The Contrarian Trader

Stock market, economic and political analysis for the intermediate term stock, commodity and equity option trader.

Archive for the ‘stock selection’ Category

Contrarian Commentary, The Week Ahead 01/06/07

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The two V V’s (Volatility and Volume) have returned to the markets and can either make or break a speculator. It’s at this point the savvy speculator shows patience, turns off CNBC and researches the historic support levels of those stocks that they had been wishing to buy in this recent run up in the stock market. It’s at those support levels that you will find the best entry levels. You can then place your stop loss orders below the support level. By buying in this fashion you greatly reduce the risk of being shaken out of your position.

The one saying that Crammer has that I must agree with is when you are not trading well then you simply “stop trading”. Just like in sports when you trade well your confidence is high and you trade smarter. When you trade poorly your confidence is low and your trade on emotion. When you trade on emotion you trade on impulse. I address these points for one reason If you believe as I do that we will see a continuation of this market correction which could last from one to three months you’ll see many attempts at a counter trend rally caused by anything from an M&A announcement or a manipulated short covering rally. Normally these end up as head fake rallies which only serve to separate the little guy from his or her hard earned dollar. So, what do we do?

If the S&P 500 breaks and closes below 1400 level it will be a signal to many technicians as well as program trading systems to sell. On the NASDAQ we are looking for support to hold at the 2400 level. It closed on Friday atop its 50 day moving average at 2413. Looking at the NASDAQ chart on a daily basis it looks like a real nice consolidation. But, pull back to a Weekly Chart we are looking at an index that is extremely overbought. Can the index break out? YES! We want to see some heavy distribution days that will give us the green light to load up on the short side.

You’ll remember that during the Santa Claus rally I kept referring to how the bank and brokerages were manipulating the market by buying back stock of their own companies. By doing so they created an atmosphere that lent itself to create a feel good rally. You’ll note that since Christmas the Financial Sector has been correcting. This is no surprise but it’s good to revisit why the markets rallied for no good reason. It was bonus season and compensation dictated behavior. They’ll be back again later this year and it will be the same all over again.

I have also been referencing the Utilities Sector as it is a leading indicator for the future direction of interest rates. This rally has been based purely on the hopes of an interest rate cut in the first quarter of 07′. Well here we are in the first quarter of 07′ and it doesn’t look good. Wage inflation was reported on Friday and that is what has Mr. Bernanke most nervous. The Utilities Sector closed beneath its 50 day moving average on Friday. What is the market telling us? It’s telling us that this much anticipated rate cut is unlikely and institutional investors are giving us an honest heads up by their actions. They are selling the interest rate sensitive utility stocks. Actions speak much louder then their hollow words as when they appear on CNBC to pump these stocks as they are selling.

It’s at this point of the cycle that I am begging everyone to start paying more attention to the weekly charts with particular attention to the MACD. As with bull markets the daily charts can stay overbought for a long time. During a correction the daily charts can stay oversold for a long time as well. The problem is that many people think that stocks are cheap and then buy. After they buy the markets continue their decline. A weekly chart gives you a better perspective of as to how the momentum of selling is either accelerating or declining. Weekly charts also give you a clearer picture of as to where your support and resistance levels are. It’s critical to identify these support levels and when we begin buying again to buy at those levels. This reduces your risk. We are all about the preservation of capital so remember this phrase before you make an impulse buy “today’s highs may be tomorrow’s lows”. Think about it.

To our members we will be covering in detail our current holdings and watch lists in Monday nights Contrarian Commentary. For those interested in becoming a memeber please take advantage of our 30 day free trial. WWW.TheContrarianTrader.com

The “VIX” is in…..

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Yes, the Volatility Index also known as the VIX put in a new multi year intra day low last week. What you can read into that event is that there is little to no fear in this market. So yes, the “VIX” is in for what could be a nasty sell off in this market. The theme of the week last week was the pumping of the Airline Stocks on merger and acquisition talk. By the end of the week the sector’s prices had returned to where they started, once again the little guy was left holding the bag. CNBC received the order from home office to pump the stock of their parent company GE which broke out on huge volume. The S&P 500 “broke out” this week to brand new highs but, don’t get to excited. Friday’s price and volume action was very disappointing. You may say that I am nuts! What is wrong with me? The index closed higher on huge volume. What could be wrong with that you say? In a word “churning”. When you have an up day on huge volume that we saw on Friday you would expect more of a point gain. What we can interpret from the price and volume as we saw on Friday is that there was a lot of sector rotation and profit taking. The Banking Sector also continues to help support this market. When will the rally on the S&P 500 be over? Watch the BKX ,when the Banking Index finally begins to correct you’ll see a market decline because it’s the banks and the winged tip jackals on Wall Street with their computerized trading that is keeping the market up. On the NASDAQ we saw similar price and volume action that accompanies churning. The Semi Conductor Sector continues to struggle to break out above its current resistance levels. Without the participation of the Semi’s it’s going to be difficult for the NASDAQ to have convincing break out. The markets are extremely overbought and two weeks remain in 2006. We are not predicting a sell off in the markets until after the early 2007. The PE ratio on the S&P 500 is now around 20 which have in the past few years represented a top of the trading range. With decelerating profits it’s hard to justify the rally and expansion of PE’s. All hopes are pinned on the FOMC reducing interest rates in early 2007. With job markets still strong and the threat of wage inflation as well as core inflation it’s going to be hard to make the case for a reduction of rates. Add to the list the declining US Dollar which would further deteriorate if the FOMC lowers rates. Sure, the US Dollar had a strong week on the back of Bernanke and Paulson going hat in had to China but I wouldn’t expect the rally to continue. It’s a new world and the Communist Chinese are our number one financier.What I expect to see happening for the remainder of the year is more of the same. Pre market you will see CNBC hype the market by “reporting” via company and sector upgrades and then the subsequent squeezing of the shorts and a continued rally of the banks which will prevent a major sell off. Using history as a guide it’s highly unlikely to see the markets sell off. The markets are overbought but they can stay overbought for a pro longed period of time.We will cover our current holdings in Monday evenings Contrarian Commentary. We are planning to add to our current short positions to take advantage of what we see as a fantastic opportunity to profit from the coming correction.If you have any questions please feel free to email me at Robert@TheContrarianTrader.com Robert Desmond

President & Chief Investment Strategist

The Contrarian Trader

Bad Luck that saves you money…a Trader’s Tale

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A couple of weeks ago a I received an email from a great member John who I frequently email during the day. He had asked me to take a look at Biovail (BVF). Normally I would take a look at the chart and do a review of the key fundamental statistics and give my honest opinion. But on this day I didn’t due much of a due diligence. I respectfully replied to him NEVER! I was blunt and short for a reason. The main reason being that I had hoped to persuade him not to trade the stock. Why you might ask?  Well, a number of  years ago I was long Biovail. I owned quite a bit of it. As I do each morning I sit with great anticipation watching for my Level II screen to light up with the red and green colors that greet me each day. On this particular day however one stock sat white in color. You see this normally with thinly traded stocks, it may take a minute to catch a bid. But (BVF) was no thinly traded stock. I did my research and my worst fears came true. Biovail did not open that morning because of a ” truck accident the previous night that was carrying a large batch of their product Wellbutrin. It would have a material impact on earnings. Around 11am, (BVF) opened for trade. It opened sharply lower then it’s previous nights close. Long story short…in the blink of an eye I lost $20,000.00. Bad luck? Perhaps, but just because you were burned by bad luck doesn’t mean you shouldn’t learn a lesson from it. To rationalize what the event I decided to evaluate what had happened and to perhaps learn a lesson so that I may avoid a repeat situation in the future. “Turn Chicken Sh__t into Chicken Salad” as my Dad would say. Here is what I had learned. Biovail’s management was suspect by the Wall Street analysts for being lets shall we say slick. Isn’t that the pot calling the kettle black you might ask? Lesson 1: It pays to listen to rumors of bad management. Avoid these managers like the plague. If the street thinks you are a dishonest then you must be bad.  There are plenty of other companies to trade. Lesson 2:Trust your gut instinct. Your gut instinct doesn’t reveal itself to be correct until after the fact. If your gut tells you to get out then, get out while the markets are open to you. Lesson 3: Use money management techniques. Short term traders by necessity are less diversified in a speculative portfolio.But, by simply being a speculator doesn’t give you the right to exist for any length of time without having some diversification in your portfolio. Lesson 4: First out best out. That’s why I lost only$20,000. I acceptted my loss only a few seconds of the stock being open. It was the longest market order ever.  Had I waited for a counter trend rally the loss would have been staggering, I got off lucky. The reason why I brought this story up was because of Daystar Technologies (DSTI). I love sell offs, that’s how I have made what I have made. I am very good at buying stocks during  times and conditions when very few people are willing to offer a bid. Daystar was getting hammered by big sellers these past few days. The $5.30 support level was the bottom of it’s trading range, it should have rallied off of it. What happened? Nothing..it sliced right through it. This happens sometimes, then late in the day you get the buyers coming in to make it close over support… a key reversal day. This morning it was so oversold it felt like re -entering the trade was like taking candy from a baby. After I re-entered however what bothered me was the reason why I had entered. Taking candy from a baby? There are no free meals on the street. As the stock began to slip again to new intra day lows I got that Biovail feeling again. After I hung up the phone with investor relations at Daystar I had drawn two  conclusions from my conversation. 1)Daystar was up for sale 2) There were no bidders. I sold not two seconds after I hung up the phone using a market order. As I was carrying a very large line the last thing I wanted to be doing one weekday morning was sitting at my Level II screen with my coffee in hand waiting and hoping for Daystar to open up. We no longer have Daystar Technologies as a Buy Watch. To the markets, listen, you can expect this game playing to go on for the next couple of weeks. They are going to hold the market here by doing what they did this morning. The spiked the market by squeezing the short on the back of the retail numbers. It’s the same old thing. They’ll keep upgrading earnings forecasts, sectors and individual companies through to New Year. Watch the Banking Index (BKX) it was up all day. Why? Here is how it goes. Morgan Stanley will call down to the floor when they see the S&P 500start to slip and begin to buy back their own stock. As it’s the Holiday Season and all the wing tipped jackals await their bonuses the good ole’ boy club the boys over at Citi, and Goldman Sachs will lend a hand and buy back a few shares as well. This keeps the markets from selling off. As I have always said, the Banks, Brokers and Insurance companies make up almost a quarter of the S&P 500. That’s huge. So, if the financial sector heads higher nobody panics. You just watch when the BKX heads south, that’s when this market comes apart at the seams. So, obviously we are out of DSTI. We no longer hold this position nor do we intend upon trading it again as it’s soundness as an ongoing concern becomes an issue that we need not be involved with. Stop losses are tight across the board. We will keep them open so long as they hold above support. I am still gradually purchasing the SPY March 139 Puts and will do that to average into the trade. We have a very large VIX May 25 call position as well. If this market corrects we will be in a fantastic position to take advantage of it. When the correction is over there will be some really great stocks on sale.

Robert Desmond

President & Chief Investment Strategest

TheContrarianTrader