Newsletter

October 15, 2005

The Pure Love of the Game

Market & Sector Review

This Week's Economic Reports

Member Update: For the past few weeks I have been working with one of our members on his very unique method of looking at relative strength and selecting stocks. This information will be available to all our members, on the daily Groups, Index, and ETF Reports, as well as on each stock within each group, along with this members explanation of how to use this new information to make money. In our workings over the last few weeks I can honestly say I really like what I see and will most suredly be using it in my analysis. Look for it this week!
The Pure Love of the Game

Why do you trade? What motivates you? To most traders, the answer is obvious, isn't it? We trade to make money. Many traders, however, say that they would trade even if they merely earned just a little. Many traders interviewed in "Market Wizards" by Jack Schwagger, said that they initially took any job in the financial markets just to be around the action. Money wasn't the only motivator. Trading provides its own rewards.

One seasoned trader, for example, said he would trade even if he didn't earn much money at it. He said, "I'd probably still do it. It's so interesting. I think it's a lot better than punching a clock somewhere. I find the game itself interesting. I enjoy watching how stocks react to news. It's always amazing to me how you can see small movements snowball into large herd mentality sorts of movements. A minor piece of news starts some selling, and then all of a sudden, there's more selling and more selling, and then there's a huge avalanche of selling. And it all started with just a minor piece of news. But then at other times, it won't do that. I find that very interesting."

Another seasoned trader says, "I like the freedom trading gives you, the ability to earn a living while not having to have employees, the mental challenge, and the constantly changing environment." There are many reasons to pursue trading, and money is usually not the only reason. Many seasoned, profitable traders truly enjoy trading; they have a passion for understanding and mastering the markets.

In systematic studies, psychologists have repeatedly discovered that peak performers have a true passion for what they do. Whether it's art, sports, or business, the folks at the top are not primarily motivated by fame, glory, respect, or status. They are driven by the pure love of the game. Winning traders, similarly, have strong interests in the markets, and this passion is the driving force that puts them at the top, year after year. But many novice traders are drawn to the markets to meet deep-seated psychological deficits and needs. They yearn for respect and status. They hope that by earning huge profits, they will be able to solve all life's problems. Trading to satisfy these motives will most often lead to disappointment. For long-turn survival it's very important to be motivated by more than the money.

Trading should be viewed as fun and challenging. You should do it because you love it. If you can, you'll find you can trade more creatively, effortlessly, and profitably. What motivates your trading? Do you see it as a challenge? Is it fun? Is it enjoyable? Be motivated by the intellectual challenge. Follow your passion for trading. Do it because you love it.

Market & Sector Review

It was quite some time ago when I last gave a link to an interview with James Dines. At the time he was pounding the table on Uranium stocks and I know from emails I received at the time, many of you bought into his arguments and have profited handsomely. As far as newsletter writers and authors are concerned Jim Dines may be the most unique and insightful I have personally come across. It is what I have learned from his thinking as well as from readings about other market masters, that I personally began to change strategy, years ago, and look to hold onto core positions (I may trade against) during longer-term sector trends, separate and distinct from other trading, or as Jesse Livermore said "It was never my thinking that made the big money, it was my sitting, got that, my sitting." I think Jim is a lot more than just a market person, his range, his thinking, is extremely broad and very sharp. For those interested here is a link to a recent interview if it is still available, that lasts approximately half an hour Jim Dines Interview enjoy, relish, and learn. By the way, it should be noted that I personally, nor The Prudent Trader Site, receive no income from the links whether you decide to subscribe or not. That decision is totally yours.

Last week I stated "luckily the confusion, at least to me, kept me mostly in cash, perhaps lost opportunity on the short side but that is quite O.K. there will always be opportunity." Well I remain in cash (other than reduced positions previously stated in the metals) and do not regret one iota having missed the downside. When one has cash one is completely objective, sleeping well and not in need of what I jokingly call the great American dream: "God please make it rally so I can get out even, I'll never do this again." I was leaning bullish, but confused, before this market started down, there is nothing disgraceful about being wrong (only liars are not wrong), but never let being wrong cause you to loose big. `Remember the name of the game is not only to make money but to preserve capital. I have missed plenty of opportunities in the past and will miss quite a few more.

Before we look at the overall market, for fun, let me give you an old market cliché': "Sell on Rosh Hashanah (Tue 10/4/05) and Buy on Yom Kippur (Thursday 10/13/05)." So far the sell date proved very effective, Thursday was the buy day and so far may be very timely for a quick trade, only time will tell. The decline of the last few weeks has caused a great deal of technical damage which will take time to heal at best. I believe at the moment that trading rallies will fail to gather very much near term strength and we will have to fall to and test the current yearly lows made in April.

As you can see the trend-line break calls for a move to the April lows around 1140. This is an extremely important level and if we see this level tested and confidence does not improve or if confidence in fact deteriorates do not be surprised if we get a brief panic sell off at that point. The advantage by the way, of a panic ending is that any serious sign of instability will quickly travel around the globe and central bankers will probably abandon their fight against inflation and move towards halting or making as shallow as possible any recession that may occur. That would be the ideal situation for investors as they will gain two great historical advantages, falling interest rates coupled with depressed equity prices. Will it happen that way, I for sure do not know, but it would not necessarily be a bad thing as it will present opportunity galore. In any case remember that no matter what happens it is not the end of western civilization as we know it, it's merely a function of market activity and the business cycle.

I don't think the bearish issue here will be easy to assume and profit from as transitional phases often are not easily navigated and can be frustrating, especially basis many an index. I know many if not most are not suitable and will not short stocks, if that is you, then either remain in cash or look to sectors that may go opposite the indices. As I pointed out in last weeks letter the 80/20 rule basically states that 80% of stocks will travel with the major indices to varying degrees, but 20% will travel the other way, in both bull and bear markets. Begin your research with the most improved groups and ETF's listed below.

If you are looking to sell short keep in mind the ETF's are excellent vehicles to sell short as the uptick rule does not apply as it does in stocks. Depending upon your time perspective things are not as bad as they may seem on the surface. Step back a moment and take a look at some weekly charts of the major indices they remain range bound and trendless at this point and the other possible scenario is we remain in that sideways non-trending environment.

For those of shorter term orientation, taking another look at the S&P Chart above my tendency would be to put on a 25% short position as we approach the 1200 area, say 1190ish, another 25% just over 1200 to 1210, and risk a close above 1230. This is of course assuming we do not get a large volume upmove, but one on lower volume. A low volume rise will almost assuridly give us a test of atleast this weeks low if not more.

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.