Take a Break & RelaxMarket & Sector Review
This Week's Economic Reports
Take a Break & Relax
Your mind is very much like a muscle. When you go on a long run, or do excessive physical exercise, you soon run out of energy. Without a significant push you just can't go any farther. Your muscles ache and you need to take a rest and recuperate before you start moving again. What does this have to do with trading you ask? It's vital that you understand that your mind has limited energy, that after putting in a hard and tedious effort, you need to take a rest in order to rejuvenate so you can face the market with a renewed sense of vigor, renewed energy.
When trading you must be relaxed! If your mind is strained and tired you'll have difficulty taking advantage of opportunities. Your mind will be elsewhere or you'll be just too tired to act decisively. You'll be prone to decision making biases and you may act impulsively simply because you are too tired to patiently wait for the proper signals to enter or exit a trade. If you stay relaxed and full of energy, you will be able to trade logically and consistently.
Most people can work for only a limited number of hours per day and if we try to work in marathon stretches it eventually catches up with us, and becomes apparent in weak performance. It's important to take breaks after a marathon work session. You need to identify how many hours you can perform at your peak performance, and develop a specific plan to make sure that you have enough rest and relaxation to work in your optimal state when it is necessary. If you work too many hours without taking a rest, you'll expend all available energy. It's essential that you take a rest and rejuvenate.
Part of trading profitably is the acknowledgment of your limitations and putting together sensible ways to work around them. If you know how to manage your energy so that it is always at an optimal level, you'll be able to trade profitably and consistently.
Market & Sector Review
I have pointed out several times the importance of diversification its given light but important treatment in the "Develop A Trading Plan" dissertation on site, i.e. not having all ones eggs in the same basket. Not diversifying for an investor is just plain asking for trouble. But what does diversification really mean? If I own Intel and Advanced Micro devices I am diversified between two stocks am I not? In this case no, because both are in the same business, the same sector, the same group, in fact are competitors, and while one might out or under perform the other they will have a tendency to move in the same overall direction.
Jim Cramer, a former hedge fund manager, now a CNBC personality, has a show called "Mad Money". Whether you agree with his opinions and outlook or not, Jim is quite the entertainer in my humble opinion. There is a short section of his show (shown at 6 p.m. and 9 p.m. eastern U.S. time) called am I diversified, where callers tell him there positions with the question am I properly diversified. Usually he finds that the individual is over or under weighted in one sector, or has too many stocks in the same sector, and recommends they sell this and replace it with that. I am not recommending you listen to his show and follow his recommendations unless you do your homework and agree that it fits your style, your objectives. Like all advisors Jim runs hot and cold and his time frame may not be your time frame. While size of portfolio's (dollar amounts) and percentage commitments are not discussed I find this not only entertaining but informative. The total size of your portfolio in dollars, your goals and objectives, as well as your risk tolerance will determine the amount of positions you should hold at any given time. On Wednesday evenings show a lady called in and read her portfolio holdings, again no dollars and no percentages, here is what she held:
Tyco International -> a diversified manufacturing and services company;
Duke Energy -> a diversified energy and utility company;
Home Depot -> Large specialty retailer;
Intel -> a semiconductor chip maker;
Citigroup -> diversified financial services company
Whether or not you fancy any or all of these holdings you have to admit this lady is properly diversified. 5 different stocks in 5 different sectors, Jim had no choice but to hit the button for the halleluiah chorus! That's diversification!
In last week's letter I said: "In the short term however, I suspect we have made or are very close to a minor top. … MDY the ETF representing the S&P Mid-caps reversed on substantial volume after making nominal new highs, the McClellan Oscillators are diverging into these new highs and the rally has been on uninspiring volume. I hope everyone playing the long side is playing it close to the vest and moving their stops up with their stocks." The first 3 days of this week were totally uninspiring both in terms of price movement and in terms of volume. Then Thursday and Friday the markets basis the major averages were hit hard and the volume increased dramatically especially on Friday. The large volume increase on this down move is a bit disconcerting and we have to face the possibility the short term top I spoke of last week may be much more. May being the key word as the S&P closed right at the April high and there is an old cliché which states that old highs become new lows. Had the volume been lackluster Thursday and Friday as it was on the way up I'd be looking to buy on Monday.
As technicians, we look at patterns and indicators and attempt as best we can to spot repetition in those patterns and indicators to help determine whether the odds favor that we should be buyers or sellers. Trading the markets is a game of probabilities, and money management. If we manage our money correctly, the probabilities will eventually trade in our favor and over time we will trade successfully and make money. First I have a tendency to look at the long term picture in terms of long term cycles, i.e. the approximate 20-year secular cycle and the 4-year cyclical cycle and plan strategy depending upon my interpretation of where we stand at the moment in those cycles basis the major averages -> not necessarily individual stocks which may or may not trade with those cycles. First let's take a look at where, in my humble opinion the cyclical cycle stands and then how we may best participate from this point forward.
However, now for the possible good news: in general bull markets are born during extreme pessimism, the rise is accompanied by skepticism, and the peak is met with euphoria. I think if you go back to the October 2002 bottom you will recall pessimism abounded, broker friends were telling me people were not even opening their statements (out of sight - out of mind). As the market rose through 2003 skepticism was rampant, how could this market go higher with all the bad news? Now for the last phase, euphoria, have we seen it yet? Yes bullish sentiment is high and high enough to warrant a short term correction, but certainly not euphoric. So while I don't think we have seen that euphoria yet let's look at some potential buy candidates should this market find its footing perhaps in the Fibonacci support zones. Just keep in mind we are, in my humble opinion, in the last phase of this bull, and I'm just trying to squeeze out what I can. Should this market be turning here for good then in future letters we will look at potential short candidates and those that might fight the trend.
Let's first take a look at the changes in raw numbers this week and proceed from there:
Still appearing on the most improved list are the precious metals we have talked about for the last two weeks. I believe this sector will continue to improve whether or not the major averages do, since its price movement has disconnected from other markets, i.e. the dollar and the stock market that it has been following for years. A correction is certainly possible in here and I will probably use that correction and hopefully a resumption of the up trend, as an add too point. But this week lets move on to a new group, that is appearing on the most improved list (and in a sharp down move in the averages I might add) MG513 Generic Drugs. We spoke about the drug sector awhile ago and while the timing was a bit off, on the majors anyway, this is a defensive area that may
have already gone through its own bear market.
Looking at the daily group report lets isolate the Drug Sector:
Note the following:
Relative Strength Rankings improved from 102 to 28 over the last six months
Relative Strength Rank over the last 12 months improved from 144 to 73.
PT-PPO Rank improved from 130 a month ago to 32 today.
ADX reading above 30 indicates a strong trend
Let's take a look at the charts:
Possibly still early in this upmove with plenty of upside potential. But you can't buy the group, so let's see the stocks that make up the group.
While the overall markets picture appears in doubt this evening, this is a group I will be watching in case what we are witnessing is nothing more than another short-term downswing. This group and some of the stocks above are on my watch list and will be ready to buy should the proper opportunity present itself, along with the precious metals sector which I have some small positions that I am looking to add to. It's important to continue to watch the shifts going on underneath the surface of the major averages so that you are ready willing and able to take advantage of potential opportunities. Whether or not I personally buy into this group will depend upon its price action and volume going forward, pick a couple and follow them. Continue to follow the shifts taking place in the market so you can take advantage when opportunity presents itself in your time frame.
It should not take very long to go through the reports and spot the changes taking place. Make notes, make watch lists, be ready if and when the opportunity presents itself, that is what trading is all about!
This Week's Economic Reports
Have A Great Week!BillDisclaimer: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.
However, now for the possible good news: in general bull markets are born during extreme pessimism, the rise is accompanied by skepticism, and the peak is met with euphoria. I think if you go back to the October 2002 bottom you will recall pessimism abounded, broker friends were telling me people were not even opening their statements (out of sight - out of mind). As the market rose through 2003 skepticism was rampant, how could this market go higher with all the bad news? Now for the last phase, euphoria, have we seen it yet? Yes bullish sentiment is high and high enough to warrant a short term correction, but certainly not euphoric. So while I don't think we have seen that euphoria yet let's look at some potential buy candidates should this market find its footing perhaps in the Fibonacci support zones. Just keep in mind we are, in my humble opinion, in the last phase of this bull, and I'm just trying to squeeze out what I can. Should this market be turning here for good then in future letters we will look at potential short candidates and those that might fight the trend.
Let's first take a look at the changes in raw numbers this week and proceed from there:
Still appearing on the most improved list are the precious metals we have talked about for the last two weeks. I believe this sector will continue to improve whether or not the major averages do, since its price movement has disconnected from other markets, i.e. the dollar and the stock market that it has been following for years. A correction is certainly possible in here and I will probably use that correction and hopefully a resumption of the up trend, as an add too point. But this week lets move on to a new group, that is appearing on the most improved list (and in a sharp down move in the averages I might add) MG513 Generic Drugs. We spoke about the drug sector awhile ago and while the timing was a bit off, on the majors anyway, this is a defensive area that may
have already gone through its own bear market.
Looking at the daily group report lets isolate the Drug Sector:
Note the following:
Possibly still early in this upmove with plenty of upside potential. But you can't buy the group, so let's see the stocks that make up the group.
While the overall markets picture appears in doubt this evening, this is a group I will be watching in case what we are witnessing is nothing more than another short-term downswing. This group and some of the stocks above are on my watch list and will be ready to buy should the proper opportunity present itself, along with the precious metals sector which I have some small positions that I am looking to add to. It's important to continue to watch the shifts going on underneath the surface of the major averages so that you are ready willing and able to take advantage of potential opportunities. Whether or not I personally buy into this group will depend upon its price action and volume going forward, pick a couple and follow them. Continue to follow the shifts taking place in the market so you can take advantage when opportunity presents itself in your time frame.
It should not take very long to go through the reports and spot the changes taking place. Make notes, make watch lists, be ready if and when the opportunity presents itself, that is what trading is all about!
This Week's Economic Reports