Newsletter
February 4, 2006
The Big Picture
Market & Sector Review
Largest Changes This Week
This Week's Economic Reports
The Big Picture
When you're having a tough time of it, it's easy to get bogged down. You find yourself thinking totally about the current trade you are about to make; you desperately want it to be a winner. Instead concentrate on the big picture. Especially at times like this it's important to remember that this is merely one trade among the many you will make, and the outcome of a single trade is not relevant to the total picture of your trading account. All that is important is at the end of your accounting period, across a series of trades that you come out ahead. When you are in a slump looking at the big picture can do a lot to make you feel better, and when you're feeling better your better apt to make that trade.
When you are looking at the big picture, think in terms of probabilities. Across a series of trades, if you are following a sound trading plan with sound money management and risk parameters you will need only one in three to be successful in order to be successful overall. Unfortunately when we trade we do not win one and lose two then win again. In the real world we may lose 5 in a row, then profit on 3 of the next four, then 4 of the next eight and so on. But if we are overall winning one in three we should be just fine (Review Money & Risk Management in the Learning Center). So maybe you've lost four in a row and the next will be number 5, but in the big picture we find we are doing just fine. In fact a very good friend of mine, we were brokers together, used to cheer out loud when he took a loss, he would say hey I'm getting closer to a big win.
In a purely mathematical sense, it isn't possible to estimate the odds that a trading strategy is expected to produce a win, since the strategy cannot be repeated an infinite number of times under the exact same conditions. The best we can do is use historical data to see how well the trading strategy worked in the past, and assume it will work in the future when similar market conditions occur. Ideally, historical data should provide evidence that your strategy will give you enough of an "edge" to come out ahead. Since you never really know how well a trading strategy will work until you try it under current market conditions, it is extremely important to control risk. Unless you control risk, then a single trade may actually be quite significant. It's a good idea however, to minimize the significance of a single trade in terms of your overall capital so that it won't hurt very badly should it go sour. By managing risk and trading high quality setups, you can more easily think in terms of probabilities. That is, a single trading outcome will actually be minimal compared to a large set of outcomes.
From a purely psychological sense, think of outcomes as just one among a series. It will take some of the pressure off of you. You will not tend to think that every trade needs to be a winner, which can be very stressful, and you will be more relaxed if you look at the bigger picture.
Market & Sector Review
I don't know how many of you are old enough to remember the gas lines of the 1970's when there was an oil embargo. I can personally remember parking my car about 5th or 6th in line, on a Saturday morning an hour before the gas station opened. I would then walk across the street, order some breakfast, read the morning paper then wonder back to my car just prior to the station opening, the line now with 50 or 60 cars. For those that remember alternative and renewable energy sources became the topic of the times. Wind, and solar probably being the most talked about. I personally looked at solar as a possibility for my home however there were two drawbacks I couldn't overcome, first here in New England we can have days on end without sun, and secondly the cost at the time was too high, the payback took too many years to be worthwhile. Then all of a sudden oil became plentiful again and prices dropped sharply. As a result the alternative energy talk became the property of the environmentalists looking to replace fossil fuels due to the greenhouse affect. The rest of us thought there was no shortage of oil at all, there was just a shortage of "cheap" oil.
Could this happen again negating the research I am currently doing? While it is certainly possible I do believe it is different this time. In the 1970's the shortages and rising prices were the result of a political oil embargo today with the rest of the world catching up to the standard of living enjoyed in the U.S. the demand side of the equation will continue to grow and probably exponentially so. Currently their appears to be adequate supplies of oil to over the next several months drive prices down towards $40 or $50 per barrel but that will in all probability be the new floor before the next major rise in prices. The topic of oil and energy will again move to the back burner as it did in the 70's but only for a short while, in my humble opinion. Astute investors and traders will be able to utilize that time frame to accumulate energy at advantageous prices before the next big advance occurs, be it oil, natural gas, or alternative energy.
As I wind up this series on energy with alternative energy choices and stocks I have those times in the back of my mind. This week therefore let's take a look at some of the alternative energy choices and where future opportunity may lie. I will be presenting lists of stocks (below), some of which have already moved, some of which are highly speculative, mostly small to mid caps which in some cases trade relatively thinly. Without giving individual opinions on each I can say that I am personally short to intermediate term bearish on most of these stocks but longer term very bullish. While there are more alternative energy choices and stocks than outlined below here is brief outline of each:
Nuclear
Nuclear energy made a striking debut in the 1950s as nuclear optimists claimed to have discovered the ultimate source of energy. For over two decades, a nuclear mania swept across continents, and then it stalled. Engineering difficulties and unexpected system failures soon discredited the technology that accompanied the dawn of the nuclear age. Nuclear power remains highly controversial in many parts of the world. However, in the face of global warming, fossil fuel price volatility, and a growing demand for electricity, many nations may begin promoting nuclear power as a viable solution to current challenges. If you are a long-term bull on this particular choice the best way to play it may be with Uranium mining stocks.
Solar
Currently, the world derives three-hundredths of 1 percent of its electricity directly from the sun. While PV technology contributes to the global electricity share only meagerly, the growth potential of the industry is tremendous. Worldwide, PV sales increased at an average rate of 20 percent annually during the 1990s and then leaped to 33 percent per year since 2000. Between 2000 and 2002, there were more than 70,000 PV systems installed in Japan, 10,000 in the United States, and tens of thousands in Europe.
Hydrogen & Fuel Cells
Hydrogen is the lightest, as well as the most abundant element in the universe. On earth, it is a main component of water, fossil fuels, organic matter, and many other natural compounds. Hydrogen readily bonds to other elements, so it is rarely found in its pure form. To use hydrogen as a fuel, it must be extracted from another substance, such as water or natural gas. For this reason, hydrogen is considered an energy carrier as opposed to an energy source. However, it does effectively serve as a medium for storing and transferring energy from a source to an electric current. Hydrogen is an extremely enticing energy option for a clean, sustainable energy future. However, as corporations and governments pour billions of dollars into developing hydrogen and fuel cell technology, uncertainties linger regarding the economic and technical feasibility of this emerging industry.
Wind Energy
Since the early 1980s, the cost of wind energy has dropped almost 10-fold from $0.38 per kilowatt-hour to less than $0.04, economically challenging even conventional fossil fuels. With such economic incentives, the global wind industry has doubled its electricity generating capacity every three years since 1990, and this rate continues to accelerate. Wind power is well-poised to play an increasingly vital role in the energy mix during the twenty-first century. Despite its advantages, the wind industry needs government support in most nations to sustain recent growth rates.
There is no Media General average or grouping for alternative energy stocks. They are contained within other groups including but not mentioned below, major oil companies that have or are adding divisions to supply alternative energy, BP comes to mind. Some of the additional groups containing stocks involved in alternative energy are: MANUFACTURING - Industrial Equipment & Components; MANUFACTURING - Industrial Electrical Equipment; ELECTRONICS - Diversified Electronics; ELECTRONICS - Scientific & Technical Instruments; UTILITIES - Electric Utilities; & CHEMICALS - Specialty Chemicals. The list below is by no means complete and I am sure there are other candidates available. The table below contains: the stocks symbol and name; Media General Grouping; A very brief description of their products; the groups relative strength ranking as of Wednesday February 1; the stocks relative strength percentile rank (excluding those under $10); and the MSN - StockScouter rating which is based on proprietary calculations of Gradient Analytics, to learn more: StockScouter The list is sorted by MG group number first and then company name second, in descending order. Not in any order of importance or quality.
Rest assured I will be picking up the weekend edition of Investors Business Daily and including in this spreadsheet, each companies earnings ranking for future reference when the time is right.
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.
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