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Newsletter January 14, 2006 Riding the Downers Market & Sector Review Largest Changes This Week This Week's Economic Reports Riding the Downers No matter who you are, there are times when you just aren't functioning at the top of your game. You try and put on a trade, but your heart just isn't in it. What do you do? Do you continue on and hope for the best or stand aside and wait before tackling the markets again? As a general rule it's usually a good idea to stand aside. If you are a music fan you may remember the 1971 song by Jerry Reed "When you're hot you're hot". The verse of the song is: "When you're hot, you're hot. And when you're not, you're not". My father (one of my hero's) loved that song and used to tell me remember those words for that is how life is! He was a salesman much of his life and used to tell me most sales people do it backwards, they make a sale this morning then take the rest of the day off to go fishing, play golf, whatever. He told me no, this is when you work harder than ever because you're hot, so try and pile up the sales for when things go bad and go bad they will. It is when things are not going well that you take a day or two off, go fishing or play golf, or whatever to clear your head of the cob webs then begin again. Sage advice! At first glance, this advice may seem counterintuitive. Throughout our lives, we've been told over and over, "At first if you don't succeed, try again." It may be necessary to try again, but it may not be a good idea to try again when you aren't ready. Give yourself a break. Your body and mind have limits. When you are feeling low, a lot of your mental energy is spent so that no one will suspect you're in a slump. If you broke your leg, you wouldn't try to jog two miles a day. You would stay off your feet until you recovered. If you had a high fever, you wouldn't jump in a cold pool and swim a few laps. When physically ill, your body can't take it. You would end up feeling worse when it was all over. It is vital that you rest and recover Similarly, when you're not feeling up to par, and have wavering confidence, it's wise to say out of the markets until you are feeling better. A common mistake is to ignore your feelings and just push yourself to keep going. When you are a seasoned trader who is not feeling very badly, this may work. But if you are relatively new to the trading profession and are feeling down, you will find that the harder you push yourself, the more you'll feel let down and frustrated. Instead of pushing yourself beyond your limits, calm down, rest and cultivate a fighting spirit. It may seem unproductive to take a break when feeling in a slump. But it works. Don't fall for the conventional view of success as making huge profits even when you aren't psychologically fit. It's better to work at your own pace, and focus on the process of trading. If you hone your skills in a calm yet deliberate manner, and take breaks when your psychological energy or confidence is depleted, you come back with a tough, fighting spirit that will help you achieve lasting success. Market & Sector Review I think a lot of traders spend a great deal of unnecessary time searching for something to buy or sell today. They utilize all kinds of technical tools, scan the markets utilizing various formulae (including Prudent Trader Scans) to determine what to buy or sell today basis their own, or someone else's analysis of the DOW, S&P, or NASDAQ indices. I will often ask friends and compatriot's what they are doing in the market these days. When I ask them why they bought XYZ and what does XYZ do for a living, I am sometimes amazed at the answers. Well they are a technology company (what does that mean?) and the stock is oversold, so I bought it. Please when you buy a stock, know what they do. If you know anyone who owns or has owned Apple, for instance, I'll bet they knew the company makes computers and ipod's and sells music on the internet. They knew the business was good and was growing rapidly and all that growth would be reflected in the bottom line, and the bottom line will drive the stock price. Trade the right stocks for the right reasons. Sometimes it is so much easier to find a theme, such as the Apple example above, although that company is very unique, build your watch lists around that theme and then utilize your favorite chart patterns, indicators, and market scans to determine when those stocks are buys and when profits should be taken or at least partially so. A theme is nothing more than a longer term trend in motion in a sector that is likely to continue for some time to come. Then build your lists around that theme, and utilize your technical tools, or favorite market scan, to determine when you should act. Apple was not a theme it was/is a unique situation, gold discussed last week is a theme, and this week we begin discussing another theme - Energy. When one thinks of energy oil is often what pops into the mind first, but there is also natural gas, liquefied natural gas or LNG, coal, solar energy, and other alternative energy sources. Within the oil sector we have the major oil companies, the drillers and exploration companies, the refiners, and so on. The question therefore becomes which stocks within which groups as well as how and where they are played (I'll cover the other areas in future newsletters)? Which ones, and the how to, will greatly depend on: 1) your trading and or investing goals for a particular account; 2) the risk you are prepared to take; and 3) the time frame you are interested in, i.e. very short term through long term. Typically in previous bull markets the energy sector is one of the last sectors to participate in the advance thus it has been a good warning that the bull market was aging. However now we must ask the question is this time different? Most often the answer to that question is no, but we are in a different world now and the most populous nations in the world are becoming prosperous, buying cars, building plants, and using oil as never before, thus throwing the market into a demand driven market place as opposed to a supply driven marketplace that it has been in the past. First let's take a look at a couple of historical charts of Oil! In the early 1970's OPEC began playing with the supply side of the equation in order to raise prices. Take note that in 1981 after about 60 years of price stability under $10 per barrel oil made a high of around $31 per barrel about triple the price of the previous 60 years. In the early 1990's oil prices once again spiked to a new high of $41 per barrel primarily due to Iraq's invasion and take over of Kuwait a major OPEC oil producing country. Again this is a supply side move as the supply of oil was greatly reduced during that period. Previously major spikes in the price of oil were due to shocks to the system, i.e. controlling the supply via embargos or wars involving major producers which again affected the supply side of the equation. This time the rise in prices, have been steady and while several hurricanes temporarily reduced the supply side of the equation, it is the demand side of the equation that is driving prices today. In that respect this time is different. In fact recently the U.S. Department of Energy released its long term price projections for oil. Previously their projections were for oil prices to be $33 per barrel in 2025 in today's dollars. That has now been revised to $54 in 2025 again in today's dollars that is a 64% increase in the government's official projections. According to a recent Adam Smith newsletter, if we factor in the 2.7% inflation rate of the last 5 years then the energy department is officially looking for $112 per barrel price of oil 20 years hence. Now I realize that is an awful long term forecast for most of us to trade on, however the key factor here is oil is likely to remain in a bull market for the foreseeable future and therefore can be traded as such, utilizing severe corrections and shakeouts as opportunities to position ourselves with what should be the long term trend. Next we will look at the venerable XOI - the Amex Oil Index which represents the crème de la creme of oil companies. Notice on the chart a Raff Channel that has defined this market well since 2003. If this is not a well defined up trend then one does not exist. Are we ripe for a decent correction, even a good sized shakeout? Quite frankly it's a definite possibility, breaking the channel is also a good possibility prior to a new one forming. Corrections and shakeouts are part of all bull markets and that is when you will get your most advantageous pricing. In fact if you look at the largest (negative) changes below, we may be closer to that correction than most think. Being aware ahead of time I think is just part of a good plan. While I have not as yet completed tabulating the results of the recent survey, I was a bit surprised by the number of you who trade differently in different accounts, my guess would be the longer term side in your IRA's or 401K's. I was also a bit surprised by the shear number who wished to be able to search for value and growth + value stocks. In that vain let's take a look at the component stocks of the XOI, their current RS % Rank, P/E, and dividend yield, I think you'll be surprised. Does this represent value? When you consider that the NASDAQ 100 is trading at approximately 31 times earnings along with miniscule dividends and the U.S. Government expects the price of oil to virtually double again in the next 20 years I think it does. In your longer term accounts (read retirement) where you should be acting as an investor as opposed to a short term trader, your mission should be to maximize returns while minimizing risk. This group represents stocks with generally low valuations and if energy prices continue to rise in the years to come, the profits and probably the dividends of these companies will rise as well, which in turn should drive their stock prices higher. Now if you can utilize your superior technical skills to time your entry, hopefully after a shakeout, your returns can be just that much higher. As for the more volatile, with perhaps better growth prospects within this sector, i.e. MG122 - Independent Oil & Gas, MG124 Oil & Gas Drilling & Exploration, MG125 Oil & Gas Equipment & Services, I would review Waveslider's methodology once again and use it to time your entries and perhaps your trading exits as well. You can review his methodology in the Trading Reports Explained page, in the Members Area. I have personally been following this methodology since we have been publishing it, I have become quite enamored and have incorporated a good deal of it into my trading. You can only learn and get a feel for new methodologies such as this by following, taking notes, review those notes, until you've come to really understand what is happening. It just might help you make more money than you are currently. Largest Changes This Week This Week's Economic Reports Have A Great Week! Bill Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.