Monday, November 29, 2010

* Setting Euro Fears Aside The Market Rallies off the Lows of the Session

Stocks rebound as buyers step up and support the market

The market returned from a holiday shortened week greated by hefty selling as fears over deapening of the European debt crisis. Stocks hung around the lows after a steep sell off heading into the 10am hour. Even a positive Dallas Federal Reserve Manufacturing activity report could not hold off sellers from pushing the markets to their lows. Many leaders were holding up during the sell-off, a positive sign for the markets in general. Just before 2:30pm EST the markets found solid footing and pushed higher back to the day’s high and closing just off the highs of the day. Another positive move by the market bouncing off support and as market leaders continue to act positive the uptrend remains intact.

Market pundits have been pounding the table the market had reached a top. CNBC has been running articles on the market topping and we have seen the highs of the year. While this may be true, as no one person knows the future what we have in front of us says we will push higher. Market leaders remain positive and in control. Not too mention smalal caps are indicating strength and when small caps lead it signals traders are willing to take on risk rather than unload it. The moral of the story is to pay attention to the market leaders and their price/volume action.

In the early going the VIX jumped considerably as fears over a market collapse continued to put pressure on stock prices. By the end of the trading session the VIX index reversed its gains and closed lower indicating further decline in the index is instore. The VIX certainly indicated near capitulation type selling just without the volume. Panic selling over the European crisis is noteworthy, but the action at the end of the day is the most important indication of where the market wants to go.

This week is going to be a big week as far as economic reports. Tomorrow kicks off the week with the following reports: S&P Case Shiller, Chicago PMI, NAPM-Milwaukee report. The Fed’s beige book is out later in the week and CNBC’s favorite the Non-Farm Payroll report on Friday. There should be plenty of noise generated this week, but we’ll be focused on the market action and a laser focus on our leaders.

Tomorrow closes out the month and there will be talk about window-dressing in terms of the market action. We are looking for the market to build upon today’s move off the lows and push higher.

Sunday, November 28, 2010

Top Current Holdings, Total Return, And Date Of Purchase

I am currently fully invested in all of my regular accounts and my IRA. Don't forget to check out the 2010 Big Wave Trading Performance.

ticker symbol – total % return since first purchase – date of purchase

URRE 137% 10/26
MIPS 119% 8/20
RES 89% 7/13
JOBS 81% 8/16
SPRD 59% 8/27
GGAL 54% 10/19
TZOO 47% 9/28
CPWM 44% 11/15
XXIA 40% 8/31
FFIV 37% 10/22
IGTE 34% 9/17
AXTI 34% 9/20
ARUN 30% 8/27
TRS 30% 10/1
IVN 27% 9/14
CGNX 27% 9/24
FVE 27% 9/10
NSU 25% 8/20
MHR 24% 10/12
EPHC 24% 10/15
ACOM 24% 10/4
NNBR 21% 9/1
BIDU 21% 9/20
CWEI 21% 11/2

Friday, November 26, 2010

Performance of Big Wave Trading Ideas

Great performance, but an important lesson to be learned

Cutting your losses makes a big difference in performance and the following charts prove by riding winners and cutting losses you can outperform the market.

How profitable are trade ideas from Big Wave Trading?

Our batting average

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A couple days ago I posted Josh’s YTD trade performance for all but 68 of his 2010 trades. Today I filled in the holes, which consisted of trades closing early in the year. Here are the results for all 614 of his trades YTD. Again, any errors are mine.

Note this confirms Josh’s long term average of 60/40.

I have also included a plot of the Gain/Loss percentage for each trade. If anyone ever doubted the wisdom of “keep your losses small” this should convert you. Going through the trades I was struck again by just how disciplined Josh is at following his sell rules, and how that preserves profits far more often than it results in missed gains.

I have always found it difficult to let my winners run. JH is a master, as this shows; his average gain is 33% with a standard deviation of 44%.

I find these results nothing short of remarkable. Awesome even. It is not a trivial matter to translate Josh’s trades into profit dollars in your own portfolio. But as I said before, there is gold to be mined here.

Thanks Josh and BWT! The CEO should give you a huge bonus :)

Tuesday, November 23, 2010

North Korea and PIIGS Weigh on Stocks as Volume Rises

Fears rise over PIIGS bailouts and potential war in the Korean Peninsula scare traders away from stocks

The markets were rocked with news out of the Korean peninsula where North Korea and South Korea fired upon each other. Futures weakened considerably throughout the early morning session as European fears continued to put pressure on stocks. A better than expected GDP results and a spike in the Richmond Fed Index couldn’t help push stocks higher. Volume on the NYSE rose much higher than Monday’s level where the NASDAQ only saw its volume barely above Monday’s level. Market leaders were largely positive, but overall the damage was done with the banks. Today’s action was not ideal, yet we were able to find support at the lows with a few leaders finishing in the green.

Panic certainly struck the market today as fears regarding Ireland’s bailout, but now attention is turning to other countries making up PIIGS. Spain is the real issue here whereby its bailout will certainly be the grand daddy of them all. It is surprising the European Union hasn’t set up a TARP like program to deal with its banking issue, but what really needs to occur is for governments to run surpluses with slashing entitlement programs. Many will cry foul and ask for bigger taxes, but increasing taxes does not solve the problem of insolvency. It is an easy equation and for it to balance out spending needs to be drastically cut. But, all of this, for our markets with leaders showing promise we may have seen one giant shakeout.

It is entirely possible to see the market roll over here and we’ll be very quick to cut our losses and push to the short side of the market. However, with the market showing support at the lows today along with plenty of leaders finishing in the green today it shows a positive direction for the market. Let’s not use “we are oversold” as an excuse for the market to go higher. We can certainly stay oversold for quite some time, but with the recent selling we should see a drastic reduction in AAII and II Bulls. Stick with the leaders and your stocks.

Tomorrow morning we are going to get a flurry of economic data the market will get a chance to digest. More importantly will be how the market reacts to this as well as any news coming out of Europe and the Korean Peninsula. Any further downside should throw caution to the wind and should get you on the defensive. Always be prepared and have a plan and as always cut your losses.

Friday, November 19, 2010

Reversing Course Stocks End the Day off the Highs but with Big Gains

Better than expected jobless claim figures and a big jump in Philadelphia Fed index pushed stocks higher. Volume rose across the board as traders rushed to get back into stocks. Late day selling did knock stocks off their highs of the day, but gains were plentiful and solid. Today’s action does go a long way in to bring back the current uptrend. Given the gains and volume it is highly probable the rally will continue.

The index I focus on is the NASDAQ and second would be the S&P 500. Outside of these indexes there really isn’t any other index I want to pay attention to. The Dow Jones Industrial average is an ancient index and using this index to put the market in correction is not something I would put much stock into. Recently, the Dow had 6 distribution days yet the NASDAQ had only suffered 3 days worth while the S&P 500 had 4. The leading indexes, NASDAQ and S&P 500 didn’t have the heavy distribution you normally see at a market top. If we do see distribution over the next few days it would signal major weakness, but for now the uptrend still lives.

Many are comparing our recent market with the April highs. Why not, it is recent history and we all tend to think history repeats itself. The major difference is the February through April run came off a 3 week 8% decline in the market. Our recent uptrend came off the back of a longer and deeper correction. Thus, the probability of a 5% pullback and the uptrend remaining intact is high. Perhaps we do roll back over, but until we get full sell signals in our stocks and the NASDAQ/S&P 500 pile on the distribution this uptrend will continue.

Well, my McClellan is still in oversold territory, but that will hardly mean anything if distribution creeps back into the market. One index did see a 17 point drop was the AAII Bull index while the index dropped to 40% while the bears jumped to 33%. Sentiment took a big hit and it isn’t out of the ordinary for a market to shakeout nervous bulls. Especially if sentiment gets out of hand like we saw over the past few weeks. The drop in Bulls does not guarantee we will rip higher over the next few days, but it is a good sign the shakeout over the last few trading days has cut down sentiment.

Tomorrow is an option expiry Friday where volume will be exaggerated in the early going. It’ll be important to see who the market reacts throughout the entire day as well as leading stocks. The most important thing would be to cut your losses short.

Wednesday, November 17, 2010

Late Day Volatility Brings Excitement as the Market Awaits GM’s IPO

Market leaders did little to inspire, but we held Tuesday’s low

The market did very little to calm the nerves of anxious bulls as the Dow closed slightly lower while the S&P 500 closed just higher. Volume ran lower across the board as the market was able to hold off from moving past Tuesday’s low. Closing slightly higher the NASDAQ fared better, but the index ran into a brick wall in the last hour as sellers slammed the index. A wild ride in the last hour made the day interesting and kept traders on their toes. We did see the market close off their lows, but overall the market lacked an impressive rebound after Tuesday’s heavy volume selling.

We may be oversold, but like the market was overbought we can see this market stay oversold for quite awhile. One thing is for sure, we have cleared the overbought conditions from the September 1st market uptrend. It all boils down to your stocks and what they are telling you. Are they giving you complete sell signals? Profit taking signals? Ignore the noise and hoopla from the financial media and focus on your stocks.

Much will be made of the GM IPO as it starts trading tomorrow. At this time we do not have a specific view on GM simply due to the lack of trading history. No one really knows how the stock will act, but it does appear most feel the stock will quickly sell off as the stock begins trading. Speculation is swirling around the company, but at least in its latest quarter it did not lose money on every car it sold. Wait for the stock to trade for a few days and set up a possible IPO base before jumping in. Despite your feelings on the bailout or how the car company has been handled it may present an opportunity to make some money.

If we are to move higher will need to see a better showing out of our market leaders. Today a few leaders did make a move higher, but there wasn’t a contingent of leaders pushing the market higher. It’ll be important for the market to have the leading stocks push higher like we saw on September 1st. Remember to cut your losses short!

Tuesday, November 16, 2010

Stocks Tumble in Heavy Trade As Fears over Economic Conditions Grow

European Debt Crisis 2.0 and Chinese Inflation strike fear in the market.

“If a tree falls in the woods and no one is around, does it make a sound?”

There were plenty of traders around to see the market make take a dive to close lower (NASDAQ) for the fourth straight day. Volume jumped across the board as traders feared the worse in the European Debt crisis 2.0 and Chinese worries over inflation. Late day selling tried to collapse the market, but buyers were able to push stocks off the lows of the session. Despite the last ditch effort the market still closed near session lows.

Investors Business Daily put the market into correction mode after signaling the market in correction. IBD has had a streak of bad luck when putting the market into correction mode. After putting the market in correction we saw the July rally and again in September. While leading stocks have been beat up pretty good after a few days worth of selling they still are holding their moving averages. Remember, taking profits, working a position is a wise strategy and if you failed to take profits on the way up you will not forget in the next rally.

The McClellan Oscillator has moved further into extreme oversold conditions. Remember, these conditions may last longer than you might think. However, the oscillator is about at the same levels we saw at the February, July, and August/September lows just before the market rallied. At the very least, we should see some sort of bounce from the market. Will it turn into a new run, that remains to be seen and quite frankly we’ll need to see some serious strength from leadership. Anything is possible, but panicking and selling out because you panic will only net you heart ache.

It appears many pundits are rushing to be the first to call a top in the market and get on the short side. This includes IBD, who I respect greatly and appreciate the information they provide and that I pay for! At any rate, we did suffer quite a bit of damage, but we have yet to see “the great unwind.” The market is the ultimate pricing mechanism, but speculating on what may happen is gambling. Take cues from your tocks and if they are flashing classic sell signals.

Stay prudent in this market and avoid panicking!

Monday, November 15, 2010

Volume Slides, but Late Day Sellers Push the Market to the Day’s Low

Merger Monday fails to spark buyers

Late day weakness left a sour taste in traders’ mouths as late day sellers closed out the market near session lows. Mixed economic data got the day started with a better than expected Advance Retail Sales figures surprised the market. However, a very disappointing Empire Manufacturing report did not help ease traders’ minds about the economic recovery. Volume ran light throughout the day with the exception of the early morning gap where the NASDAQ experienced volume running higher than Friday levels. At the end of the day we were able to hold Friday’s lows, but the late day selling suggests we have further to go on the downside.

Friday’s sell off did some damage, but left the S&P 500 with 3 days of distribution and the NASDAQ with only 2. Given the bullishness from AAII investors last week it is no surprise this pull back has gone as far as it has. The market is, at the moment digesting more than 10 week’s worth of gains and to expect the market to continue to rise is foolish. Remember, markets do not move in straight lines and history shows us little intermediate corrections will occur in market rallies. While we certainly could be seeing a top form we have yet to see the signs of a “top.” Right now, we are simply in an intermediate correction.

One indicator I have neglected is the McClellan Oscillator. Price and volume reign supreme, but the McClellan oscillator has been a decent indicator regarding oversold and overbought conditions. Keep in mind the oscillators including the McClellan shouldn’t be used in absolute terms but as a guide. Right now the Oscillator, depending on how you calculate it is in oversold territory. Oversold conditions can last much longer than you expect and May/June certainly proved this, but the current pull back certainly seems to be nearing an end. Whether or not a bounce will produce much remains to be seen, but for now we must be prudent investors.

We did see a few big cap technology stocks take a bit of a hit as sellers really took to these stocks as they have been leading the market higher. Even with heavy volume selling these stocks have held key long term moving averages. Intermediate pullbacks like we are seeing right now highlight the importance of buying right and not chasing including these big cap technology stocks. If you had chased these stocks you would be sitting on hefty losses and being forced to cut loose your positions. Staying disciplined is the best course of action.

Be defensive right now; keep any new positions on the lighter side until this market can prove its worth by pushing higher on volume. As always cut your losses!

Thursday, November 04, 2010

Stocks Rebound on Federal Reserve Announcement

The market responds positively to the Federal Reserves $600bn asset purchase plan

Big two market events down, one to go for this week. The Republicans stormed the elections with big wins in the House of Representatives, but failed to make a big push in the Senate. Even with a big Republican victory the market quickly turned its attention to the Federal Reserve’s Rate Decision. More importantly the market was looking for language specific to a fresh round of asset purchases from the Federal Reserve. Ben Bernanke and company announced a $600 billion ($600,000,000) round of buying of the long end of the curve. In true post Federal Reserve announcement action the market swung wildly as it tried to digest the news. By the end of the day the market closed just off the highs of the day with volume jumping above yesterday’s level and our uptrend remains intact.

For most of the session stocks spent a good amount of time in the red as traders feared asset purchases may NOT be as big as previously thought. Fear can lead you to mishandle your stocks and cause you to sell out too early. We have a strong trend with plenty of stocks moving higher. It is best to stick with them rather than to cut out of them too early. Today is a prime example you must stick with your winners until they begin to show signs of major weakness especially in a strong uptrend. Taking a portion of your position off to lock in gains is wise, but removing an entire position will cause you to sit out major moves in some big stocks.

A major hurdle today was cleared with the April highs with big volume. The market along with our leaders will continue higher with such a strong move today. If we do turn with leaders breaking down we’ll adjust accordingly, but all signs right now are pointing for this market to continue higher. Regardless of what you think about the Federal Reserve printing money or if we were pricing the market in gold the bottom line higher prices are to come.

The market will set its sight on the Unemployment release on Friday. Perhaps a worse than expected jobs report will bring on talk of Quantitative Easing part three, but at this point any is pure speculation. So far, this week we have seen the market move in a positive manor despite what we may have seen as headwinds. Friday’s number in the long run may not even matter with strong corporate earnings with the Federal Reserve and elections behind us. The key takeaway is our stocks are acting well, the market is acting well, and our stock leaders are continuing to show strength. Until this changes, all systems are go for higher ground.

Remember, always cut your losses short and ride your winners!

Wednesday, November 03, 2010

The Market Advances on Mixed Volume

Traders anticipate positive news from the mid-term elections and the Federal Reserve Rate Decision

Election Day is here and the market cheered its arrival. Volume on the NASDAQ slid higher while he NYSE volume skidded slightly compared to yesterday’s levels. Mid-term elections and the Federal Reserve were the talk of the market as many debated the effects we may see. Clearly the market was giving a vote of confidence today with the NASDAQ extending its gains. The one drawback was the inability for the NASDAQ to take out its April highs, but we did close just below those levels. All in all, a good day for the market and helped erased any doubt yesterday and last week may have brought.

Today was a great example of why opinions DO NOT MATTER in the stock market. Yesterday’s commentary was cautionary, but I highlighted the fact we need to focus on our stocks and not our opinions. Too many traders try to time the market perfectly and suffer great losses. Identify a trend and find the leading stocks and get long. Fighting a trend is a futile effort and will only lead to you losing more money. For example, in October Doug Kass was shorting stocks because the “rally has gone on too long.” If you stuck with Mr. Kass’ investment philosophy you have been beaten up as of late.

A big win was the move in small cap stocks as the Russell 2000 closed up 2.05%. Volume figures I won’t have available to later, but the move in small caps showed this uptrend more than likely has a lot more room to run. Small caps had been consolidating and lagging the NASDAQ, but today’s move was a good signal small caps are looking to make another big push.

The Federal Reserve’s key decision tomorrow has the dollar moving lower once again. Commodities have been flying as cotton has made another all time high. Sugar and coffee have seen decent runs as of late and with the Federal Reserve continuing to print more money commodities and stocks will continue to reap the benefits of money slushing around. Crude oil continues to push higher as it too as it benefits from the excess money. Clearly the dollar is in a downtrend as it continues to price in the Federal Reserve’s monetary accomodation.

Regardless of what is going in terms of news flow it is all about the stocks. So far we continue to see our stocks acting well and not giving us major sell signals. Of course, as a stock moves higher we want to take profits and to lock in gains. Stick with your winners and cut loose your losers!