Sell-off warning on 4/18/2004,
I use value investing, technical analysis and industry knowledge to invest. It is hard to determine what good/bad news is priced in or not, so when it comes to determine a market top, I rely on a model purely based on market data. It has nothing to do with "gut feeling" and worked pretty well. Below is an email I sent to investors and friends about a model sell-off signal (only one in past two years). I choose to post here several days later to benefit people who entrusted me with money.
Date: Sun, 18 Apr 2004 21:22:04 -0700 (PDT)
Subject: We are approaching a serious sell-off!
My proprietary model (based on the technical trading pattern of the stock market) is telling me
that the market is at the most dangerous time since January 2002. We are fast approaching a
serious sell-off. I am waiting for a final confirmation reading in the next two weeks. If we do
get that signal, the market will most likely go down 15-25% within 12 months. If you want to be
notified on that signal, please reply this email with “Send me that confirmation reading”. If you
don’t want to receive email updates in the future, please reply with “Remove me from the list”
The above model is purely a technical calculation of the market data, it has nothing to do with my
"gut feeling" of the market, or the market fundamental.
There are also other signs that support this view - Individual investors are again pouring new
money into stock mutual funds as they rush back into the stock market last quarter. Inflows are
again equal to the first quarter of 2000. "Smart Money" (Insiders) continued to dump their own
company's shares in record numbers. Speculations are rampant as seen in many of those
“short-squeeze plays” where money losing companies are trading at 50-100 times revenue.
In spite of what you may be hearing and reading in the financial press, 2003 is more likely a bear
market rally than a new bull market: Since this bear market began in early 2000 it has undergone a
series of sharp sell-offs followed by ever-weakening rallies. Each sell-off has taken the indexes
to new lows and each rally has established a peak that was lower than the previous high. With all
the fiscal stimulus the market still failed to penetrate Jan 2002 level. The inflation is clearly
on the rise and the US economy sees no new growth point (such as PC industry in the 90s). We are
witnessing a structural change of the economy and permanent loss of white-collar jobs. Our next
generation is chasing the teen singing stars while failing on math and science, and the poor kids
in China and India are studying 60 hours/week to become the best science/engineering work force.
A serious terrorist attack such as 9/11 could suddenly and unexpectedly throw the markets into a
tailspin. In a nutshell, many people’s hope of a nice retirement based on their current stock
market investment (index funds or mutual funds) is in great danger.
Being a value investor, I won’t buy a stock unless I think it’s worth at least twice what it’s
trading for -- the proverbial 50-cent dollar. In times like these, when I haven’t found a 50-cent
dollar in months, it’s easy to rationalize buying 80-cent dollars rather than holding so much cash
-- but this is extremely dangerous thinking. As I’ve learned from painful experience, 80-cent
dollars can become 50-cent dollars in a declining market. I have been selling when my stocks got
a jump in Q1 of 2004, and cut back long positions in every single stock including ALVR and EONC,
completely out of UTSI with a small loss, holding about 50% cash.
Just because bargains are harder to find, however, doesn’t mean I’ve given up. Far from it. Q1
was a period where my model said the market was consolidating, and eventually will come out to
either up or down side. Recently it is getting clear that we are approaching the end of this bear
market rally. Money making opportunities are just around the corner; this time is on the down
side. I sell short or buy put option to make money in a down market. This is one advantage of
hedge fund - when market has a serious downturn, most mutual funds and all index funds will go
down with it. Here are a list of stocks I am planning to short: AMR, PCS, SOHU, RIMM, ZIXI, WWCA,
PCSA and CA. I am also going to buy put options on QQQ. The strategy is to sell into big
positive news in the next two weeks to unload long positions, and add short positions unless the
model signals a change. Just a caution note that short selling has unlimited risk and you should
not try unless you are very experienced. Never trade based on my email since my positions may
change quickly and there is no way for me (and I have no plan) to notify you. |
