Buyers Exhaustion

The market was in rally mode since mid July, so correction was expected and normal course of action. In the last few weeks there were several signs of froth with stocks gapping up and making 4-10 dollar moves after that. There were several blowout kind of late momentum phase moves The IPO market was red hot with everyone rushing in to buy Nymex IPO. The markets had moved ahead of themselves.

So a correction of some magnitude is a normal and healthy thing for the market. The markets ran out of fresh set of buyers. Those who bought late after being on sideline were caught holing the bag. Absence of bids leads to scary correction on days like yesterday.

The bears will be all over painting their bearish scenarios and peddling their doom and gloom. While it is easy to get tempted by such talks at these kind of junctures, a more balanced perspective is better option for those looking for profitable opportunities. Not all sectors will be equally affected by correction. Even a rush to short (unless you are a day trader) might result in some serious whipsaws.

The move will evolve over a period of time. The easy money phase of last few weeks is now over. It is back to being a stock pickers market. Stocks with significant earning/sales surprise in last earning season will withstand the correction, similarly stocks with earning and price momentum may go in to bases but some of them will start breaking out after few weeks in anticipation of next earning season. The opportunities on short side will also take time to evolve. Even greater skill is required to pick and time your shorts.

I have only 2 open position currently on long side (LVS and IAAC) and plenty of cash. Here is what I am watching on both long and short side currently:

Long
ADVNB,Advanta Corp Cl B
PNTR,Pointer Telocation Ltd Ord
DXPE,Dxp Enterprises Inc
JCTCF,Jewett-Cameron Trad Co
FTGX,FiberNet Telecom Group
TGEN,Targeted Genetics Cp

Short
BSC,Bear Stearns Companies
BIDU,Baidu.com Inc
GOOG,Google
GS,Goldman Sachs Group Inc
MA,MasterCard Inc
NMX,Nymex Holdings Inc
NYX,NYSE Group Inc
RIMM,Research In Motion Ltd

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5 comments:

walter said...: i am all cash myself, at the moment...

you have target for LVS? Seems to be diverging from MGM, WYNN, et al. - interesting picture developing...

I am attending conference today and tomorrow - so will be catching up on market after hours...; Nov 28, 2006, 9:06:00 AM
Unknown said...: I cashed out of all positions except long term yesterday morning also. Now watching and waiting for some opportunities to buy good stocks at lowere prices. Problem is, when will they stop going lower?; Nov 28, 2006, 10:16:00 AM
Pradeep Bonde said...: Intense selling phases are clustered. So in few days it might be good idea to get back in to some longs. It is never a bad idea to keep the buy list ready.; Nov 28, 2006, 10:22:00 AM
Vipul said...: I have tightened some stops and got stopped out of few positions yesterday but have not been explicitly raising cash (unless stops are hit).

This allows me to stay in positions in case the market turns back up, but one of my stops got hit on the absolute LOD and the stock came right back up after that. Is it a good idea to get back into that stock, or to wait once the stop gets hit no matter how.

That also makes me wonder if I should be relaxing stops to 15% or so during a correction to prevent getting out of good positions while allowing for a max drawdown.; Nov 28, 2006, 5:07:00 PM
Pradeep Bonde said...: 1 Your approach is a better way to trade. As long as you have diversified positions it works. If you are highly concentrated in few stocks,then you have too high a drawdown with letting market take out stops approach.

2 I get back in to stocks if it again comes up on scans.

3 Raising stops in correction may not be best strategy. The best approach is to consistantly follow same stop strategy.
As to putting stops at 15% again it depends on your holding periods and diversification. If you are long term investor, larger stops are better.

Corrections like we witnessed on Monday can wipe out hard earned profits in few days. Hence after getting hit previously, I anticipate corrections and reduce my holdings accordingly. There is no fun in building up your acount by 60% in 3-4 months and then giving up 20% in few days.
The stocks bought late in the momentum cycle are the one which most of the time are most vulnerable to correction, so larger stops on them can be devastating.

Your profit taking strategy can also help in setting stops. The Boucher kind scaling of positions is better for that reason.; Nov 28, 2006, 5:24:00 PM

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