"Long Term Daytrader" Article Very Interesting..
I met this nice French girl at a party last year who only knew two words in English: "That's great." No matter what you said to her in English, she always had the same reply. "What's your name?" I asked. "That's great," she replied. "How do you like this party?" "That's great," she answered. "Would you like another drink?" "That's great." And on it went.
Just like the French girl, no matter what the condition of the economy or the markets, the only word many investors know is "Buy." If your stock is falling like a knife, it is considered a dip, and you are expected to buy. If your stock is going up, you buy because it could go much higher and you don't want to miss out. In fact, the one-trick strategy of buying anything that moves is still quite popular and is being urged by a number of analysts. Now that the Nasdaq is at two-year lows and down 60 percent from a year ago, many are suggesting any investors who have any money left should buy immediately. If you're uncomfortable with the Nasdaq, they say, you can always buy the Dow stocks, which have been relatively immune to the carnage.
A few weeks ago, analysts were leapfrogging over each to downgrade many technology stocks and, as expected, the stocks they downgraded rallied for two to three days. However, the downgrades didn't last long. Days later, some analysts were on television telling everyone the worst was over and it was safe to step into the market again. Abby Cohen of Goldman Sachs raised her equity exposure from 65 percent to 70 percent and cash to zero. The Dow responded by rallying 138 points that day, followed by another Dow rally of 128 points. We took one look at the market internals, especially the TICK, and knew this so-called rally had no legs, and it turned out we were right. The Dow sold off big-time for the next two days.
Goran Yordanoff from Tradingmarkets.com wrote a revealing piece on how analysts like Ms. Cohen are telling us to buy now to try and suck some of that sideline cash into the market. Yordanoff pointed out that Cohen's bullish call on March 7 was perhaps made so her brokerage could "front-run" the market. Apparently, a couple of the big brokerages, including Goldman, were big buyers of S&P futures at the close on March 6. Usually, the SEC frowns upon this activity, but perhaps it's okay if the brokerages do it.
Yordanoff also takes a critical look at Abby's stock-picking record. If you had bought the stocks that Abby had recommended in the last year, you would probably be crying right now. On April 6, 2000, she recommended: CSCO, DELL, EMC, FDC, ORCL, PMCS, TER - down 46 percent. On Oct. 3, she recommended: BEAS, CSCO, EMC, JNPR, NTAP, and ORCL - down 60 percent. On Nov. 27, she recommended: CSCO, DOX, EMC, GLW, ITWO, SLR, SUNW, VRTS - down 39 percent. If you can't believe Abby, whom can you believe?
This is not to say that you shouldn't listen to analysts. Analyst Dan Niles of Lehman Brothers previously recommended that investors reduce their exposure to Intel and other semiconductor stocks back in October 2000, a call that turned out to be on target. And last weekend Niles said on CNN that investors would be wise to avoid the whole semiconductor sector. He had a rather negative outlook for Intel and said it would take a long while for their problems to be resolved. He disagreed with Abby's recommendation to increase your exposure to equities at this time.
So what can you do in this confusing market environment? A few aggressive traders I know are nibbling at some of the beaten up technology stocks, willing to take some short-term pain for long-term gains. They believe it is better to buy when the market is at 2,000 rather than at 5,000. The Nasdaq has fallen so fast in the last week many believe the elusive bottom is near. Keep in mind they are taking only small positions of certain technology stocks like CSCO, SUNW and INTC, the kinds of stocks many traders are avoiding on the long side. This is classic bottom fishing and is only recommended for those who have the patience to hold for the long term and have an exit plan in case they are wrong. Other traders, however, are cautiously sticking with gold, steel and cash.
There are other strategies, however, that are working in the current environment, including hit-and-run trading (discussed in a previous column) and shorting the rallies. When you short, you are betting that the price of a stock will go down. Although many investors dismiss shorting as un-American or unfair, it is a strategy that traditionally works well in bear markets and recessions, and has worked quite well in the last year.
Sometimes you have to reverse your thinking. In other words, instead of buying on the dips, you do the opposite: you short the rallies. As Oliver Velez pointed out in a previous column, two to three-day rallies to the upside mean nothing in a recession, and should be shorted. There is some danger in shorting, though, because losses can be unlimited if you are not monitoring closely what's happening in the market. For example, some of my trading friends who have made a fortune with buy-and-hold shorting in the last year got their heads handed to them when Greenspan unexpectedly cut rates by a half point on Jan. 3. But as expected in a bear market, this rally didn't last long and the technology stocks they had shorted dropped even lower than before.
Right now, however, if you want to be on the side of the trend, you should think about shorting, because the trend is still pointing down. Of course everyone wants a "V" shaped recovery, and that is our hope, but savvy traders should be prepared for anything, including a "U" shaped or "L" shaped scenario.
Until there is technical and fundamental evidence that the worst is behind us, shorting the rallies is a strategy that appears to be working. The hard part for traders is finding technology stocks that are still grossly overvalued. That is why many traders are now taking a closer look at the Dow, wondering whether this index will follow the Nasdaq into the abyss and provide more viable opportunities for shorting.
Article by David Sincere. Pristine.com |
