November 10th, 2010

Regaining Our Bearings

Ever since it launched at 5:00 on June 21, 2006 with Dylan Ratigan as moderator, CNBC’s Fast Money, the show with some real Wall Street traders used to be my favorite segment on the network. I always liked the fast talk, the quick wit and the wealth of information that the panel always seemed to have at their finger tips. But like most of the entertainment on CNBC, either they have gone down hill or I’ve just outgrown them.

Tonight’s show is a case in point. The market did decline 0.81% today but almost universally, the day was labeled a reversal day. You’d be hard pressed to not walk away at the show’s end believing that 1) you have been selling all last week in anticipation, 2) that today’s action marked the beginning of a correction of major proportions and 2) the first thing you should do (even before Cramer starts his opening monologue) is to close out most of your positions in some after-hours trades.

Granted, all the panelists are “traders” so their professional time-horizons are days and weeks not months; they can’t see much beyond next week and appear to have no idea or interest in where market or the economy might be next year. Granted, my time horizon is longer-term. My style is one of momentum trading where I attempt to discern the market’s trend and direction; my goal is to ride the wave from the reversal at the beginning all the way to the reversal at its peak.

Rather than becoming panicked, my reaction to today’s market action was not surprise but anticipation starting to be realized. When I see some market weakness, I need to step back and take a bring the big picture back into focus. For example, in “The Road Beyond the Congestion” of October 28, I wrote:

“The 1220 level represents a key resistance area, the neckline of a huge, elongated ascending triangle reversal with the apex at the March 2009 low. The market spent 3 months in 2008 in that congestion area just above 1220 and it could spend approximately three months in a similar congestion area above, on top of or below 1220 as it peers around the corner deciding which way to go.”

and included the following chart – which is pretty much where we are today:

In “Sweet Dreams” of October 14, I laid out a picture of a strong market in 2011:

“What you see [in 1995] is a 37% move from the election to the end of the graph 14 months later. Extrapolating a similar 37% run higher from a close of possible 1150 close on this years election day results in a close of somewhere between 1500-1550 by the end of January 2012. The market could be bumping against it all-time high 14 months from now. I have a hard time believing it myself. It’s a dream, a sweet dream. We should only be so lucky.”

It’s interesting that there have been several references recently pointing to a 1500 target for the market based on a fundamental analysis based on applying historical average 16 P/E to a continually higher 2011 profit estimate (see “CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500” from Bloomberg this past Monday). For example, Eddy Elfenbein of the “Crossing Wall Street” blog agrees with my technical analysis and wrote on Nov. 8:

“According to the latest forecasts, the S&P 500 is projected to earn $94.27 next year. At a ratio of 16-to-1, that translates to an S&P 500 of 1508. The index would have to rise by 23% over the next 14 months to get there, which is very reasonable.”

In short, today’s market changes nothing. I don’t intend to sell my winners yet but, instead, to take the opportunity of consolidation, this short breather, to follow the game plan I outlined earlier in “It’s Time to Clean House” and clean out the under-performers to make room the new winners when this market begins moving again in a few of weeks.

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  • Anonymous

    thx, guru. do you like csco or it is too big to move?

  • Joe

    Unfortunately, now that it's a damaged stock (i.e., don't know how long it will take to close that gap), there's no way I would touch it. It might be "cheap" and a buying opportunity but I just don't know how long it would take for it to move above 25-26.

    As a matter of fact, that was the breakout point even before this earnings announcement debacle and I wouldn't have bought it before unless and until it had gone above that level.

  • Anonymous

    One more question. would you touch NEWN? where would you put buy limit order from the chart?

  • Joe

    As a matter of policy, I don't usually trade IPOs and prefer stocks with more than at a minimum 4-6 month trading history.

    There's no shortage of outstanding buying opportunities. There's little need to try and pick up average level of gains but with much greater risk.

    IPOs like NEWN (especially since it's a Chinese stock with now real transparency) are more akin to gambling than they are to investing.