September 1st, 2009

Was This The "Dip" We Were Told To Buy?

I must confess that today has been very painful. Studies demonstrate that the average investor reacts more to losses than to gains. I guess I’m not telling you anything new because you’re probably suffering that painful loss right now. Wouldn’t it be wonderful if humans could mentally and emotionally easily offset bad feelings we’re having with the good ones we’ve had.

This brings to mind of the exception I took last Friday with Jim Cramer, that master baiter (get your mind out of the gutter, I mean “someone who sets traps in which to catch you”) and master equivocator to his latest vacuous and even dangerous call:

“‘rallies are times for action.’….too many investors don’t trade during rallies and thus watch their gains disappear….He said investors shouldn’t let their emotions prevent them from doing what is needed during big rallies…..investors often let emotions sway them to hold on to their stocks — the exact opposite of what they should be doing. ‘The goal is to buy low and sell high,’ he reminded viewers, ‘so when the market’s up big, it’s time to lock in some profits.’ ….gains in the market are not really gains until the stocks are sold….the way to play big market rallies is to sell in increments during the rally. ‘Get the great prices while they last,’

I can just hear him boast and shout, “I told you so”. So if “sell the rallies so you have cash to buy on the dips” is the answer and last week was the rally, then was today the dip? Does he and all those others who trot out that mantra refer only to day trading, or do the refer to all styles of investing? How does one know – other than their telling us – when rallies and dips near their ends so that we get green lights to act.

That’s why I believe that we, instead, should have our own longer-term vision, game plan and discipline. If we do, we’ll take a more reasoned and less emotional approach to the market’s day-to-day volatility. That’s what helped us not get suckered in to rallies last year and what will help us avoid getting into a funk and wrongly selling into corrections. We’ll be better able to emotionally handle the losses and not become unreasonably euphoric about our gains (remember, it doesn’t take a genius to make money in an up-market).

That’s why my my plan

  • begins with a sense of where the market’s been, where it is, where it might be headed and by when. You’ve read my current view here often: A rally to year-end with a target of 1100-1150. There’s support around the 300-DMA (which, incidentally, the 50-DMA is about ready to cross above – that’s cause for a small celebration). I’ll run for the hills if this support fails but won’t panic if we drop to it. The market will tell me what to do when it reaches the upper target.
  • Some say buy stocks as they retreat and sell when as they move higher. I prefer the opposite – buy when stocks confirm the beginning of new momentum as they break through resistance and sell when their trend changes and they fall below support. Value and fundamental investors follow the former approach, momentum investors follow mine.
  • Buy and hold stocks only when favorable markets are at your back and never attempt to sail into strong headwinds.

I haven’t yet seen a change in market direction and am still waiting for the big boys to come back from the beach and start the sidelines money flowing to the market. [What a great conspiracy theory – drive the market lower so as to shake up investor confidence, loosen up shares and drive down their prices in anticipation of their buying spree. Some say that’s exactly what the Chinese do in anticipation of their commodity buying sprees.]

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  • Jonathan

    Tough to say if this is THE dip.

    Lucky I was though to "only" own stocks that remained positive today while the market was correcting severely.

    I'm not gonna lie to you, I was so close to press the button "sell" but I decided to "let my winners run". They are close to a 30% & 50% gain so far. These are my "killings" for the summer but this is being scary.

    Thanks for your posts.

    John.
    http://guillouj.blogspot.com/

  • Jesse Caris

    You're trying to catch a falling knife at this point. 10 days ago you said "FAS will take off sometime in next 10 days for huge move to 130 before YE" You need FAS to more than double to get there. You were late by about 4 months on this trade. You bashed Jim Cramer a couple days ago and did it somewhat arrogantly. But he helped protect peoples gains, at least those who followed him.

  • Z

    This action seems like the same thing we witnessed in May/June. I see a lot of people calling "the top" and getting bearish. It's odd, generally with an amazing rally you would expect bullishness not skepticism and bearishness.

    My thinking is go counter the herd. Wait for this to play out and have a list of stocks you really like as investments – let the stocks come to your price and scale in. Key thing is patience.

  • Guru

    Jesse, don't forget that FAS is a very volatile instrument. It could drop temporarily but I haven't abandoned the thought that it will go to 130 before it goes to 50 (it's now at 68).

    As far as Cramer is concerned, his aim is to promote himself not protect investors. He did say "sell to generate cash so you can buy on the dips". Again I ask, is this the dip?

  • Anonymous

    Cramer's timing usually is very bad..check the ted spead @ 19 this morning for true market works..

  • Jesse Caris

    Guru, I don't think this is a dip. this is the other side of the head & shoulders, the beginning of the large move down that will take us to new lows over the next 1-2 years.

  • Jesse Caris

    i think a break of 979 will confirm my theory of the head & shoulders large move down. That may take a day, a week, even a month, not sure about timing.

  • Guru

    Anon, I musts confess I don't see how the TED spread is predictive of anything. It did spike simultaneously (but didn't foreshadow its coming) with the housing bubble crises in July 2007 has been elevated until May 2009 when it was clear that the market had hit a bottom and has been trending lower since (chick here for Bloomberg graph).

    If you're saying that market isn't now in the same crises mode as it was May, 2007-May, 2009, I don't disagree but if you're saying that indicates that it might not change I don't agree.

  • Jesse Caris

    Guru, At what point would you become a bear? What are you looking for in the market to convince you of this?

  • Anonymous

    A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn. It does not predict day-to-day movements of the stock market, but gives you a general direction of the market.

  • Guru

    Jesse, you'll have to go back to Charting 101. What H+S do you see? If this is the H+S you're talking about, then it hasn't yet even finished the "head" formation. And should you be correct, then there's still the right shoulder.

    That's a giant leap from this premature reversal to "large move down that will take us to new lows over the next 1-2 years". Even if it is a H+S, the max correction decline would take the Index to around 930-950. Prediction beyond that are totally meaningless.

  • Guru

    Jesse, depends on what you mean by "bear" and that's not said to be splitting hairs. A correction of 10%? Yes, I've written I could see a move to 950.

    A 20% move to 800? I don't think I would ever predict that from this vantage point. Why should I? That would mean I'd have to dump all my stocks and go into cash and there's no evidence to do that now. Move to 50% cash? Still not enough evidence.

    In the same way that I wouldn't invest 100% until the Index crossed above the 200-DMA, I wouldn't go into 0% stock/100% cash unless the Index dropped to 870. That's where the neckline of the failed H+S was (May-July). I guess if the Index broke below 870, that's when I'd become a bear.

  • Jesse Caris

    thanks Guru,see you at 870

  • Z

    Jessie,
    How can you be so sure about the path of the market?

    I have been a bear from mid 2007 to early this year. I can see the case for bull or bear now but there seems to be so many bears and I've been taught to be flexible in my opinions.

    Maybe you are right and I certainly wouldn't be sleeping well holding a lot of some financial like COF that is up 4-5X from the lows.. but I just don't see how being a long term bear makes you money.

  • Minnesotalee

    OK, Ok, Ok….. Jesse you can't interpret anything like a H&S pattern out of the most recent data. If anyrhing you must look at the much stronger inverse H&S that has gotten us to here. These other things you see as H&S could be there bit are of such minor consequence. Look at the bigger picture. This market can pull back as it did on first trading day in September. This is the biggest head fake re the charts. Obviuously you put little value in technical charting otherwise you would be bullish. Being bullish from technical buy signals does not mean certainty in being correct. It does however provide giudance as to when to buy and sell if the signal is there. Finally from my P&F charts it indicates a FAS price objective slightly lower than the Guru's and a S&P of 1295 that is greater than his. There's too much momentum and the wall of worry now will advance the bullish trades. If you're out of the market sitting in cash, you'll regret it. What will make you bullish? Will it be after the technicals reach their price objectives? I'm not glad that you are bearish, because I would like to see people here make profits using whatever technical analysis methods you employ. The stats (I look at patterns that are better than 87% probability for success) aren't perfect but it's better than hope that the market goes up or down. The downers are hoping because they missed the inverted H&S and want to get in at a lower $. This is it spend those $ and bet on AMERICA. Guru I fully support this is a DIP (or puyllback) and we can look back in NOvember to determine if Sept/Oct was a downer or not. BTY when you plot Cramer's recommendations, you can't see his reasoning from them. He's not always wrong but too much so to only use him and not the technicals nor the (god-forbid I'm saying it) fundamentals.

  • Minnesotalee

    Here are some numbers for the BEARS here on FAS. In April FAS went from 50 to 28; the bears were incorrect due to a pullback. In May it went from 28 to 66; then in July from 66 to 35 and in August from 35 to 82. BTY all these pullbacks were above the bullish SUPPORT line. By technical analysis this was a false sell signal. Now we again have a pullback above the BuSL, and until the chart gets below this support, the bulls have it. Volitile high Beta stocks will do this. Obviously this is not a trade for the fundamentalists. No fundamentals can predict this movement except for the daily meomentum in the stock. If you're a day trader then even false sell signal in a bullish trend can make you money-it's called a short or selling on the put option. But you need conviction, you need a method, not hope or patterns that have to be predicted. Go with exixting meaningful patterns in a trend and the stats will be there 8-9 out of 10 trades. No coin flips please…

  • Minnesotalee

    Constant Pursuit of Truth- I enjoyed this article Jesse.

  • Jesse Caris

    Lee, I didn't even realize that I still had a blog up! lol, cool.