Keep Emotions In Check
The
markets appear to
have stabilized…at
least for the short term. With the markets being extremely oversold it
was inevitable that we would get a bounce. What was intriguing is that
Barron’s cover story this weekend
was
"It’s Time to Buy Stocks."
The
article argues that the "Fed Model" indicates that stocks
are undervalued by more than 17%. Barron’s has been known for its
bearish stance in the past.
The basic premise of this
model is that is compares the interest rate being paid on a 10 year
T-Note to the earnings yield of the stocks that make up the S&P
500 Index. It takes the 12 month earnings of the index and divides it
by the current level of the S&P 500, which gives you the yield. If
the S&P earnings yield is greater than the Treasury rate,
then stocks are considered "undervalued."
What do I think about this
model? Well as with any models I use…I just use it in combination
with my other analysis to form an opinion on the markets. I primarily
look for a confluence of indicators, such as breadth, market action,
sentiment, etc. to alert me of when the market is changing direction.
For example,
if I were just using the "Fed Model"
written
about in Barron’s, I would not buy blindly into the market just
because the model is flashing that
stocks
are undervalued. I have to see some technical confirmation that the
markets are turning, such as a follow–through
day. In addition,
I would go one step further to wait for the stock or stocks I am
looking to purchase to fortify me with a low risk entry. Always keep
your emotions in check, especially during uncertain times.
I have found in my research
endeavor, that if one uses timing models or systems, it is important
to understand why and how your models work and not just blindly follow
the buy or sell signal. Know the intricacies of the data you are using
and how it effects market action and why it effects market action. If
you do this it, I assure you it will be invaluable in your trading
journey.
Frontier Oil (FTO)
held up well today even though the Oil Services Index ($OSX.X)
and the Oil Index ($XOI.X)
were battered in the session. FTO is forming a high handle for a
multi-week cup and has been showing some decent earnings growth.
The Semiconductor HOLDRs (SMH)
completed a RST bottom today and looks poised to continue for the
short term.
Now for the intermediate
term lets see if the Semiconductor HOLDRs and the WEBS-Taiwan
Benchmark (EWT)
can complete the RST on a weekly basis. Stay tuned.
Remember that all securities
are risky. In any trade, you should always reduce your risk by
adjusting position size and placing open protective stops where
you will sell your long or cover your short in case the market turns
against you. For an introduction to combining price stops with
position sizing, see Loren’s lesson, Risky
Business.
Greg