A new year is
upon us, and like most, we all try to start off on the
right foot as a way of continuing good fortune throughout the rest of the year.
My column today will attempt to put in perspective where “we” are
currently in the markets/economy with the hope that my observations will allow
you to seize upon some short-term and not so short-term trades.
Bear in mind, this is primarily based
on fundamental analysis. In recent years, fundamental analysis has taken a back
seat to the so-called “new” metrics of determining what a stock/market
is really worth, and like a stock in a runaway up trend, it can continue for
some time. So be careful, always use your charts to confirm or dispute an entry
on such information. However, like all things in life, they do return to a sense
of normalcy, or what some may call, regression to the mean. I know first-hand,
as do many of you, that opinions and fundamental analysis got in the way of what
was happening in the moment and, as a result, led to some painful losses.
The first part of my column today will
be to give you an overview of my thoughts on the market. Like all
“grounded” traders, I won’t go to my grave with these observations and
go broke in the process, however, I will always be cognizant of these thoughts,
so that I can act decisively when and if events unfold in that manner. The
second half will be my regular commentary on the trading day ahead.
I think it is fair to say that there
is a fair degree of uncertainty in the market right now, you have one camp
predicting blue skies ahead, while the other camp is not quite so sure that the
much hyped recovery is just a quarter or two away. The
first camp has some pretty good anecdotal evidence to support their
1.Â Recessions have lasted on
average for 11 months, the shortest being six, the longest 16. Given that the
authority on recessions, National Bureau of Economic Research, proclaimed
the current one to have began in March 2001, one may conclude that in February
of 2002 would be the official “end” to the recession.
2.Â There is evidence of an up
tick in retail sales as well as a reduction in the number of jobless claims.
camp also has evidence that suggests that this will be
a slow laborious climb out of the recession.Â Again, these are
1.Â The highest number of
continuing jobless claims (number of people who are not able to get re-hired)
2.Â Corporate accounting that
borders on a skit from Monty Python. Are these earnings that companies are
reporting even real? Witness the demise of Enron, with more companies
potentially to follow.
3.Â The aftermath of this
country’s largest financial bubble
4.Â Valuations which are
completely out of whack with current earnings.
Only time will tell which camp has it
right. However, it is not important to know which one is right, but just know
how you will act in accordance with what happens in the days and months ahead.
Obviously there is the very real possibility that the economy will not recover
as soon as most say, this will be the scenario which will offer nimble and
astute traders the possibility of some very nice gains. I suspect that this
constant tug of war over which way the economy is heading will offer traders
tremendous opportunities throughout the year. Simply buying or shorting the
market and walking away will not be possible.Â Witness the chart of the
Nikkei below.Â Sure there were several “bull market” periods,
20%+ moves, but the investor who simply bought and held on the first 20% move,
has now lost approximately 70% on the investment.Â The point here is
simple, investors and traders will need to be very nimble and active in order to
outperform the markets in the year to come.
Contrary Investor and StockCharts.com
The Semiconductor Index
and the Bank Index
PowerRating) will, in my opinion continue to be the
driver of prices both intra-day, and over the long haul.Â The semiconductor
sector is way ahead of itself, but continues to attract momentum players and hot
money.Â If there is a shakeout at some point, intra-day trading will be
incredibly robust.Â Look to use the Semiconductor Holders
as a way to play this sector both intraday and longer term.
The demise of Enron
is far from over, at least in terms of the spillover effect.Â J P Morgan
has been very quiet regarding their true exposure to Enron, and one can only
suspect that other investment and commercial banks may have also been involved.Â
Keep an eye on this index for early clues to market direction.
If you had a chance to read Larry
Connor’s piece on Sunday, you will know that he noted several CVR
(Connors Vix Reversal) signals, which indicates a high level of complacency in
the market.Â After reading his piece I also noted I had neglected to scan
for any stocks with bearish formations on a longer time frame.Â Was this
indicative of complacency or what?Â Needless to say, I came across nothing
which stood out on the short side.Â The two stocks below exhibit nice
patterns, however, use protective stops since the overall market
“feels” vulnerable in here. The third stock, AutoZone
has been on my watch list for a long time as a possible short candidate.Â
If you do a little fundamental research on the stock you will find multiple
reasons to feel that this stock is incredibly vulnerable.Â While investors
have not paid attention to these facts yet, it appears that from a technical
standpoint there may be a nice entry point upon us if the stocks breaks below
A quick look back to the beginning of
2000 and 2001 will indicate that the markets are very decisive in the first
couple of months, especially in the first week of the new year. As a result plan
on stepping up to the plate if the volatility and decisiveness exist. My biggest
periods of gains always come in short periods. Most of my income in any given
year comes from a few pockets of extreme volatility, the remainder of the year
is just chipping away each day.Â
|1146 (key)Â||1612 (key)|
As always, feel free to send me your
comments and questions.Â I wish you all the best in the new year and look
forward to offering you even more services in the first quarter of the year, so
keep an eye out. See you in TradersWire.