Hmmm.... does this mean the top is about in??

Let's look back in time a couple of weeks. Remember I wrote a short while back about how it looked like the S&P 500 was going to complete (and fall down through the neckline of) a beautiful looking head and shoulders.

Remember I also said that if you had shorts in that you want to place your stops around the top of the head, and that if the market manages to close above the head line, that usually signals a reverse of trend and a new upward movement?

Well let's see what the market ended up doing.....



Hmmm.... not trying to toot my own horn or anything, but it looks to me like the S&P is running along exactly as predicted. IF (and this is a big if for most traders/investors as the psychology of a nice-looking head and shoulders pattern is pretty compelling) you were to take long positions at the top of the head and hold until today, you would be up roughly 6.3% in just a few short weeks.

The idea is to be impartial about markets, because they will do exactly what they will, and there is nothing you or I can do to change that.

So even though I know that the fundamentals of the underlying companies and economy that this index represents are getting worse and worse by the day, I also know that markets can be more irrational than anything else in the short term. But there are a few things that have popped up in the last few weeks that to me seem to signal the possible end of the rally in the near future (My personal feeling is within about 2 months the top will be in for a long long time).

Here is one:




I will give you an example of why this is a hugely top-defining moment and why this should make you pretty scared about the whole "Green Shoots" jargon being spit out by the talking heads out there.





Anybody remember this?? I personally am too young to remember this, but I can tell you there are sure a lot of people alive today who do. It was over a decade into the vicious Stagflation Bear Market that rocked the nation and skyrocketed unemployment. BusinessWeek is a "reputable" business magazine that covers the economy and such. But they are mainstream media. And if we as traders know anything about mainstream media it's that they are usually the LAST to the party.

This is what happened to the Equities Market after BusinessWeek claimed that they were "dead".



Bang On, weren't they!

So this is just a word of advice. When the entire crowd is running toward something, it might be time to look over their shoulders and see exactly what they are leaving behind. Might be some opportunity there. Or a whole lot of it.

As to some of my soon-to-be purchased picks, I have picked out ideal targets for Hangfeng Evergreen Inc and Migao Corporation for plays on the upcoming massive Agri-boom across the world.

I am looking to scoop up both of these for below their Net Asset Value (The price per share of the value of all company assets minus debt not accounting for future earnings or growth). This is a good idea for all long-term investors because you are basically getting the company for a cheaper price than it is actually worth at market value.

It's also a good idea for investing in Small Cap stocks because generally if they get bought out they get bought out at a premium. The cheaper the price you pay versus the assets they hold, the more cash or converted stock you will end up with at the end of the day.

(See Silverstone Resources - now owned by Silver Wheaton - which we made over 400% on and got to convert to Silver Wheaton shares as an added bonus!)

So here are the numbers I have crunched. Keep in mind that any time a stock is far off NAV it will eventually return to it. So if you are looking to short or buy puts, find a stock that people are paying way too much for (they will eventually wise up). If you are looking to go long, look for a stock that people are selling for way to little (because they will definitely wise up too).

For Hangfeng Evergreen:

NAV is $5.35 / share. And Check Out this Revenue Growth! Now that is a thing of beauty :)
So far the revenue they have clocked in for this year is over 35% higher than comparable quarters this year. Will the share price go down in the short term? I absolutely think (and hope) so, along with the broad markets.

Will we be getting a solid company with demonstrable profits, decent insider ownership, revenue growth, and a business model that operates within a fundamentally sound and improving industry and country?

Absolutely! (Same goes for Migao)

Migao's NAV is sitting at just under $6.00 per share. They are currently trading at $7.95 which is certainly steep for me. Also phenomenal cash-flow and revenue growth for several years running.

Remember that the secondary beauty of these companies is that somewhere down the road they will be great buyout targets for larger companies looking to expand their market share and regions of operation. Will keep you updated on these every now and again.

CDE closed today at a new high since the reverse split of $16.00 per share ($1.60 per share pre-split, making our $.62 cent purchase grow with a 158% return in 8 short months!). This one still has a long ways to go fundamentally as it is still trading to a discount of NAV by over 35%. The fundamentals of silver itself have not been better in a very long time and I encourage you all to keep accumulating small positions of the physical metals to offset the rabid insanity of our interventionalist governments.

That is one decision you will not regret. Own a few producers, too, outside the USA as we may just see a resurrection of FDR's "Illegal to own bullion so we can confiscate it for cheap, devalue the currency to enable our spending, then sell it back to you for the new price of almost 100% more" program.

On another note, Peter Schiff seems to be pretty serious about running for Senate, and Rand Paul also seems to be making some headway. We need more of these guys in government all around the world, and I suggest if you live in the US you make some kind of a pledge to their campaigns. They are huge underdogs in these races and it will not only take grassroots awakening but the aid of grassroots donations to beat out the corrupt, croney career politicians in seats right now.

All the best guys!

Derek.

To turn $1000 into $4000 in less than two months....

All right, so just a quick few notes. I am still working on part 3 of the ultimate buy. In the mean time I'll just post a few positions I recently took.

I haven't really covered stock options to this point for any of my readers out there, but I will do a segment on them in the next month or two as I am planning on trading them pretty heavily on a <90 day contract basis, due to the high volatility out there I'm looking to leverage my gains without having to extend as much capital as taking the same size position as in ordinary stock.

Anyway... I digress. Here's a few positions I have taken over the last sis weeks. These are all still open positions and I will let you know when I close them off. Some are down some are up, some are for fundamental, long-term reasons and other are for trading purposes.

Linear Metals Corporation, Traded on TSE: Symbol LRM
Purchased December 22, 2009 at .045/share - 40,000 shares

Silverstone Resources, Traded on TSE: Symbol SST
Purchased Jan 05, 2009 at .70 / share - 2,000 shares

Couer D'Alene, Trades on NYSE: Symbol CDE
Purchased 05 @ $.55 / share - 2000 shares

Baffinland Iron Mines, Trades on TSX: Symbol BIM
Purchased December 15, $.0165 / share - 10,000 shares

JPM (JPMorgan) March 2009 Puts, $15.00 strike price,
Purchased 20 contracts at $.42 / contract

That's it for now. Others to come.

The one I want to focus most on is JPM - the reason I took out puts at $15.00 for the third friday of March expiration is because I think there is a decent chance the stock will make it down that far.

Looking at the Put side of the table here, current puts at or around the real stock price trade at a premium of about $3.00 per share for the march contracts. This is after a few days of upward movement, as well, which generally will mute the premium for the opposite trend on the short term.

But I think JPMorgan has a fine chance of reaching new lows within 6 weeks. Here's why:

No matter how you look at it they are still in the iron grip of a heavy bear trend, complete with huge false rallies and crushing reversals to follow. The 50 day Moving Average (the average price of the last 50 trading days, for those who don't know what a MA is) has acted as an inpenatrible ceiling for the last few months and I don't think this particular rally is going to be any different.

In fact as we have seen on most Bailout announcements the tendency is to buy the rumor and sell the news.

But the big thing for me? March is when the Fed starts buying up treasuries of its own (kind of like writing a cheque to yourself from an account that says zero and cashing it) which will cause huge debasement of the USD. This will crush JPM's balance sheet as they are very very heavy treasuries and their value will collapse as soon as this plays out. This will inevitably hurt the stock. Not to mention they just raised guidance for defaults on loans by ONE HUNDRED PERCENT. It will get worse as well.

So if I can get down to even $16.00 or so on a huge selloff over a week or two, my 20 contracts which cost me around $900 USD after commissions could very well turn into a tidy $3000 - $4000. However if the trade continually runs against me I have set a stop at a 50% loss on the options and I will sell them off on the market early. Risk a little for a decent sized reward.

So here's the chart for JPM - let me know if you think I've got a chance :)

What the government SHOULD do

This entry is actually a response to a very interesting website I stumbled across earlier today. It's an open forum where people can post ideas about government policy. Following on the "wiki" premise, the site is called www.policywiki.com. The particular section I am interested in is regarding my own home-grown Canadian people and what they think our government should do (since it just announced a decade of fairly significant deficits to "combat the recession").

I was going to post my response in the "my ideas" section but I think it might be a bit long for the forum format so I just did a synopsis there and linked to this post, where I have my full argument.

So here it goes... my thoughts on today's economy.


LESS consumption is the true key to a long-term successful economy. Unfortunately the modern economists have bought into this idea that consumption is the key to a booming economy.

It is not: Very shortly, this is what has gotten us into this situation: We, as a nation, have BORROWED money (because of ridiculously low interest rates) to consume. The stuff we are buying does not have any asset worth - they are things that we wear, that we eat, that we burn in our cars, that we surf the web on. These things are worth far less, or are completely worthless, almost as soon as they are purchased. The debt taken is not backed by anything of value, it is an IOU.

couple this ridiculous social mentality with the fact our companies have been outsourcing their projects due to labour unions, high corporate taxes and bloated and unnecessary regulations and we have a massive dive in production coupled with a massive hike in consumption.

The icing on the cake is that our government thinks it needs to run huge deficits in order to "get us out of the recession". This mentality speaks a sorry truth that our government believes in pushing bubbles and putting the brakes on when they burst. Unfortunately this only ends up in the building of a bigger bubble and the burst is that much more violent.

Government policy should be completely changed - we as a country should force what is TRULY best for us into their policies. Our entire tax structure, government service load, and monetary policy needs utter reform in order for us to become a true world leader economically - the only thing that keeps us in a somewhat healthy state is that we are just "not as bad off" as our friends to the south. But we are still much worse than we should be.

The types of policies that should ABSOLUTELY be avoided:

A) Government taking on more debt

What our government is planning on doing is equivocal to you buying a brand new car after you have just lost your job. Imagine when interest rates approach more normal levels historically how a "mere" $60 billion or so turns into $100 billion or $200 billion because of the devastation of compound interest against debtors. We will end up paying 2-3 fold for money today that is being completely wasted.

B) Giving money that we as citizens have sweated for to fund Research and Development

This is perhaps one of the more terrible ideas that I have heard to date. Pouring billions of dollars into R&D guarantees nothing - there is absolutely no asset whatsoever to back all of that debt; only the hope of a possible future asset that may or may not even come close to the value of the underlying debt.

C) Jobs - Government should NEVER be responsible for providing jobs!

It is a universally proven fact that the average government employee is around 60% as productive as a private sector employee. Even worse, virtually all government corporations in our country have lost BILLIONS of dollars. A recent example is CN Rail - they cost billions to taxpayers when they were run by the government. Funny thing, since going private (i.e. being bought out by private equity) they are now one of the most fundamentally strong companies in Canada and have stellar earnings levels! They even employ more people!

D) Imposing ridiculous laws on markets for trading and day-to-day business.

Naked short selling has been around since the mid 1600's when the Amsterdam Stock Exchange was first started. Anybody who blames short sellers for current market turmoil is simply announcing in a horribly loud and uninformed voice that they have no fundamental understanding of how markets work, both long term and day-to-day.

First, on a long-term basis, the market relies almost completely on fundamental aspects - if the fundamental components of the business being traded are bad or, even worse, completely insolvent (as the entire US banking system is now) then the price of that company will reflect it. If short selling did not exist, prices would actually be LOWER than they are now.

How does that work, you might ask. Very simply. Short sellers must eventually become buyers in order to cover their positions. Short selling is much riskier versus simply holding equities, because you can actually hold NEGATIVE equity (i.e. if I short at $10 and the stock goes up to $30 I actually have lost 200%) versus long positions where the most you can lose is 100%. But short covering offers support levels, which in turn entices true buyers back into the market. It is the precursor to the majority of bottoms and eventual positive trend building. Without short-selling most people would just hold their stocks and hope they go up some day.

Now for the good stuff:

What the government SHOULD do:

A) Stop subsidising.

I understand that lobbyists are convincing but the subsidising of corporations must end. This only makes them second-string government corporations who spend the money badly, employ unproductive workers and build B-Grade products. (See big 3 automakers for example over the last 25 years for an excellent reference point.)

Subsidies kill innovation, smother it completely. Who needs to worry about those kinds of things if the money is just going to keep on coming, if your customers aren't your lifeline? Recessions create opportunity. It is a chance for small companies to spring up and take market share that their massive competitors over-extended themselves to grab. It is a chance for revolutionary products and innovations to be born.

The subsidies don't just stop there - governments have to STOP SUBSIDISING DEBT. The only debt that should be tax-deductible is debt that is strictly for capital growth purposes, whether personally or corporately. All other debt should be left out of the write-off category.

Stop subsidising student loans! The only reason university and college have gotten so expensive is because the government hands out loans to anyone who needs them. If student lending was based entirely upon the private sector, using reasonable and conservative lending standards, tuition prices would plummet because everybody and their uncle wouldn't be able to get a student loan. This would actually OPEN UP the opportunity for people to enroll in college and decrease the crippling debt loads the unfortunate students of today have to graduate with.

Many many other examples of government subsidation and how it actually destroys true economic growth - but you can find those out on your own if you really want to.

B) Lower corporate taxes:

Unfortunately, the sheer size of our government is what causes us as citizens to have a massive tax burden. This also translates over to businesses. It is much more appealing for a company to do business elsewhere because they will pay far less tax on their income. This strips millions of jobs away from the private sector. Jobs that you or I could have - the government, bloated and inneficient, beurocratic and lumbering, literally robs us not only of our hard earned money by funding operations much better (and efficiently) handled by the private sector, but also robs us of the jobs those private companies would be creating.

Something to always keep in mind. The government can never CREATE wealth, they can only shuffle it around. And to make matters worse they always create new beurocracy to "adminster" the shuffling of said funds, taking their cut in the process. Subsidising causes inferior productivity, workmanship, and less money ending up into the private sector's (i.e. YOUR) hands.

It is akin to this scenario: You and 5 friends are sitting at a table. You each have $10 in your pocket and are trying to decide whether you should buy pizza or submarine sandwiches. A man sitting at the next table overhears them deliberating.

"I have an idea".

"What is that?" you ask

"Why don't I pick for you? That way you'll get a fair and unbiased opinion."

You and your friends mull this new option over. It would stop any arguments, you decide. "Sure, you can pick for us."

The man holds out his hand. "I'll need the money first."

You look quizzically at each other, but finally shrug and hand it over.

"Okay." The man scratches his chin. "I think you should get pizza."

Those of you who wanted it smile, and the others just shrug it off - that was the deal. The man pulls out a cell-phone.

"What are you doing?" you ask.

"Ordering the pizza." He waves you off with a smile. "There's this nice little shop called Vinnie's down on Main St."

You shake your head vehemently. "That place makes terrible pizza!"

He shrugs. "It should be fine. Not that know the first thing about making pizza, but I'm sure you'll end up liking it. Besides, Vinnie's shop has three employees and most other stores have only 2."

You throw your hands up in frustration as he orders your pepperoni pizza for delivery. The total comes to $50.00 He smiles and hands you the 5 $10 dollar bills, pocketing the last one for himself.

"hey, what are you doing?" You point to his pocket where your money lies. "That's our money!"

He shakes his head. "That's the fee for my services." With a tip of his hat he walks away.


Definitely a much more simplified version of things but the story is essentially the same for subsidies - the government takes your money, picks the worst business to give it to (after all they really only have their own business model to follow), and takes their cut before doling out the rest. And you are left with less money, an inferior product in your hands, and are being told that this is a necessary part of the modern economy. Rubbish!

But back to the nuts and bolts to wrap this thing up. The last thing government should do is completely alter the monetary and tax structure for individuals. I have a proposal that would ultimately build the most rock-solid foundation for an economy. It would be painful for most people as it would result in drastic lifestyle changes, but in the end.... perfection.

a) Remove ALL TAX on investment income for individuals. Also remove all tax on interest and dividend income - this increases savings rates by a huge magnitude creating a virtually indestructible base for an economy over the long haul.

b) Remove tax write-offs for all interest payments except those for mortgages, business, and other capital growth.

c) Concentrate on trade missions to Asian countries, who will soon be the world's primary economies and importers of our valuable resources.

d) Abolish the bank of Canada. Replace it with a Crown Corporate who's primary purpose is to acquire gold and silver using government surpluses on a sliding scale (I.e. percentile basis of the surpluses). Allow the free market to determine interest rates for the individual.

e) Make it illegal for the government (themselves) to replace cash contributions to CPP with government bonds - i.e. remove the ponzie scheme that currently exists. Also require that 25% of the contributions be used to purchase gold and silver bullion from Canadian mints. Mandate that all securities held within CPP must pay dividends and have paid them for at least the previous 5 years. Mandate that at least 25% of CPP holdings must be Canadian equities, and 50% must be international with a maximum 10% of the international holdings being US companies. -

A note: I personally disagree completely with CPP and have tried fighting being forced to contribute on several occassions but apparantly you can be JAILED for this as it constitutes government fraud, so I use this as a far-distant second choice.

and,

f) STOP subsidising companies and lending and allow the market to determine what it appropriate. This will eradicate the idea of booms and busts and allows for steady and constant growth.

We have one of the hardest working and most innovative countries on earth and every time the government hands out cash to a dying company it robs thousands of us of new opportunities. The government needs to be hacked down to a more manageable size and the private sector needs to be allowed to function as it should.

That's it everyone. Part three of "The Perfect Storm" should be up in the next week. Happy trading.

Also, anyone looking for some decent trades for future earnings reports, I highly recommend shorting Goldman Sachs, J P Morgan and Morgan Stanley as the further insolvency of their balance sheets comes into play. I predict either BAC or Citi possibly declares bankruptcy this year.

Another fantastic buy for the next few months is the UltraShort Lehman 20+ year bond and the Ultrashort Lehman 7-10 year bond ETF's. These guys will probably double as the bond market bubble bursts and shatters within a matter of 150 days. Possibly triple. I have already made money taking out options against BAC at the beginning of the year.

I will post some near-term trading positions that I will be taking over the next few weeks so you can follow along.

The Psychology of Trading Part II: Technical Analysis - Is It Really That Technical?

Image from theinnermind

Greetings all!

I've had some excellent reviews of my Psychology of Trading Part I and I am very excited to carry forward with this.

My primary goal throughout these posts is to simplify and break down the idea of the stock market. Stockbrokers and Fund Managers WANT this stuff to seem as absolutely complicated as possible because you will be too insecure to invest your own money - inevitably, because we are all told that investments are the #1 way to build a nest-egg, we hand our money to them... because somebody has to do it.

Well many current mutual funds are on par for a significant loss this year and historically the average stockbroker doesn't make their clients any money at all; they don't sell profits to their clients, they sell the idea of profits. Which, unfortunately and for many, are not actualized in any way.

On another side note: I am sorry for the lack of pre-warning as previously promised, but I made a purchase of BIDU (Baidu.com) about 15 minutes before the close. I am a current shareholder of BIDU since last January, where I purchased 100 shares at 118.34. So far the stock has definitely performed well.


Today I picked up another 100 shares on my E*Trade account to ride out the stock. Now this one is not for the weak or heart - firstly because to buy a minimum 100 shares you would need $40,000.00 right now, and secondly because it is very volatile - today's trading range was over 24.00/share in price movement, or $2400.00 of profit/loss at only 100 shares.

Now I got in this 100 shares at just over 400.00 even, and it closed off at 398.87 for a small loss of around $1.50/share (keep in mind that this is only 6% of ONE DAY'S TRADING RANGE)



Ergo, even if I only catch 2 or 3 decent days up I can make $4,000. I am setting my stop at $378.00/share or a potential $2250.00 loss. My gut, based on the strength of the bull (upward) movement the last 6 months as well as the overall success of GOOG (Google's stock up over 700% in the last 3.5 years) which Baidu is basically the Chinese version of (with a 4.5x bigger market!) tells me that my purchase will be well over $500.00/share within the next 2 months.

As usual I apologize for digressing. But I did promise at the start I would post my transactions and the reasons for - the #1 reason to buy BIDU? People are bull-crazy for Google's business model and therefore that translates over to BIDU which is younger and has MORE growth potential. Their loss is my gain.

So what I want to talk about today is stock charts - Not the different types of charts or time intervals or color-coding or anything like that. No, I want to talk about the chart itself. What it is. What it represents. The story it tells and why it plays bard to its publicly traded company.

So what is a stock chart?

Well, before I define the meaning of the chart, I should define what its source of data is, that being the stock ticker, or ticker tape. A ticker is "a computerized device that relays financial information to investors around the world, including the stock symbol, the latest price and the volume on securities as they are traded" INVESTOPEDIA . Basically it is a real time quote of a stock, telling you how many shares are traded, when, and for how much.

Image from Walden Group

I can't find a quotable source on the actual definition of the word chart on its own in relation to stocks, so I will define it myself:

A chart is A visual representation which sums up all of the transactions during a set period of time on a time vs price scale. This in essence sums up all of the information flying through the stock ticker.

So instead of having to sift through 150,000 trades on a single stock to see every transaction for the day, you can refer to the daily chart to see a summation on a single page of every trade for that day. A little easier to manage, wouldn't you say?

Now, why is the chart so significant?

Well if you refer back to The Psychology of Trading Part I you will remember the market principal. And if you remember that, you will also remember that a market is based on buying and selling by a group of people with singular intent, that's it. A share's value is entirely perceived (intangible) by both the buyer and seller. When they can agree on a mutual price a transaction occurs.

So what determines this agreeing point? The truth be told I believe that 90% of trades in the stock market are are based on 1 thing which is comprised of 3 things: Group-think, which I also discuss briefly in Part I, is the factor in 90% of trades. Group-think is instinctual, based on Fear, Greed, Remorse, or a combination of them all.

Most of the "agreements"/trades made between buyer and seller are panic-oriented. Somebody hits their Market-Buy key (a shortcut key when trading stocks that says to purchase a certain number of shares at the lowest offer price instead of making a bid) because they are scared they missed the train. This is one of many many examples.

The stock chart is the storyteller of Group-Think on a particular stock. It tells you whether the Bear or the Bull is winning the tug-of-war over a particular period of time. And let me tell you, once you know how to recognize what is happening, a chart can be as loud and flourishingly blatant as any living-room yarn-spinner.




For Example:





Each chart shows the mentality of the majority of people buying and selling that stock.

In a downtrend, more people feel the stock is of less value and therefore offer less or sell for less. In an uptrend, more people feel the stock is worth more and therefore offer to buy for more or won't sell for less.

You will see uptrends and downtrends on every stock chart you look at. Some only last a few days or weeks, some 6 months, some 40 years.

But the chart tells the story. Say I look at the Up Trend chart and I refer to the peak of the second Bull-Run (the second point from the left). What changed the price of the stock? It could have been any number of things, such as poor macro economic data, an undershot quarter of earnings, a hit in that particular sector because of a new law restricting business. Who knows? I don't need to know any of that, though, because I have drawn a loose trend-line.

When you recognize a trend and want to jump in on it for a short bull-run, where do you think the best point is to do that? As close to the trend-line as you can get. The idea is to get in when selling negativity is still just starting to ebb. What happens to the uneducated amateur (I call them "fish") at this point is something called "buyer's remorse". This is especially effective on higher-volume stocks as more traders are subject to this.

Buyer's remorse in terms of stocks is where someone bought shares and they were up, up and up, but held on because of greed and lost half of their winnings in a down-swing. The result now, is a combination of panic and greed (they want to keep some of what they made) so they sell out. When the stock price goes down lower and lower, the buyer remembers the money they made before. "The stock is cheaper now and I know it will get back up there again" they think. "Just like before. This time I will make my money all of the way!" This time it is greed and remorse again that makes them buy the stock at its cheaper price

What you have to do is to be one step ahead of the fish. They will wallow in doubt and anguish until the group-think pushes the price the other way. Then they will jump on board with the rest. That's where you have a full reversal and the stock starts to move upward again.

The trick is to get on at the trend-line, because there is where the price will start going your way. Also, you have a natural reference point for when you can enter the stock, and you can exit pick your exit by looking at how far up each retraction moves. (i.e. if every time the stock moves up again it goes .15/share higher in price than the last time, you can pick your selling point to match it.)

But what is even better about this is that you can trade with tight stops (how much money you are willing to lose before you will sell). If you look back and see that the last three times the price touched down to the trend-line, the most it went under was by .25 before coming back up, you can put your stop loss in at .35 below the trend-line to account for some slippage and bad news or other small external factors.

You also know that if the price carries on through your stop-out it has probably reversed the trend completely and now you can watch for short-selling opportunities in the future.

The trend-line's slope tells you the power of the ruling mentality. In other words, the sharper either up or down a stock's price moves, a higher % of traders on that stock feel it is worth more or less as the trend warrants.

A comparison:



Which is the sharper uptrend? Chart # 2 has a much sharper slope and therefore the bull-mentality has much more power here.

Chart # 1 has a very slow uptrend with wide movements, telling you that mentality shifts more strongly and over a longer term with the bulls coming out only a little ahead in the end.

Which is the better long-term Long (Buy) Position? Which is the better swing-trade (shorter term) position?

I will leave it to my readers to answer if they would like and I will follow up on this in my final entry of The Psychology of Trading.

Thank you to everyone for your feedback and reviews! I look forward to many more!

Buying for the New Year

I hope that everyone is done their Christmas shopping. I had to dodge down to the mall last night to exchange a gift because the particular item I bought was just purchased by the person I was supposed to give it to. Bad Luck.

Anyway, as I was hemmed in traffic, I decided to counter my road-rage (to which I am easily prone) with some deep thinking. So I sparked a cigarette with my Tim Horton's (I have been a shareholder since its I.P.O.) and pondered away.

I sold my stop-loss point on DUG as of Friday, as it hit and carried on through the rest of the day. A small loss at the opportunity for great profit.

But buying opportunities are out there for me. By the time I got home I know what I was going to write about. After some scribbled notes last night, I will put a few generic stock tips out there for people interested in buying right now.

The first note to make is that we are in what is referred to as a sideways market. The S&P 500 has been hovering between 1400 and 1550 for almost a year now with subprime woes smashing it down and individual, surprising company growth pushing it back up. Many factors are involved in this situation but the main point to take away is that over 75% of large-cap stocks practically mirror the S&P 500 barring extraordinary circumstances either bad or good. I.e. the large-caps are moving sideways as well.

Charts on this page provided by Yahoo! Finance

This has created many buying opportunities for value-investors, but even more importantly it opens the doors for smaller companies to grow as the large-caps tighten down the screws to weather the storm.

There are a few things you as an investor can do:


1) Follow those large companies that have been most hurt by the economic woes of this sideways market. Citigroup (C) has lost over 44% of its share value because of the sub-prime problems of the last year. However they haven't lost 44% of their business. So, when the tables start to turn (i.e. watch the chart. If Citigroup finds a strong support that it bounces off of a couple of times, it might be a good time to buy and catch a chunk of that 44% downturn and maybe even scoop up a dividend while you're at it.

But more importantly is this: The entire financial industry has taken a very solid hit because of the sub-prime mess. Even banks that had very little sub-prime loans in their portfolio. So if you buy one of those at a good point and hold, it will retract and GAIN on the companies hurting from defaulted loan losses.

All it really takes is a good eye and an ability to take advantage of the panic of other investors who are less intelligent or rational than you are. If you look at SCSS, I have made over 1.00/share in less than a week from the panic-selling of other individuals.


2) This is the opportune time to buy small-cap companies that have been trying to squeeze precious market share from the big players. Well now is their chance to do just that as many of them are cutting back operations and budgets, laying off thousands of employees, and simplifying product offerings.

This is a small company's dream! One small cutback by a large company might let the little guy DOUBLE his market share overnight. And by doing that they suddenly have twice the revenue with the same or close basic overhead and the addition of only variable costs. The result: A huge spike in earnings which draws publicity, which means a flood of money from the two-steps-behind, news-following investors. But we've already beat them to the punch, and every time one of them is willing to pay a cent more for a share, that's another cent of profit to us.

On a side note I just purchased E*Trade Financial after hours on Friday. This is another of the companies that have been hammered the last year (-85%). But they are making big changes (I am happy for one because I make some of my trade with E*Trade) for the better and I see their share even doubling over the next 12-18 months. My favourite part of this purchase is a review of their key statistics. The company's intraday market-cap (the number of shares x the price of the shares) is only $1.5B, while their actual real enterprise value is $21.5B, and it is trading at a MEASLY 3.5 P/E (share price to earnings ratio). In a situation where people have been dumping this share left and right for as long as I can remember, I think it's finally time for a turnaround.


I got into the stock for $3.60 just before the close for 1000 shares. I am setting my stop in at $2.50 because I am expecting returns of $6.00 - $10.00/share over the next year, a 50% retraction on the past 12 month's massive decline. If you refer to the chart, you will see an outrageous increase in volume (i.e. panic selling) as the stock price plummets.

Many of these sellers will start to buy back the stock at the first sign of a few good headlines and I will profit because I am one step ahead of them. Even if this stock makes it halfway back to its valuation I stand to make a profit of $6,000 to $10,000 versus a maximum potential loss of $1100.

The final thing I like about E*trade is that is far smaller than the big players in the sub-prime losses. For example, Citigroup has 1.06 TRILLION in cash assets to manage and thousands of offices. E*trade is much more flexible and can innovate much faster to offset losses.


And finally,

3) Because the US market is in the middle of stagnation, for the near future, it pays to take a look at foreign markets.

China is not a good choice for the beginner or average investor, because it is so over-valued as a whole right now that you have a very high chance of hitting a bubble stock that will crash down on you. (On the flip-side, if you wait out for a while until the deflation starts, you can make a pile of money short-selling the overbought stocks).

Emerging countries like Brazil are an excellent place to look. This country is starting to develop at an exponential rate and there are billions to be made. I have been reviewing Brazilian stocks for almost a year now and have several companies in my long-term portfolio, every one I purchased at a steal and has made solid growth.

Just remember that there is always some place in the world where your money will grow. It just might not be as close to home as you'd think.

Merry Christmas everyone! I will post again before the new year.

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A Risky Endeavour?

Well it is the morning of Day 2. My second post, and so soon. I guess I'm just excited about today. Last night after I finished posting I still couldn't find it in myself to sleep, so I decided to do a little more poking around for stocks.

I am taking up a few positions on the short-term, meaning typically around a week to one month. I basically do these to catch one or two trend swings then cash out my profits. When I trade short-term trends I set very tight stops on my trades using a volume-related price target. (i.e. I won't sell my position if there is an odd print in trading that is $.75 out of the money from an ECN. I set a minimum requirement of transactions and avg volume per transaction that triggers my stop-loss sell or buy point)

The first position I am taking is in Select Comfort, which just lost about 40% of its share value, declining from about $10.50/share all of the way down to $6.21/share on yesterday's close. The reason: SCSS posted a management update about slowing profit levels in a time when they thought they would be experiencing moderate sales growth. The result, by looking at the MASSIVE volume of the last few days, is that a good chunk of the shareholders are dumping off their shares because of a 2.00 gap down and a subsequent 1.00 + decline over the following day.

What I like about this is that the company is still in the black, and they have always had excellent cash-flow. The second is that as of November 27 they have a 30% short ratio. After this huge decline a large majority of the short position holders will be eager to cash in their profits.

I will demonstrate on the following chart why I want to buy into this stock now and where I am putting in my stop-loss points.



Now you can see on the chart that my hopes are obviously that this gap will close in sometime in the near future. I am anticipating a gap-fill for this morning (.12) and I am going to take up a position around 6.25/share for 500 shares. My stop-loss point will be a solid break through of yesterday's support and a loss of $.50/share, so I am setting my stop-loss point at $5.60 /share on appropriate volume and transactions.

My first sell point is at $7.00. I will sell 200 shares of my 500.00 share position, and reset my stop-loss points accordingly when it reaches that point. My full sell point is a retraction to the point where the gap initial starting trading, around $8.00

So I am basically risking a maximum $.70/share loss for a potential gain of $.80 on 200 shares and $1.80 on 300 shares. As always with investing there is risk. The most important thing about risk is your ability to control it, and to dictate how much of it you are willing to put up with.

I have taken up a 300 share position of UltraShort Oil and Gas Proshares as I said I was going to do last night, and I have made short gains of almost $2.00/barrel of oil. Of course this is just the first day and I am talking about several months of investing, but it always feels good to pick a good entry point. - you can view the chart on Crude Oil prices HERE.

If any of my readers have stock picks of their own they would like me to check out please feel free to post here or email me at any time. Otherwise I will be back with more portfolio positions.