troy Ltd
HEP,Holly Energy Partners LP
HERO,Hercules Offshore Inc
HES,Hess Corp
HNBC,Harleysville National Cp
IAG,Iamgold Corp
ICO,International Coal Group Inc
IP,Internat Paper Co
JRC,Journal Register Co
KPA,Innkeepers Usa Trust
KRC,Kilroy Realty Corp
KV-A,Kv Pharmaceutical Cl A
LSCC,Lattice Semiconductor Cp
MDP,Meredith Corp
MEAS,Measurement Specialities
NAI,Nicholas-Applegate International & Premium Strategy Fund
NBR,Nabors Industries Inc
NFB,North Fork Bancorp Ny
NKTR,Nektar Therapeutics
NTGR,Netgear
PDE,Pride Internat Inc
PNFP,Pinnacle Finacial Partners
PTEN,Patterson-Uti Energy Inc
RCRC,Rc2 Corp
RFIL,Rf Industries Ltd
STLY,Stanley Furniture Inc
STRL,Sterling Construction Comp Inc
SURG,Synergetics USA Inc
TAR,Telefonica De Argentina
TI,Telecom Italia Spa Ads
TONS,Novamerican Steel Inc
TPX,Tempur-pedic Intl
TRE,Tanzanian Royalty Exploration Corp
TWI,Titan Internat Inc
TWTC,Time Warner Telecom Inc
TYY,Tortoise Energy Capital Corp
UTH,HOLDRS Utilities ETF
VITL,Vital Signs Inc
VMSI,Ventana Medical Systems
VOL,Volt Info Sciences Inc
VTR,Ventas
WBS,Webster Financial Corp
WMB,Williams Companies Inc
WTFC,Wintrust Financial Corp
WTNY,Whitney Holding Corp
XCO,EXCO Resources Inc
XEC,Cimarex Energy Inc

Now you should find so many good trading ideas from this list. Above all you can do it yourself daily. So next we will look at reducing this universe to handful of stocks with best potential.

A breakout scan

Instead of naming specific stocks, lets look at the scan I use in TC2007 to get my list of stocks.

The basic idea behind breakout is to find stock experiencing range and volume expansion. There are many ways to scan for this and I am sure there will be lot of disagreement about how to do it. But anyway here are two simple scans for finding long and short ideas. This will also answer all those sending mail asking for specific stocks. All these scans are for those using TC2007.But the logic should apply in any programme.

Long Scan:
V >= (2 * AVGV30.1) AND C >= (C1 + .25) AND AVGC20 * AVGV20 >= 2500


Short Scan:
V >= 2 * AVGV30.1 AND C <= (C1 - .25) AND AVGC20 * AVGV20 >= 2500

Now if you run these scans today you will get 99 stocks in long scan and 87 in short scan.

You can use relative strength filter to look at reducing the universe. If you are a chart pattern kind traders you can eliminate using patterns.

Buying high volume breakout works under certain market circumstances. There is a large school of thought which says buying breakout does not work. My testing and experience shows it works on certain stocks selected based on fundamental or momentum criteria.

I personally sometime buy breakout, sometime pullbacks, sometime put buy stops in anticipation of breakouts.Lot of my success is due to stock selection methodology. If you select stocks with high probability of making a significant move, the entry method or criteria plays small role.I am not a big believer in chart patterns.

Note: Tomorrow we will look at how to reduce the trading universe.

Instantbull- one stop source of market information

Earlier I wrote about Instantbull featuring this site. I have become a great fan of Instantbull. Everyday I head to it to read multiple blogs, all the stock market related sites , all the daily news and all financial news. The beauty is all this you can do it in single window, no need for multiple tabs in your browser. The other thing is that the site is lightening fast. It has become my one stop source of market information. First thing in the morning I visit it to get a complete overview.

The site has Q&A style interview with CEO, Gal Arav.It offers interesting behind the scene look at what drives the site and the technology behind it. There is a link at top right of InstantBull's homepage.

Tell me what www.InstantBull.com is, who uses it, and how they use it.
CEO Gal Arav: InstantBull.com is a free website that just launched at the end of July and serves as a "lightning fast" interface to the world of stock market investing. There are 3 main types of information that we aggregate: Stock Message Boards, Stock Market Blogs and Investor Portal Information. Thousands of investors have already adopted InstantBull.com - from amateurs to professionals, and from day-traders to long-term investors. Users are telling us that they are delighted to be able to use our technology to quickly view all their favorite websites without having to open up multiple browser windows.

Read the rest on the site. Very fascinating. Wall Street Journal should be worried.

The market is having on orderly pullback/correction after a strong move up. Some stocks which were rallying for many weeks like TAR are down. But there are also fresh set of breakouts like DLLR, ISIG, DIOD, BLUD, DST, TAM, etc. I have positions in some of these.

This site has been added to Instantbull in New/interesting category. I am noticing more people visiting it from that site.

For some strange reason the Phatinvestor has stopped updating this site for last 14 days. I smell a huge conspiracy!!

Creating a database

Let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.
You cannot wisely read a book on "How to keep fit" and leave the physical exercise to another. Nor can you delegate to another the task of keeping your records.
How to Trade In Stocks by Jesse Livermore

A reader has asked how to generate trading ideas on regular basis.
On a regular basis I maintain few databases from which most of my trading ideas come.

1 Earnings database
This is a database of top 2% earning performer every quarter. This is primarily my source of finding trades which have potential to make 100% plus kind of moves.

2 Sales database
Similar to earnings database this contains top 2% sales performer with quarterly sales over 10 million. I have found that most of the super performer for year, stock which make 300% kind of moves or 10 baggers come from the above two list.

3 Momentum database
This is a database of top 2% stock selected based on their price momentum. This list contains many from the earning and sales list but also many speculative stocks or special situations where the stock price is going up for reason not directly attributable to either earnings or sales.

4 Virgin Stock database
This is a list of stocks which have never rallied beyond their IPO price. You know virgins are always in demand in all culture. When these stocks start a move probability of them having a smooth move is very high. They are the kind of below the radar play no one on the street is tracking and make great moves. I always find ideas amongst these group when nothing is working.

5 Breakout Long
Stocks which had recent breakouts from my above databases.

6 Breakout short
Mostly large cap stocks with possibility of breaking down. I added WAG to this list yesterday. Shorts often work out much later after the kind of high volume action seen on WAG. Big fuck ups are always easy to trade on short side plus you don't have problem of stock availability.

7 Market learning/strategies database
This is an extensive database of all strategies I have developed using data mining. It includes every strategy I have researched at some time. Lessons learned from hundreds of books on trading or market. There are unique insights from sector wise learning. Certain sector are best bought at 52 week low while some at 52 week high. What is normally the process of market turns, which sectors lead, which lag, which have a potential for large move.This is a continuously updated documents with insights updated and added frequently. I refer to this document daily.

The market has ever changing cycles but some things work again and again.

Where is the smart money flowing

If you look at the sectors closely you will notice that there has been large scale buying in some of these groups. The buying happened before the rally started. Some of these sectors will accelerate at some stage. I am keeping a close watch on some of the stocks in this sector which have high momentum. Retailers rallying is always a good sign. I would like to see Internet sector in this group. That sector has been the market leader for last 3-4 years.

Even though I look at sectors on daily basis, bulk of the time I have found it is better to keep an eye on the individual stocks. Many times individual stocks rally before a broad based sector rally or some time that stock has a catalyst which rest of the stocks in the sector lack. For example look at HANS or NTRI in last two years.

MG527,Home Health Care
MG741,Sporting Goods Stores
MG815,Networking & Comm Dev
MG832,Semiconductor-Memory Chips
MG843,Processing Systems & Products
MG328,Office Supplies
MG527,Home Health Care
MG739,Catalog & Mail Order Houses
MG741,Sporting Goods Stores
MG815,Networking & Comm Dev
MG832,Semiconductor-Memory Chips
MG342,Farm Products
MG345,Dairy Products
MG443,Reit-Healthcare Facilities
MG446,Reit-Residential
MG731,Department Stores
MG821,Multimedia & Graphics Software
MG845,Telecom Services-Domestic

No lack of good ideas

Market does not go up in a straight line. So I am expecting a sideways move or a pullback . It might be a pullback of long duration. However I am finding lot of good trades which I can hold for long period. Till now my approach was to look for low risk few days kind of trade. But now I am finding the kind of stocks which move for weeks or months.

There is a considerable amount of skepticism by bears about this rally. Many are saying this will end in a flash. Well we will see how it ends. Let the bears put their money where their mouth is, I will play it from long side till I find compelling evidence that it is not working. Everyone has a different view on the market based on their pet theories and experience. All I see is that high volume breakouts like these do not happen just few days before a market is about to break down. As they say in Hindi- pata nahi yeh bear log kis chakki ka ata khate hain.

As always these are not buy recommendations. Do not trade based on what I say. Some of these stocks have already made their move. Not every one of them is going to make multi week move but if you use some EPS/ sales/ momentum filter, you should find some interesting candidates. Many of them will have some sort of correction/bull flag/ pullback to offer a low risk entry point.

AB,Alliance Bernstein Holding LP
BLK,Blackrock Incorporated
BSC,Bear Stearns Companies
DECK,Deckers Outdoor Corp
EAT,Brinker International
FD,Federated Department Stores
FISV,Fiserv Inc
FMX,Fomento Economico Mex
GOL,Gollinhas Aereas Inteligentes
GOOG,Google
GROW,U.S. Global Invest Inc A
HOS,Hornbeck Offshore Services Inc
JWN,Nordstrom Inc
LAZ,Lazard Ltd
LEH,Lehman Brothers Holdings Inc
LM,Legg Mason Inc
LNN,Lindsay Manufacturing Co
OMC,Omnicom Group Inc
PLMD,Polymedica Corp
TAM,TAM S.A. ADR
USG,Usg Corp
USNA,Usana Health Science Inc
WFR,Memc Electronic Material

There are also some shorts appearing on my screen. But not chasing them at this stage. There are enough opportunities on long side till this rally plays itself out.

Note: Will someone who understand the Hindi phrase translate it for our non Hindi speaking audience. Put it in comments.

What will be the markets new theme

A pullback or sideways action would be good for further gains. The market will turn its attention very soon to the next earning season. Expect breakouts in anticipation of good earnings.

Stocks which have not responded to good earning in last quarter due to overall market negativity will start to breakout or accelerate their moves before earning.

The earning trends continue to show no hint of rcession in near future.

Earnings growth for the S&P 500 is expected to remain solid for both this year and next, on both a median firm basis and on a total net income basis. On a median basis, growth for both the current and next fiscal year is expected to be 12.80%. Both growth rates have held steady over the last several weeks. On a total earnings basis, the growth rates are more skewed towards this year, at 15.2% versus 10.4% next year. While the total growth rate is certainly predicted to slow, by no means is a 10.4% year-over-year growth rate tantamount to predicting a near term recession.

We would point to one methodological point however, which could be inflating the expected growth rates. The rates are based on the forecasts of EPS, and then multiplied by current shares outstanding to get total earnings. Recently firms have been pumping enormous, and unprecedented, sums into share repurchase. In the first half, over $216 billion was spent by S&P 500 firms to buy back their own stock. The shrinks the number of shares outstanding and boosts the EPS growth rate. Add in dividends paid out and over 80% of earnings were returned to shareholders rather than reinvested by the companies.

How Legendary Traders Made Millions

I have been reading How Legendary Traders Made Millions by John Boik and now half way through it. It is an interesting book about history of stock market and some of the greatest traders in the market.

The book describes in detail each decade in the stock market, what happened during the decade in market, what were the major events, and how the market reacted to them. It covers a 100 year period. This is juxtaposed with some of the successful traders strategies during that time.

The book would have done better with a more crisper editing , but if you ignore that, it has very good content and some good ideas. I will have more about the book once I finish reading it.

I found this interesting letter on Victor Niederhoffer site.

A letter from Donald J. Boudreaux to the New York Post
Dear Editor:

Falling gasoline prices are indeed welcome economic news ("It's a Gas! Pump Prices Fall to 6-Month Low," Sept. 13). But I worry about what these falling prices reveal about the ethics of American motorists. If rising gasoline prices are caused - as so many pundits and pols allege - by the greed of oil companies, must it not be true that falling prices are caused by the greed of consumers?

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

Why did the market rally

A 100 point rally in Dow Jones and everyone is out with an explanation as to why the market rallied. Now this rally was noticed yesterday but it was in works since mid July. Sector after sector stabilised. Market and certain sectors stopped reacting to more bad news.Sector like oil and energy was being slowly distributed to enthusiastic late stage buyers who believed in the inflation and 100 USD oil myth. On a more practical level if you were data mining, you could figure out emerging strength. All this was happening while the chorus of bearishness was rising.

Now if you look at what is the explanation being offered it ranges from simplistic to absurd. If you read the newspapers it is attributed to fall in oil. Some bearish commentators are out dismissing it as just short covering rally. Some are blaming the hedge fund. When in doubt blame the hedge funds. It always appeals to the masses.

At the other extreme , I read with lot of interest the explanation for yesterdays gain as vast Fed conspiracy. Now it is on a blog which is extremely popular probably one of the most popular trading blog. So according to this market guru the Fed controls everything and it decides to take gold down, drive equities up and sells oil. It is one huge Matrix controlled by the Fed and the evil Bush administration.(Hey Ben Bernanke can you send the girl in the red here please)

If you believe this kind of non sense , you should stop trading. What is the point of trying to go against the Matrix. How come this is still a secret. Why is it not on the front page of the liberal rag-The New York Times. Can you imagine a secret programme run by Bush to manipulate the market and Bill Keller is not even aware of it. Probably he is also part of this vast controversy.

Denial ain't just a river in Egypt.

The secret newsletter

I am also watching shipping. The triple witching season will make trading a tad tricky but there are some very good opportunities that I am finding. Many things that have broken out of long term ranges will have legs. There will be pullbacks along the way but you can not always count on them.

The strategy of anticipating what sector is likely to be in play is working. Expect more sectors to stabilise and sectors with heavy short interest to offer some good squeeze opportunities.

I have number of emails asking for specific stocks, but I do not want to get in to it for various reason. The most important being is the methodology is important not the specific stock. Second everyone has different risk profile. Third I might get better execution or might be already in the stock. I may exit positions and may not talk about them here.

When I talk about sector I am referring to sectors as defined by TC2007 database. So when I say transport it includes Airline,, Air freight, Trucking and Railroads. Those who have tc2007 know what I am talking about. Some databases have different stocks under Transport.

As always do not trade based on anything written here. And there is no newsletter service I offer. This is not one elaborate ploy to get you to sign up for it. There are no secrets, everything is what it is, some of the old posts contain many details about methodology.

One more thing no more Paris Hilton P**** and Anna Kournikova boobs. I am shorting them. Looking for new babes to go long!! Your suggestions are welcome.

I am watching the metals for possible bounce today. The metal stock that are still clinging to their top of the range may find some buyers today.

Cryptic clues

Hot hot hot

Any gap up tomorrow will be aggressively sold.

Very few easy bounce like Transport and brokers remaining. But there are some I am excited about for tomorrow.

Retail is hot. Technology is hot. Lodging is hot.Even housing stocks are hot. Cubans and Puerto Ricans are hot!!

Biotech should join the party at some point.

At individual stock level, there is no risk in buying good set ups.

All the major bears are married to a thesis and would rather be proven right than make money.

Stock selection will again pay rich dividend. Look for Earning and sales out performers and sectors which are still clinging to top of range.


If the market rallies can Google be far off. 600, 600, 600

If the market falls from here , you will get lot of situations where the stocks will rally back to resistance and tumble. One such candidate I shorted today.

I have my list of low risk entry stocks with bounce potential for tomorrow ready. (Cryptic clues are hidden somewhere)


Do not trade based on any of the above non sense.

Note:Those who are still looking for the cryptic clue- it is iron and steel.

No surprises in Apple event. The stock should sell on this news. All the good news seems to be priced in to the stock at this level.

Shorts are getting gored

Some heavily shorted stocks are making moves. Besides that many stocks are breaking out from consolidation. Market seems to be believing in the Goldilocks scenario. Oil is down, commodities down, the much heralded housing crash is yet to materialise and interest rate expectations are heading lower. Many people were on the wrong side of the trade, so we have a nice short squeeze.

Market not following bearish script

Bears had their hopes raised high when the market had two day correction. If you recall I said it looked like garden variety correction. But the bear were ecstatic and recommending doubling down on the short trade. The market is not following the bearish script so far. Don't be too excited by today's strength. I have used it to aggressively take profit on some of the trades I talked about in recent days. Market is still stuck in range.

Are you a trader or a rule maker

Rules for customers at Bastani Bakery and Cafe(now closed) in Mumbai

When your trading is not working make more rules. That seems to be the general rule in trading blogs. Or if you want more people to read your blog make more rules.

Every day I find a new blog proclaiming with absolute certainty that if you followed the 10-12-15-20-100 rules of trading, success is assured. I have seen many traders making new rules everyday or every week. There seems to be some relationship to their struggle for profitability and rule making.

Trading psychologists are another set of people who are peddling the rule following magic miracle pill to your trading success. Most of these psychologists have not been successful in trading. But they are very successful in making unsuccessful traders believe that if you follow their rules, making millions is easy.


Another set of rule makers are the trading gurus and newsletter writers. Now these people are very good at making rules that appeal to followers. It is an excellent marketing strategy. Most unsuccessful people have a feeling of inadequacy. When a guru tells them your success is guaranteed if you follow these simple rules, then there is instant reassurance and more subscribers. I am yet to see a newsletter writer who does not claim to have his own rules to guaranteed riches. When own rules lose appeal then there is always a recourse to searching for rules by others like Jesse Livermore, Richard Donchian, Nicolas Darvas, Bernard Baruch etc. and promoting them to others.


Now if you look at the actual rules, they are often vague, self contradictory and in most cases based on some unproven market assumptions. A rule which sounds good or is a clever play on words or is a nicely constructed sentence like " Plan your trade and trade your plan", does not mean it will work. Often there are contrary rules someone says " As a rule I never buy 52 week high", someone says "Never buy a 52 week low". Then there is a rule which is often the most quoted one with various twist to it- " Never risk more than 1/2/5/8/10% of your capital on a trade". The same rule gets twisted in some cases to "Never put more than 10 or 20% in one position". While the billionaire trader George Soros says be a pig if you have a good idea. Warren Buffet risked more than 30% on one trade. But what do those two gentlemen know about trading. If you examine each of the most widely quoted and popular rules you will find such contradictions.

The other problem with the rule makers is, those rule might be working for that specific trader (in totality of what they do in their trading) but the way they promote it is in absolute terms. No rule maker says " As a rule I never risk more than 1% on a single trade" or " As a rule I never buy 52 week low". Instead the rules are proclaimed like Moses handing out The Ten Commandments.

Profitable trading is based on clear well defined logical concept. It is based on some central market tendencies. No amount of rules are going to make an unprofitable trading system or trading approach profitable. You have a choice you can be profitable trader or rule maker. Making rules is easy.

Full metal panic

The oil and metals sector are dominating all short scans. Lot of it looks like panic selling of positions by those caught on the wrong side. The exits are jammed. Those looking for shorts in these sectors now, may be too late. You had to be positioned for it much earlier. Only the day traders and extremely nimble will find short opportunities. In fact these sectors should stabilise soon. Most move like these on the short side are of shorter duration and emerge suddenly.

While the metal panic plays itself out, there is selective buying in technology, retail and consumer sector. However it is a tricky market as the panic move on commodities has to end before the market stabilises and new themes emerge.

Transport is stirring

As I anticipated on Friday, the transport sector is showing hints of stabilisation and presenting some good opportunities today. AKAM and GOOG are also making a move as anticipated, I would like to see more volume on GOOG. Thinking ahead and anticipation is the key in this tough market.

If you want to anticipate next set of opportunities keep an eye on brokers some of them might make a move. I am eyeing some for quick trades.

From the Friday post

Trucking and transport is one sector which has been driven down majorly, I am anticipating a bounce now that oil is retreating.

Fast and furious selling

The oil and metal longs are throwing in the towel on many long held positions. Looks like many longs have been completely taken by surprise on oil and some metal stocks. To most observers the oil long trade was long over and there were enough hints of an impending correction but somehow many bulls believed in the 100 USD hype. There is never a lack of stubborn bulls or bears in most sector. That is what makes the market interesting.

Expect the money from oil and metals to find a place in new sectors. There are enough hints of where the money is flowing. Watch relative strength and you should find where the next set of opportunities are setting up.

I am eyeing a position in ABXA for my long term account. Having worked in the air express industry I have a fairly good understanding of these kind of businesses.The essential nature of such businesses is high leverage, most of the cost are sunken cost and a slight improvement in revenue can have magnified effect on profit. Buying some of these companies when the chips are down can be a good long term trade.

ABX Air, Inc. (ABXA) operates a fleet of 112 aircraft, providing air cargo transportation. ABX complements its air transport capabilities with package handling, warehousing and line-haul logistic services. The Company operates primarily in the United States but has the authority to fly worldwide. ABX also offer aircraft, crew, maintenance and insurance (ACMI) and on-demand charter services to freight forwarders and other major shippers. The Company sells aircraft parts, provide maintenance and repair services for airframes and aircraft components and conduct flight-training services for customers. Additionally, ABX operates a sorting facility for the United States Postal Service and has provided cargo transportation and sorting services. DHL Express (USA), Inc. (DHL) is the biggest customer of ABX, constituting approximately 98% of total revenues in 2005.

The Towers had a special position

My first meeting in USA was in the World Trade Center. In 1999 I landed in USA for the first time. Within 12 hours I had my first meeting in the World Trade Center. On my second day in USA I spent the entire day in the World Trade Center part of it in meeting and part of it roaming around exploring the Twin Towers. I had my first Coffee in USA at the Starbucks located at the ground floor of the building.

A year earlier my wife had shifted to USA on a job assignment and her office was located in the World Trade Center. Her first day in USA started in the Twin Towers. In the next two years I visited the Towers several times. As luck would have it just a few months before Sept 11, 2001, pat of my wife's office shifted to New Jersey and only Marketing and Corporate function remained in the Tower.

On the morning of Sept11, 2001, I saw the news of the first plane strike and was franticaly trying to contact my wife's ofice and could not get through. By the time I managed to IM her and her collegues the second plane had struck. By a stroke of luck, no one was in the office at the time of the strike. I watched in horror as the towers collapsed. An intricate part of our personal history just vanished.

Today is an emotional day and day of prayer and reflection. I am optimist, in the long run good will prevail over the evil. It might be a long struggle but the evil ideology of suicide bombers and terrorist will be defeated.

Black, white and lot of grey

We are not in an environment where one can load up on a good earning/sales/momentum play and hope to double money in few months. The market lacks broad based momentum. What is working is selective stocks. Selective earning plays like GROW, NVEC, SIM,IAAC etc. Moves are of smaller magnitude.

At some stage the market will again set up for broad based momentum either before or after the upcoming earning season. If lot of companies do not pre announce bad results or warn, we may be in for interesting times. Or post earnings if we find most companies are handily beating earnings then we will again have a good rally.

What if the market breaks down? The short opportunities will emerge amongst three types of groups.

a) Stocks still trading at top of range . These are mostly concentrated in oil,steel, silver and some technology sectors where stocks have rebounded. They will get pushed back to bottom of range to form possible double bottom.

b) stocks which are already down and consolidating near their bottom of their range. Sectors like home builders, leisure, retail (some), transport etc. There is little proof of this happening currently.

c) New high priced IPO's in recent years will break below their all time low. e.g. BIDU,BOT, ICE and many stocks in energy sector which have IPOed recently.In my experience shorts work only if the entry is synchronised with the general market decline or one shorts very close to the top and holds on for six months or a year.

I am mentally prepared for either of the scenario. It might happen that the market will do neither and continue to trade for long time in a range.

Macro calls and economic analysis is a nice pre occupation to generally engage your grey cells, but if you want to make money I believe it is much better to use statistical patterns and edges to generate trades. I have several tools I use to generate trading ideas and most successful traders I know similarly use some sort of patterns to make consistent money irrespective of the trading conditions. A overall market drift in either direction is a nice bonus.

My objective is to look for out sized returns irrespective of market direction and I am more proactive in finding opportunities and quickly entering them or exiting if they do not work. In a range bound market it is still possible to make money but you need a lot more anticipation.

You have to look at opportunities at bottom of range or in beaten down stocks as they rebound from bottom. You have to be very quick to identify or anticipate an emerging sector and enter. When normal methods do not work you have to look at other things in your bag of tricks. So I am revisiting several approaches which I have researched in the past but sparingly use to find opportunities.In bull market it is easy, you just buy breakouts and market takes care of the rest.

So where are the possible opportunities:
Trucking and transportis one sector which has been driven down majorly, I am anticipating a bounce now that oil is retreating.

Technology is one sector where you will find some nice opportunities. Many technology stocks have been consolidating for a year or two and some are breaking out. Like RIMM did recently. Similarly if you look you will find many more stocks like RIMM.

Stocks breaking out of multi year range like SYX, VSNT, LNN, ERJ etc.

Betting against the big picture on housing

Don't miss this piece in today's Thestreet.com on housing. It basically summarises the same arguments I have made in my series of posts about housing. There is a time to be bullish and there is a time to be bearish on a sector. Passing off mindless bearishness as analysis is a recipe to disaster. As a trader you should think differently from analyst and newsletter writer. Analysts who are coveted by medias like CNBC, Reuters, Business Week, CBS,WSJ, Bloomberg are always a good bet to find contrarian ideas , because media always chooses people based on what people want to hear. They represent what millions want to hear.

Dogged Homebuilders Dig In

The bad news for home builders keeps piling up, with Friday's warning from Lennar (LEN - news - Cramer's Take) the latest in a long string of disappointments.

But since bottoming in mid-July, homebuilder stocks are up over 10% amid the torrent of bad housing news. This very well could be a sign that the sector's tide is finally turning after a sickening slide that has taken the builders' stocks down about 50% from a year ago.

Just look at how the market this week shrugged off earnings guidance cuts from KB Home (KBH - news - Cramer's Take) and Beazer (BZH - news - Cramer's Take) and Hovnanian's (HOV - news - Cramer's Take) big year-over-year earnings decline and sharp drop in new orders.

Some very smart people are eyeing the homebuilders.

With the stocks trading at depressed multiples and only slightly above book value, a lot of smart investors have already pounced, including Bill Miller at Legg Mason.

The latest rumor flying around hedge fund circles is that Ed Lampert, the wonder boy manager at ESL Investments who turned around Sears (SHLD - news - Cramer's Take), is now eyeing an entry into homebuilder stocks. Lampert, through a representative, declined to comment.

Note: You can read more about it here, here, here, here, here, here, and here.
Above all read this before you follow any analyst.

The original contrarian call on 24 th August.

The overcrowded short trade in the housing stocks



When everybody gets it, best part of the move may be over. What do you see day after day, a negative story on housing. Today all the leading newspapers have negative stories about housing on front page. Expect a magazine cover this weekend or next on housing crash.
So time to cover your housing stock short. It might be time to buy housing stocks if you are value investor. I am buying CHCI,Comstock Homebuilding Comp

Housing Stocks
AVTR,Avatar Holdings Inc
AXR,Amrep Corp
BHS,Brookfield Homes
BZH,Beazer Homes Usa
CHCI,Comstock Homebuilding Comp
CTX,Centex Corp
DHI,D.R. Horton Inc
DHOM,Dominion Homes Inc
HOV,Hovnanian Enterprises A
ITB,iShares Dow Jones US Home Construction Index Fund ETF
KBH,Kb Home
LEN,Lennar Corp Cl A
LEN.B,Lennar Corp Cl B
LR,Lafarge Sa Adr
MDC,M.D.C Holdings Inc
MG631,Residential Construction
MHO,M/i Homes Inc
MTH,Meritage Homes Corp
NVR,Nvr Inc
OHB,Orleans Homebuilders Inc
PHM,Pulte Homes Inc
RYL,Ryland Group Inc. The
SPF,Standard Pacific Corp
TARR,Tarragon Corp
TOA,Technical Olympic Usa Inc
TOL,Toll Brothers Inc
WCI,Wci Communities
WLT,Walter Industries Inc

More constructive action on Nasdaq 100

You have to be blind not to notice very constructive action on Nasdaq-100. The bears may have some more wait ahead of them before they can grab the honey pot. Those who doubled up on short position will have a nice week to think about possible squeeze and how painful it can be.
I have added some more positions. Akamai Technologies Inc, AKAM being one of them. If the Nasdaq-100 has to rally, the highest relative strength stock may not be a bad place to be in. As always I am on tight stops and willing to ditch my positions at short notice if I see the bears gaining upper hand.

Sky is not falling yet

Not much of an action so far today morning. I see some action in lodging sector. Some of yetesterdays breakouts like DF ( Dean Foods) have a nice follow trough. CAE, GRRF, COO, DSCM, EFX, OEH, PRFT and SNTS are showing up on my radar and I have some capital at risk on some of them.

Nasdaq 100 component stocks

I am looking at the component stocks of NASDAQ 100. I see lot of nice action on at least 25 stocks. There are few that are breaking down. Have a look at it. Does it look like the market is falling off the bed. Look at the same charts during last correction. Looks like some sector rotation is in work. There might be a surprise in store.
So it may not be a bad idea to keep an eye on Google (GOOG) today.

When you see divergence be alert

What did I see today:

1 Early morning the bears were ecstatic. The major bears on housing were patting themselves on the back. Champagne time. BZH and HOV earning call was being touted as 100% confirmation of the bearish hypothesis.Everyone was supposed to be selling their house. Run, run , run, the sky is falling. Slam dunk trade on housing short.
What happened. Do I need to say anything.

2 The sector picture today tells you a very interesting story if you keep your eyes open. What is down majorly Gold and Silver. They are supposed to rally during bear market. What is up besides homebuilders. Technology, select retails and transport.That should give you a hint of surprise in store for many people. It also tell you lot of people were caught today on the wrong side of the trade. Below the surface there is a divergence.

3 Below the surface there are good breakouts on number of stocks. Some of them are breaking out from long bases. I don't know who are these fools buying when the sky is falling. ( I am one of them).

These are just my observations. Do not trade based on any of what I say or do. Everyone has different risk profile plus if you follow this site you will be amongst a tiny minority. Only about 20-30 readers read this site regularly rest come here looking for Paris Hilton P***y or Anna Kournikova boobs after searching for it on Google. It may not be a bad idea to keep an eye on Google (GOOG) tommorrow.

Not afraid to put capital to work

There are very few breakouts today. I have put some capital to work in two small positions SIGM and AHO and eyeing a few from the list below. Will add to these positions if they work out.

Breakouts

ABM,Abm Industries Inc
AHO,Ahold N.V.
AIQ,Alliance Imaging Inc
ATK,Alliant Techsystems Inc
CECE,Ceco Environmental Corp
CHFN,Charter Financial Corp
CHIC,Charlotte Russe Hldg Inc
CMRG,Casual Male Retail Grp Inc
CSTR,Coinstar Inc
DF,Dean Foods Company
DLLR,Dollar Financial
DSTI,Daystar Technologies Inc
DWSN,Dawson Geophysical Co
EMBT,Embarcadero Technologies
GFIG,Gfi Group
GIGM,Gigamedia Limited
HOV,Hovnanian Enterprises A
INGN,Introgen Therapeutics
ITB,iShares Dow Jones US Home Construction Index Fund ETF
JOSB,Jos A Bank Clothiers
KBH,Kb Home
KFN,KKR Financial Corp
KLIC,Kulicke & Soffa Ind
MA,MasterCard Inc
MWRK,Mothers Work Inc
MZZ,ProShares UltraShort MidCap400 ETF
NGPS,Novatel Inc
NRGN,Neurogen Corp
NVEC,Nve Corp
RCCC,Rural Cellular Corp
SDS,ProShares UltraShort S&P500 ETF
SEH,Spartech Corp
SLAB,Silicon Laboratories Inc
SYX,Systemax Inc
UTIW,UTI Worldwide Inc
VDE,Vanguard Energy Etf
VSNT,Versant Corporation
WAUW,Wauwatosa Holdings Inc
XHB,SPDRs Homebuilders ETF

More trouble for housing shorts

When you see a thread like this on Elitetrader by a new member and if you are still short Home Builders you should be very worried.


hello and Thanks in advance for your input.

I feel that the residential housing market is
extremely weak and is due for a downturn.
That being said, does anybody know if there
are any ETFs that can do this. somebody told
me there was a profund, but i dont know what
that means?

So, what is the most cost effective way
(from an expense ratio standpoint) to
SHORT the residentail housing sector?
any leveraged funds that play the
downside?

any baskets of stocks that I could put together
and short?

THANKS!

Watch the Transports closely for hint of what is the likely market direction.

Watch the home builders

Just a hint of a market bouncing back and there was virtual panic buying in home builders. What does it tell you. Lot of short interest. Some fullish shorts who put in shorts recently based on bearish analysts "more downside to home builders call" are learning a lesson in contrary investing.

If obvious trades worked out every newsletter writer would be rich.

Anna Kournikova Boob Bounce Reducing Bra

Ideal set up for afternoon bounce. Some thing never change in the market.

Lot of negativity is already baked in

In spite of the summer rally, most stocks are still stuck in lower end of their ranges. So lot of negativity is already baked in to these price levels.

If you are looking at shorts, one has to look for high risk reward trade, it is easier to find those trades at the end of long and sustained move up. At this stage in the market three types of short trade should work.

1 Fresh breakdown of stocks which had held on to their relative strength. Oil sector is an example of that. But the reward on that trade may be limited because unlike the housing sector which reached extreme level and started down, in this sector most stocks will have a pullback and they will settle down in multi year or multi month range. The oil sector is cooling down, its fundamentals are not deteriorating rapidly.

2 Breakdown from consolidation at lower end of range. The homebuilders are at this stage. The question is how much more is remaining in that trade. Or is that the trade which offers the best risk reward. Here there is so much negativity and the short trade is so overcrowded that many value types will be tempted to start supporting it and shorts will start covering if they find other opportunities. Also you have to remember the large sums of money in the market from large mutual funds and other institution has very strong value orientation and long term holding bias, so they may be looking 3-5 years ahead and picking these bargains.

3 Rallies from bottom breaking down. Now these trades might have best risk rewards for shorts. Something which has rallied 25-50% after a significant decline is an ideal candidate for short entry. They will revisit their lower end of range. The technicians call it double bottom if it does that and then again rebounds.

I have around 60 stocks which meet this third criteria. I found them using a quantitative screen, screening for % drop after a significant rally and they have rallied in recent times. I am watching them like hawk for possible low risk short entries.

In the meanwhile I also have my watch list of longs ready. Over the 100 years of stock performance, the surprises have always been on the upside.

Garden variety pullback

Not reading much in to today's correction. This correction should play itself out over next week or two and market will resume its usual creep up. In the meanwhile lot of ink will flow from bearish commentators about how they are right and crash is just around the corner.

Some of these are career bear analyst. If you want to see some wild bearish projections see the beginning of the year issues of Barons and Business Week. Some analyst had forecasted some wild scenarios, none has come true in eight months so there will be some desperation. For some of it to come true markets will have to have significant correction in short period of time. If that happens, it will be a buy opportunity of life time.

In the meanwhile the best course of action for now is to take it a week at a time. Keep your buy list ready and wait for sweet spots to enter. If the market breaks out from these level post a correction, watch out, it will be a rally of some magnitude and will have long legs.

It takes a long time for market to top. Many time tops look like corrections, sucking in dip buyers. The oil top is being registered now and lot of commentators and analyst are now saying that it has topped. What happened to 100 oil scenario.

The question is where will the large sums of money from oil stocks liquidation flow. Which sectors will the money flow in to.

You know the answer to that. Many months ago I have said which will be the next sector to attract serious buying an start of potential secular trend.

oil sector has put in a long term top.

June 16, 2006 post


The energy sector has seen a multi year high. Expect many years of under performance from this sector. The bounce in last two days does not matter. Majority of these stocks are not going to see their high again. Alternative fuel, coal, oil, gas all these sectors will not regain the leadership for long time to come. Every rally in the energy sector is a shorting opportunity.

No follow through

There is hardly any follow through on the morning selling. Looks like sellers are also scared. So this might set up the market for a bounce before sellers again reemerge. There seems to be hardly any urgency to sell. Shorts will have tough time in such market. The sellers might push this tape down in last hour, but currently it is just steady market.

KLPD

What a difference a day makes. Those who turned bullish recently looking at nice beakouts in recent days got a nice surprise today morning. They got ambushed early in the morning.

Readers of this blog had ample notice of impending correction. I was busy yesterday morning running some household errands, when I came back late morning I saw range expansion on number of stocks I was holding. Then I looked at some of the indicators I have discussed here so many times. I surmised, when things start galloping in
gaps, a correction must be near by. Aggressively dumped most profitable positions built over last 4 weeks.

Once this correction plays itself out the market will again set itself up for long entries.

Sucker's Rally

A few months after the market hit a rough patch, the shares are back within striking distance of their yearly high. The one trade which has worked is buying the dips. The news has been uniformely disastrous all along with wars, high oil prices, housing crash, Iraq, job/pay growth, you name it and yet the market has climbed a wall of worry.

Look at what was being touted as reasons for impending and immediate crash: inflation, rising interest rates, slower growth, and a new inexperienced Fed Chairman. The bear want to dismiss this rally as a sucker's rally. As if it was immoral to profit from it.

In the meanwhile you could still have made money if you were not married to some vague market hypothesis. You would have still made money if you had a trading system based on proven market tendencies. You could have still made money if you had tracked and followed good earnings plays or momentum plays.

It always pays to buy when there is blood on the street and everyone else panics.

What next for market. High probability of correction.

Where is the momentum

Many people are noticing these stocks now. Momentum takes time to build and by the time most people notice it the move might be due for correction or reversal. The ideal time to pick these stocks was few weeks ago when the overall market cycle was also at the lower end of their range, the bears were smug, everyone was scared to buy.

How would you find this stock before they make these moves. Look at them carefully, at least six had outstanding earnings and in many of them the move started post earning. Track every quarter the top 2% earning performers and you would get in to these kind of moves. Rely on your own databases, screeners have many shortcomings. Many screeners operate on batch processing so there is delay between actual earnings and data being updated. Some can not calculate % when the previous quarter had a loss and this quarter has profit. Post earnings based breakouts have best success rate if you have to master one technique to beat the market this is the most potent one.

Another way to find these stocks is by using a pure momentum based method which tracks the top 1% stock on momentum. You may not capture the entire move but you will get on to all the major moves.

Stocks up 50% or more in a month
ANAD,Anadigics Inc
AOM,AnorMed Inc
CKCM,Click Commerce Inc
IAAC,Internat Asset Holdg Cp
NVEC,Nve Corp
ORCI,Opinion Research Corp
RMBS,Rambus Inc
SIGM,Sigma Designs Inc
SMP,Standard Motor Prods
SNTS,Santarus Inc
SYX,Systemax Inc
TAR,Telefonica De Argentina
VSNT,Versant Corporation
WTHN,WiderThan Co Ltd

Reducing exposure

There is some strength today which I am using to aggressively reduce my long exposure and tighten stops. The rally may not have legs. After a correction new set of stocks should set up for long entry.

Media bias

A very though provoking lecture on capitalism and belief in the future by Johan Norberg, a Swedish writer devoted to globalisation and individual liberty. It reiterates my point about cognitive bias and why you should not get seduced by bearish analysts constant sky is falling rhetorics.

The media exploits this interest in problems and disasters. We want to hear the latest, horrible stories, because our stone-age brains think that this is important information upon which we must act. At the turn of the Millenium, a survey from New York University made a list of “Journalism’s Greatests Hits”. Would you expect news stories about new vaccines, fantastic inventions, the rise in living standards, or the spread of democracy from 0% of the countries 100 years ago to 60 % today? You would have been disappointed. The greatest hits were all about war, natural disasters, dangerous chemicals and unsafe cars.

Risks, horrible acts and disasters are easily dramatised and cheap to produce. That is why crime is such a popular theme on the news. Studies from the US show that the more time people spend watching the TV news, the more they exaggerate the extent of crime in their cities. A fascinating study about Baltimore showed that 84 percent feared that criminals will harm them or their loved ones, but at the same time almost everybody, 92 percent, said that they felt safe in their own neighbourhoods, of which they have first-hand knowledge. They all think that there is a lot of crime in Baltimore , but they all think that it takes place somewhere else in the city, in the places they only know about from the media.

These results appear again and again in surveys. People think that the environment is being destroyed, that the economy is going to bits and Germans think that the reunification of Germany was bad for most people. But they also think that their local environment is good, that their personal finances are improving, and that German reunification was good for their own personal situation. Problems and disasters are always somewhere else. And if we all think so, we must all be wrong.

The problem with a globalised world is that there is always a flood somewhere, there is always a serial murderer somewhere, and there is always starvation somewhere. And therefore there is constant supply of horrors to fill our TV screens. If you don’t know the background or study the statistics, it’s tempting to conclude that the world is getting worse.

Gandma makes a macro call

Time to reiterate what I said many days ago. Nothing has changed since then only the analyst have become shrill.

August08, 2006
Tell me something that my grandma does not know

Market is forward looking mechanism. If you continue to focus on what everyone knows is current situation, you are not a market analyst. Look at what is being chewed to death by bearish commentators.

Housing slowdown: Is there anyone who does not know about it by now. The more critical thing is what is next six month outlook for economy not what has happened.

Inflation: Now this one is being talked about for last 2 years but it impacted market only in last couple of months. Now bearish commentators are all over the place with scary inflation scenarios. When everyone gets it most probably the trend is over. Also inflation is lagging indicator. With economy slowing and excess capacity in so many industries and two major deflationary countries China and India desperate for growth, will inflation continue.

Oil Prices: We have seen this movie before. Oil scare. This time it is different. What did you see yesterday after an event which was supposed to be a viagra for oil stocks(Israel war). The OIH barely budged. If you are chasing oil stocks now, what were you doing two years ago. The trend in oil started in 2004, if you are discovering oil now, welcome to the party. Probably very few oil stocks will make an up move from here. As I have said many months before the move in oil stocks is over.

What does my grandma knows that bearish commentators do not know.

Fed has become better: Over the years the Fed has become good at managing the economy. Read the book Inside the House of Money : Top Hedge Fund Traders on Profiting in the Global Markets by Steven Dronby, almost every major macro trader in it acknowledges the fact that the Feds have become better at managing the economy.

Recessions/slow downs are shallow: Over the years the recessions have become milder. Look at the 2000-2002 period. Everyone was predicting doom, what happened not even 25% of the predicted gloomy scenarios came true.

Deflation: Grandma says biggest long term threat to economy is deflation. Cost of capital is decreasing rapidly. Productivity is improving dramatically. All that you need to start business today is a business plan, the venture capitalists and angels will pour in capital.

Nightmare Mortgages

They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung

Don't follow an analyst unless you understand Cognitive Dissonance

The Internet has provided good platform for many analyst to broadcast there view about markets and economy. The interactive nature of the media has also many benefits and many drawbacks. If you want to follow any analyst you must understand the dynamics of the media and also the professional hazards of following an analyst. In simple language avoid the risk of cult following.

The biggest problem to watch for in analyst is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.

The stronger their original opinion, the more resistant they are to changing it and tend to persist in creating new argument in favor of their original views.
The other problem which further accentuate this problem is if the analyst has large followers, or recognised by media as authority or has wide access to disseminate his or her views and discredit challengers. As a result both analyst and the followers are slow to change their established opinion as that has extremely high social and psychological cost. This leads to market behaving differently from the analysts firmly held positions for extended period of time. So an analyst who publicly says Dow 5000 or Dow 100000 continues to find new reason to justify his or her call inspite of market going the other way.

The Internet by adding interactivity to the process further accentuates this process. Read comments on most widely followed bullish or bearish or value focused or growth focused analyst site or blog. You will notice any dissent is swiftly ridiculed or chased away. Then it becomes a love fest between analyst and his followers. They act to reinforce each others belief, work to discredit new data points, impute motives to others or simply say a data contrary to their belief is "spin" or " manipulated". Now this is a typical cult behaviour. Day in and day out if such things get reinforced then it becomes a very strong cult.

Very few investors/ traders have the psychological make up to avoid such cults and change their opinion and accept alternative reality or accept they are wrong and quickly seize new opportunities.

Cognitive dissonance, refers to our desire to avoid believing two conflicting things. Whereby the brain attempts to find support for the belief that carries the greater attachment or emotional involvement by finding a way to ignore or discount the conflicting belief.

In the classic study of this characteristic, researchers found that once a person had purchased a particular automobile, they would avoid advertisements for competing models and seek out those for the model purchased, so as to avoid the pain of regret that was bound to follow if they were to realize they had made the wrong decision. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Similarly, people tend to minimize the importance of subsequent information that might call their original decision into question.

The upshot is that we resort to various subconscious mechanisms to defend our existing beliefs, even where the desire to maintain these beliefs has a less-than-rational basis.

Knowing this, how do investors adjust their behaviour to compensate for the tendency to avoid or deny new, conflicting information? The answer is to seek out contrary opinions; to realize that research doesn't stop once a decision is made; to strive to identify mistakes as early as possible and take pride in the ability to do so.

Relentless persuit of trading oportunities

There is lot of strength in select sectors like Gold and Silver. Lot of top of the range breakouts.
So what next for market, a journey back to the bottom of the range. Watch the small caps very closely. My system is predicting weakness in near future.

As usual do not trade based on this recommendation. As you have seen in recent time both the Bond and Index calls have not as per forecast.

If you are nimble there are good trading opportunities. Look at Vonage VG up 33% from low in last 7 days.Like that there are 847 stocks in my database which are up 25% or more from bottom in last 65 days verses 417 which are down 25% or more from top. To give you an idea some of my equity trades which have done very well in last couple of months have been STEC,NUHC,RIMM, CHCI and MWRK. Some were quick trades, some I am still holding and in some have taken bulk of profits and holding token positions.

The key is to have a system which relentlessly looks for long opportunities. It should be dynamic to adjust to market conditions. Sometime you find opportunities at top of range, sometime at bottom of range.In some market environments you find triple digit opportunities in some double digit. Always remember long strategies make more money than short strategies. The reason for that is obvious. I have in my repertoire 2 bearish strategies, but they work only in really bearish environment, which are rare.

As a trader I am not married to a permanent bullish or bearish hypothesis. The problem with that is it prevents you from looking at obvious trading opportunities. All I am interested in relentless pursuit of trading opportunities.