This is it folks!:
TraderMike - Position Yourself to Profit from the Final
Leg of the Bear Market
This is an important message and I want you to read it
carefully. I believe that the market indexes are once again
going to be in for a rough time in the next few months and I
want you to see this as an opportunity and not a reason to
be in despair. There are some important points that you
need to grasp and understand to go through this difficult
time. This may be the most important email I send out to
you this month. Using technical analysis it is easier to tell
what the market, or an individual stock for that matter, is
going to do in weeks or months. Monthly charts are more
reliable than daily charts and daily charts are more reliable
than 5 minute charts. Looking at a daily chart of the
Nasdaq it is clear that it is still in a bear market. It is still
trading below the 150 day moving average and has failed to
break out of a downtrend by making a new high. Stochastic
are trending down. What is more option sentiment
indicators, such as the VXN and VIX, indicate that bullish
sentiment reached an extreme level in early July. This
doesn’t coincide with the recent top in the averages, but is
an important signal that the market is not likely to make any
meaningful rally that will last for more than a week until
these sentiment indicators reach a fearful oversold
condition. It will take a market drop for that to happen. As
for the Nasdaq is has support at around 1930. A close
below this number will likely speed up the selling. The
Nasdaq has repeatedly bounced off this level in the past few
weeks, but every time it touches this number it makes the
support there weaker. On Friday the Nasdaq penetrated it
and managed to rally and climb above it by the end of the
day on light volume. The DOW also fell near its support
point and rallied to finish up near its resistance level. It
appears to me that the Nasdaq will close below support
early next week. However, no one can predict what the
market will do in the next half hour or the next day with any
degree of reliability. That said we are in a downtrend and
until that is technically broken you must prepare for the
worst. I haven’t felt this worried about the market making a
major slide since I warned you that it had topped out in
March of 2000 and when I said the market would crash
after it broke support in October of 2000. A close this time
below the 1930 support will be a confirmation of my current
worries. A lot of people didn’t believe me at the time. I
remember writing a long piece that October about how
technology investment spending was collapsing and that
data was signaling that a major economic slowdown was
just ahead. At the same time Lawrence Kudlow and almost
every economist on CNBC was saying things were great.
Even after I pointed out how the Nasdaq had broken its
support(above 3600 at the time) people still didn’t believe
it. I thought it odd that people would believe me when I
said that technical indicators and chart patterns indicate that
a stock might go up, but ignore the same signals when they
said that the market would fall. My bearish stance made
some people outright angry and people unsubscribed
because of it. But I’m more interested in telling you what I
really think than blowing smoke and repeating the same
slogans and bullish talk that people like to hear. If you want
that turn on CNBC or subscribe to the Murphy letter or
George Gilder. I got one long email back then from one
person full of explicatives who claimed that he was loading
up with his full account right at the moment and that he had
a wealthy friend who was a great investor who knew the
economy would boom and that the market would follow.
He claimed I was a fool for doubting the miracle powers of
technology and the “new economy.” I got dozens of similar
emails. I have since wondered what has happened to those
people. Did they admit their mistake and get out later or
just hold on until they lost almost everything?
1. Prepare to Be Wrong
And that brings me to the first point I want to make to you.
Prepare to be wrong. Making money in the stock market is
about recognizing the fact that some investments are not
going to go your way and getting out before they ruin you.
Cut your losses and let your winners run is an old cliché.
You must insure that your gains are larger than your losses.
Unfortunately most people are more interested in being
right than managing risk. This is about managing your
money, not proving how smart you are. Look. Since the
middle of the summer I thought that the market would hold
up until September and then take a dive. Going into August
I thought that we could get a low volume rally. Instead the
markets have fallen down to support and are poised to
break it. There has been no big rally. I had to recognize
that I was wrong about this and adjust. I still made money.
Not as much as I would have if I had expected the markets
to fall the whole time, but if I had refused to admit I was
mistaken about the market rallying and refused to sell I
would have lost money.
Whenever you make an investment you have to prepare for
the possibility that it might not be a good one. If you don’t
put sell stops on your stocks than you are taking on wild
risks. You might as well go to Las Vegas. At least you’ll
get free drinks and see pretty women in exchange for losing
money. You might not think of yourself as a gambler,
because some analyst on TV says buy tech and he looks
smart, but that is what you are doing if you have no plan
except hold and hope. Just take out your checkbook and
write a check directly to Wall Street. It’ll save you time and
worry. So this is a plea. The Nasdaq is likely to go down to
the April lows and will probably even go through them in
the coming weeks. I just read a study that said that it would
take a drop to 1450 to bring the Nasdaq to historical norms
on a fundamental basis. However, most bear markets
overshoot and make stocks cheaply valued. Look through
your portfolio and put stops on individual stocks you may
have. Don’t refuse to take a loss. If you have stocks that
are underperforming the market(are they up as much as the
Nasdaq is from the April lows) than you may want to
consider selling them now. If we get a large decline stocks
that failed to rally as much as the market will get totally
crushed. This includes even popular companies that have
“technologies’ such as JNPR, LU, NT and JDSU to name a
few. If you have a broker or financial advisor go to him and
ask him what should I do now if the market is going to fall
to 1600? What can I do to protect my assets if that
happens? If he says don’t worry, because that isn’t going to
happen. Say ok. But I need to be prepared in case it does.
Come up with a plan just in case.
Does it mean switching from tech heavy funds to value
funds? Buying bonds? Putting a higher % of your assets in
money market funds? Ask him. That is what you have
hired him for. On the flip side. Don’t go crazy and start
shorting left and right or buying puts because you think the
market will tank. Do some of this if you want to be
aggressive and profit from a decline. But just as with long
positions, manage the risk and cut losses. Prepare to be
wrong no matter what you do so you can profit from the
times that your decisions turn out to be correct.
2 – There is more to the stock market than the Nasdaq
index.
And now my second point. Let me tell you what most
people did last year. Most people were overweight in
technology stocks and tech heavy mutual funds. After the
market topped out in March of 2000 they saw their stocks
decline and it made them uncomfortable. But most didn’t
do anything about it. Then the Fall came and the market
slid from August of 2000 to April of this year. Again most
people didn’t do anything. Few got out at the beginning of
the slide. Those who did get out did so towards the end of
it. And others made things worse by buying more stocks as
they dropped only to make their losses pile up even
more. The average investor had no plan to protect his gains
or protect his assets. He never accepted the possibility that
his investment decisions may turn out wrong. He watched
things drop in disbelief. He didn’t want to sell and take a
loss or lose all of the profits he once had so he had to find
reasons to hold and hope and he found plenty of people to
give them to him. He became obsessed with the idea that
the Nasdaq would bottom. He turned on his TV and
listened to Mary Meeker, Henry Blodget, Maria Bartiromo,
Mark Haines, and Lawrence Kudlow tell him that the
market would go up because there was “cash on the
sidelines,” “an economic boom coming next month,”
“another interest rate cut,” “a tax rebate,” “just the first
phase of a technology boom,” and “definite signs of a
bottom in the semiconductor industry.”
It wasn’t important to the average investor whether or not
these talking heads had solid logic behind their reasoning.
What was important was that they were receiving positive
reinforcement for their behavior which consisted of doing
nothing and hoping. Watching CNBC became a daily ritual
of worry and hope. People tied their emotions into their
stocks and felt their stomachs twist and turn with every
move of the Nasdaq. If the Nasdaq went red and finished
up a few points they told themselves that the worst was
over. If it finished red they cursed and turned on the TV to
listen to someone say everything would be ok and hoped it
would go green tomorrow. But in the end everyone stayed
focused on the short term price swings of the Nasdaq and
magnified their importance to back up their reasoning. It
was a time of slow torture and mental agony for the average
investor. So what does this mean for the future? If the
market takes another dive the same thing is going to happen
again. All you will here about on television is whether or
not the Nasdaq has bottomed or not. Will the 100 or so
popular tech stocks go up or are they finished? People will
watch the Nasdaq index and experience the emotional roller
coaster of worry and hope all over again. The TV didn’t
help you then and it won’t help you now. This is important
so read this carefully. There is more to the stock market
than the Nasdaq 100 and the couple hundred or so popular
tech stocks that are regularly followed on CNBC. If the
Nasdaq falls to 1000 and Cisco goes bankrupt, the stock
market will still exist and will continue to be profitable for
those who know how to use it. The stock market is not one
index of technology stocks. It is actually a group of
markets given the broad title stock market. There is no
need to be in despair because another tech stock collapse
may happen. There will be plenty of opportunities to make
money on the long side once the dust settles. And that is
even if tech stocks remain dead money for long
afterwards. Let me explain. The stock market is a market of
individual sectors. Each sector has its own internal strength
and weakness. Some sectors tend to go up during bear
markets. Some sectors go up first after a bear market ends
and others, such as technology, tend to make their move in
the later stages of a bull market. Last year while the market
declined, sectors such as tobacco, health care, and energy
rose. During the last decline ended a few sectors, such as
coal mining, medical research, and auto parts consolidated
and began to break out. Once the market bounced in April
they led the rally and outperformed the big cap technology
stocks.
The coming market dive will provide a fantastic opportunity
for people who will be in a position to buy stocks towards
end of it. A few sectors will hold up and begin to break out
before the market bottoms and once it does bottom they will
take off. No one knows where the market will stop falling.
But most people will try to do the impossible and guess the
bottom and buy tech stocks. All we’ll have to do is watch
the sector charts and buy the strong stocks that make them
up when they breakout. If you look at things this way you’ll
see that if the market drops it will provide an incredible
buying opportunity. It will probably be the final drop of the
bear market and once it is over stocks will actually be
cheap. We’ll be buying cheaply valued stocks, in strong
sectors that will lead the next large rally.
3) Be Positioned to Take Advantage of the Market Instead
of Letting Wall Street Take Your Money
You might think I am right or you might think I’m wrong about the market dropping. I don’t
care. What you need to do either way is to protect yourself now in case it does drop. There is no
need to have all of your assets tied up in the stock market right now. Don’t let the fund managers
on TV fool you into thinking it is a sin to have some of your assets tied up in money market or
bond funds and out of the stock market. Right now I am almost completely in cash, save for a
few small long and short positions. I plan on doing a little shorting here and there as the market
falls, but I am going to be really focused on watching the high relative strength stocks and sectors
and buying them as they breakout. This won’t happen overnight. It will take time to
develop. Don’t despair if the market drops. Remember: We are about to see what will probably
be the final 3rd leg of the bear market. When it ends there will be incredible opportunities to buy
stocks at truly cheap prices. But to take advantage of that you will have to survive the coming
collapse. Most won’t know what hit them and only a few will be left standing after the dust
settles. Many will be so mentally beaten that they won’t buy stocks when the buying is good.
When no one cares about the stock market is the time at which the smart buys. With careful
planning and consideration you will be one of them. |
