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Newsletter April 22, 2006 Trading Creatively Market & Sector Review Bulls Make Money…. Largest Changes This Week This Week's Economic Reports Trading Creatively There are times when your success depends on thinking differently, outside the box. In a strong bull market, it's easy to ride the wave and take advantage of the trend. But when the market averages are not trending (which is most often), and it's a stock pickers market, a little more skill and ingenuity is needed. Think creatively, and that means putting in extra effort and going with your gut and intuition. Trading is not rocket science: figuring out how to fly to the moon or a way to orbit Mars. Being a mathematical genius will not make you a brilliant trader. Indeed, you're probably better off if you don't make it all so complicated. It may be counterintuitive, but keep it simple. Complex mathematical formulas don't seem to work. If they did, scientists, engineers, and mathematicians would be making millions trading the markets. They aren't. You can't expect the kind of certainty a rocket scientist expects. It doesn't exist in the markets. There are too many unknown and immeasurable factors to consider. It's next to impossible to know which factors will come into play at a particular moment in time, and account for all of them. Market action is ultimately the result of people making decisions, and when the discretion of people are involved, it's impossible to anticipate exactly what will happen. You must become innovative and creative. The more you know about your creative processes, the better you'll be at trusting your intuitions. Avoid trying to be creative, if you push yourself this way you will not be relaxed and you can't be creative if you are not calm and allow free flowing thoughts. The state I am trying to describe is like a meditative one, where you're thinking about the markets but not attempting to force a brilliant idea. You also need a great deal of information to sift through, be it technical information, fundamental information, economic information, or a combination. Don't force yourself to discover a brilliant idea, just read the information in order to get your creative juices flowing. Study the information. Memorize it. Let it churn in your mind over and over. When you least expect it, you'll develop a few good creative ideas. It may be as you drive to work in the morning or are picking up the kids from school in the afternoon. Allow your mind to actively, yet leisurely, consider a variety of issues, and all of a sudden it will hit you, "Wow, I've got it." Of course your idea is not foolproof; it's not guaranteed to work. There are just too many factors that are unknown and unknowable at the time you take the plunge. That's where risk management comes in, but you knew that. Just because you didn't anticipate all the factors doesn't mean you didn't have a creative idea, uncertainty is just a part of trading. Just keep trying, you'll find your search for creative ideas is endless. You will greatly increase your odds of success and that in turn will lead to enduring financial success. Market & Sector Review Bulls Make Money…. I am sure all or most all of you are familiar with the old stock market cliché "Bulls Make Money, Bears Make Money, Pigs Get Slaughtered". Why do I bring that up in this roaring bull market? Simply because there are times to be aggressive and there are times to be thankful for what Mr. Market has presented us. This is not a time, in my humble opinion, to be greedy (a pig). This is a time to be thankful and to consider removing at least some partial positions; booking some profits. Bill, are you saying the bull market is over? The simple answer to that question is no I do not think it is necessarily over, in fact we might even have a decent up leg remaining, I do however believe it is very late in the game; the ninth inning so-to-speak. A time to be gradually removing some of our hard earned money for more advantageous times. We are all the sum total of our experiences in life as well as in the markets. If you have been in the markets a number of years I'm sure you recall black Monday October 19, 1987 when the market suffered it's worst one day decline (in terms of points) in history. At that time I was managing money for two limited partnerships. I was fortunate enough to be short the S&P futures going into that day. Unfortunately however I decided to cover those shorts very early that day expecting a rally. Boy was I wrong! Don't get me wrong the profit was nice, however I gave up substantial, and I mean substantial additional profits, attempting to call a bottom. It was though, a great learning experience, that led to some fundamental changes in the way I do things. No more calling tops and bottoms for one, with real money anyway. About a year and a half ago I outlined in a newsletter my preferred scenario and methodology for accumulating positions for the intermediate term. You can review that newsletter by Clicking Here! Since that episode in 1987 I learned that is also a good idea to liquidate positions in the same manner, as the market is working higher not attempting to catch the last eighth. Holding perhaps small core positions after liquidating a good portion. This way if the market tops out today we have booked a good portion of our profits and can afford a greater risk on the remaining core position. If the market continues to work higher we participate only to a smaller degree than before. A simple strategy of Preservation of Capital! In the above example and in perfect 20/20 hindsight I could have partially covered that short and allowed some of it to ride further. Live and Learn! While I am not calling for a top just yet, let us this week look at a couple of the composite charts available to you on site. Whether or not you come to the conclusion that a top is near keep in mind what is happening underneath the surface of the prices of the major averages. However, in the words of Jesse Livermore "don't fight the tape". Depending upon your trading time frame and the individual stocks you are tracking it is important to make any new purchases on a very selective basis. At the same time it is still very early to consider wholesale short selling. This week let's take a quick look at some of the divergences showing up in two major averages, the NYSE composite and the NASDAQ composite. Then take some time to look at the other composite index and sector charts posted on site to complete your analysis. Looking at the above chart of the New York Stock Exchange Index with some of the composite data we calculate one can easily make note of the following: This is the first time the NYSE has moved to new all time highs and the advance/decline line failed to follow suite. The percent of NYSE listed stocks trading above their respective 200-day moving average peaked in early 2004 at 92%, the current reading is only 62% At the beginning of this year approximately 86% of NYSE listed securities were in up-trends, as defined by Dr. Alexander Elder’s criteria of a rising 20-day exponential moving average. On 4/21/06 62% of listed securities on the NYSE are in up-trends. There are approximately 2,700 issues traded on the NYSE, as of last nights close only 27% (718) were within 2% of their trailing 52 week high, compared to 45% early this year. The McClellan Summation index (an outstanding measure of internal strength) continues to deteriorate. Is this enough to turn this market down? Probably not however these are good warning signs that changes are occurring be aware. Notice the NASDAQ presents a very similar picture. Finally considering the deterioration that has begun to take place let's take a look at perhaps the most popular average used by traders, the S&P 500, and see if we can come up with some possible scenario's for the near future. While this is pure speculation on my part I believe either of the scenario's put forth is equally possible. Continue to follow the composite chart postings updated on Wednesday and Friday evenings for additional clues as to which scenario becomes more likely. If we are indeed in the ninth inning the composite charts will continue to show further deterioration into future rallies. 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.