Email to the mailing list yesterday 5/18/2004.
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One of the gratifying factors of writing this newsletter is I always get feedback and sometimes healthy debates.
After I sent "We are approaching a serious sell-off" email on 4/19/2004 (attached), and the "Confirmed Sell-off" email at end of April, many friends wrote me back or called to tell me they disagree, including people with 40 years experience and some successful hedge fund managers. Their feeling was "The economy is growing fast, earnings are superb, inflation is under control, jobless claims are dropping, and we are in a perfect time for stocks to go up". One friend suggested "Do you read Barron's? Don't you see most business news is very positive and experts are bullish?"
Interestingly, since my model gave the "Confirmation of the sell-off" signal on 4/23/2004, all market indices were down, and many individual stocks were down significantly:
NASDAQ: -8.5%
DJIA: -5.7%
S&P 500: -5%
Russell 2000: -10%
Nortel (NT): -43% (One friend's favorite stock, do you have it?)
Juniper (JNPR): -24% (One friend have millions in this stock, ouch!)
Sohu (SOHU): -34% (Yes I did short it as I told you in last email. Now covered)
I see the stock market as a voting machine rather than a weighing machine. Millions of investors read the same business magazines, watch the same channels everyday, and when they agree with certain stock ideas, they will vote with buy/sell orders. The experts in major media undoubtly have big influence on the public, some of them are very sharp and have great insight, but the majority can not beat the market. Nonetheless most are very persuasive and good at selling the idea, otherwise they would not survive in that business. The end result is when majority of people feel very bullish about the stock market and vote with their buy orders, the market usually top exactly at that point.
While it sounds easy but how can we determine the top of the bullish sentiment? We are all influenced by the media and experts; we need something that is completely unbiased. I found Technical Analysis a dispassionate tool. It calculates purely market data, such as volume and price, and is not influenced by fundamentals and sentiments. I developed several technical analysis models over 10 years of observation and testing, one of those proved to be fairly accurate in determining market tops so far. It triggered a "confirmation of sell-off" signal on 4/23/2004. The previous "sell-off" signal was in March 2002. The fact that many people disagreed with the model signal is actually a contrarian indicator that further confirmed it.
When I get a stock idea, I always wonder if I am at the end of the distribution channel. Did this idea travel from analyst to a group of people who reviewed and approved it, and people closely affiliated with that group, to thousands of brokers on the “morning call”, eventually to the retail clients called by those brokers? When I liked a very convincing idea from a well-known expert on a major media, thousands (sometime millions) other readers probably liked that idea too. It is likely already priced in that stock. In this world, independent, unbiased and still early-in-the-channel research is a rare asset. Great track record beats all those “reasonable and convincing explanations” of underperformance. Good fund managers are hard to come by and they close the fund pretty fast since too much money would be chasing them once they are known. It is particularly true in hedge funds since most of them can have up to 99 investors, and the best performing funds reach capacity limits fast.
Since inception in March 2004, I can hardly find any undervalued stocks, I am also risk averse due to the early signs of “sell-off” signal, we are about break even in the first two months. The market indices had 4-10% loss in the same period so we outperformed the market by that percentage. I am clearly very satisfied by my decision to go to cash in Q1 of 2004.
Although it is my first obligation to update people who entrusted me in a timely and detailed manner, I do like to send my updates (usually delayed and less frequent) to this free mailing list. My contact list expanded significantly due to referral, I made new friends and got closer with old friends. We found our interactions mutually beneficial. If you find my writings interesting, please forward to your friends who might be interested (mailing list owners should ask me first before forwarding). There is an opportunity for you to be added to a trial of the inner circle list if you refer accredited investors to the free mailing list.
The “market top” model reading is obviously intact since the first leg of sell-off already happened. My short-term timing model (not as accurate as the “market top” one and I am still fine-tuning it) did show the market is accumulating energy for a bounce, and it can happen as early as tomorrow. I have covered most short positions. Many individual tech stocks are cut in half and I do see buying opportunities fast approaching (Note: there are always many individual stocks reach the bottom before the market reach bottom, I would buy if they meet the “extremely undervalued” criteria based on my “intrinsic value model” no matter what the market does). The “market top” model will measure the strength of the rally, and likely give another sell signal. There is a small chance that the bounce is very strong and the model gives a “reversal of downtrend” signal, however the model will signal it way before the market reaches new high. The 3-5% sell-off in the week after 4/23 was likely just a warning shot. The real bottom is usually built when “panic selling” occurs. There will likely be a day that DJIA goes down 250 points and NASDAQ goes down 75 points.
Thank you for reading and please send me your comments and questions, or simply tell me you have been reading my emails.
Good luck in the tough 2004!
Steve
5/18/2004 |
