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November 26, 2005

It's Not Personal

Market & Sector Review
This Week's Economic Reports

Due to technical difficulties, some may have received more than one notification for this newsletter, please accept our apologies.

Update: A new section has been added to the site called Sector Charts. For those that do not have exposure in other ways to the Hemscott groupings this will help. Side by side are daily charts (approximately 6 months) and a weekly chart covering a couple of years. Only the Sub-Sectors ending in zero are shown.

It's Not Personal

The best way to trade is with a logical mindset, staying detached and objective. When your money is on the line however, it's hard not to allow emotions to influence your decisions. If you are fearful and uncertain it's easy to panic and make trading errors. We deal with uncertainty by creating illusory expectations and believing that what you expect "must" actually happen. When things don't turn out as you expect, you feel frustrated and angry. The natural reaction is to blame someone, but most times there is no one to blame.

The markets are composed of lots of people with many different roles. Many may trade the same stocks you are trading. Analysts make their predictions and the media broadcasts their predictions. Many people are trying to make money from the markets in their own way, whether it is making predictions or those that report those predictions, or trading. It's easy for most of us to believe that unless the actions of people involved in the markets are out to help us, then they are against us. As a trader you must not look at the market this way. Don't think that people's motives and actions have anything to do with you. You must forget that you are dealing with people and just focus on the price of the stock and the factors that explain or correlate with it. For instance depending upon what you expect the market to do it may do just the opposite. Just because a lot of selling appeared and your gains evaporated before your eyes does not mean the market was out to get you. It is often tempting to blame the people who sold off their positions, focusing solely on how their actions hurt you, because it was people who sold and thwarted your trading plan. No one however is taking specific action against you. Everyone is merely trying to make money from the markets. They are just doing their jobs. It's not personal, it's just business.

Even when you consider a specific stock, it's beneficial to avoid thinking in this manner. People may be involved and their actions may impact stock prices, but again, no one is doing anything specifically to harm you. For instance the month of October was a down month and many stocks declined in value along the way. But many stocks also soared. Google (GOOG) increased dramatically after surprising everyone with an extremely positive earnings report and forward looking statements. Google is attracting advertising dollars away from not only other internet portals but from other media types as well. After the soaring price of Google's stock there were still good reasons to go long or short. The point here is not to evaluate trading strategies, but to illustrate how you must keep things objective. Sure, people are involved in what happens, but it doesn't help to look at things that way. Unless you have inside knowledge, or a crystal ball, we don't really know what is going to happen today, tomorrow, next week or next year. In the end, you must make a decision based on the available information you have. Some traders will be wrong, others will be right. What you must do is realize that there is an element of uncertainty in the end, and that when an outcome is uncertain, you are taking a risk. Psychologically, you must accept risk and uncertainty. It's part of trading. It may be ideal if we could eliminate risk, but we can't. It's vital that you take things in stride and view events as somewhat unpredictable, as if you are flipping a coin and betting on the outcome. If you flip it enough times, the odds can work in your favor. But if you are stunned by the outcome, panic, and are afraid to trade, you won't make much progress. So stay objective, rational, and keep trading. People may be involved with regard to how prices fluctuate, but if you look at it that way, you'll just get upset. Live by the motto, "Ultimately, it's impossible to know what will happen, and it's just business. It isn't personal."

Market & Sector Review

Luckily I now have a core group of members who are contributing excellent input and ideas, as a group we are working towards the information presented on this site to become: 1) more relevant and 2) easier to read and use in order to help members direct their attention to suitable areas and make solid decisions. One thing you learn when you have been involved in this arena as long as I have is simply one never rests and always has an open mind to new ideas, new methodologies. I am also well aware that many if not most of our members have a full time career outside the markets and of course family obligations which takes away additional time we could use for study. The reports that are generated, while containing a plethora of information, are really intended to help you drastically reduce the time spent searching for stocks on the move or potentially will be on the move. Instead of, as I used to do, and I know many of you do, searching through hundreds of charts (perhaps organized by some technical criteria) every evening, learn to spend just a few minutes glancing at and culling information from these reports in order to direct your attention to sectors, then groups and finally to stocks that may be of interest, regardless of your time frame. Once you learn the how to, your research time should be greatly reduced.

This week let's go over one way that I use the new reports to zero in on new ideas. First let me say that if you are spending more than just a few minutes looking at the data, you are looking way too long. The idea is to zero in on what is important to you, allow it to pop out at you, and then continue on to more detailed research in those particular areas. What sticks out to me and I currently zero in on is simply the direction of the linear regression line of relative strength, + or -, and their directions 5 and 21 days ago. I have found that the linear regression of relative strength has a tendency to turn positive prior to the group or individual stock making its move. Again this is a tendency but it helps me to zero in nonetheless. This may be one of the ways we are looking at to improve on the current reports.

Last Sunday I received an email from a member, who over the years has become a good friend, about the best way to sort and view the reports, specifically pointing to the industry group's relative strength tables (you can also do this with the index or ETF reports). While "the best" way is a personal decision and may be different for you, let me point to what I do and let you make your own decisions. Strong stocks as well as groups or indices will have a tendency to go through significant corrections from time to time, at this stage of the market I am looking for previously very strong groups and stocks that have temporarily fallen from grace but now appear ready to resume their up trend (or down trend if you are looking for shorts). One way to do this is to sort the relative strength tables by today's relative strength as a percent of the linear regression line of relative strength. The sort is in descending order so the strongest today appear first. I then look for a couple of conditions to exist, first I look to see if the regression line was previously negative (-) and today or 5-days ago has turned positive (+). I then glance over to the relative strength rankings today, 2-weeks ago, and a month ago to see if there is improvement. On a simple piece of scrap paper I write down the group numbers that are of interest today as such: 122; 611; 834; and so on. I may write down 6 or perhaps 15 groups. Then I quickly view the weekly charts of these groups and will probably through out a third to a half right there. Of the ones remaining I view the daily charts to see what interests me. Let's look at an example (this is just an example, not a recommendation) Technology - MG834 - Semiconductor - Integrated Circuits, last weekends data showed the linear regression line (21-Day) + (today), + (5-Days ago) and - (21-Days ago) with the group ranking improving nicely. This group actually came to my attention a few days earlier when the linear regression line first turned positive (11/15) against the broad market.

Notice how this group made an almost perfect Fibonacci correction of its October 2002 low through early 2004 high, again a previously strong group having undergone a significant correction and now improving. Although it is not easy to see on the chart above, volume is increasing on plus weeks and decreasing on minus weeks a key factor in determining that accumulation has been going on. This group is definitely worth a further look so let's move on to the daily chart.

Had you viewed the group's relative strength tables as of the close November 15, you would have noticed the change in direction which preceded the breakout on November 18.

Again this is going back in time in order to illustrate a point. If you are in agreement with the above assessments then it is time to look at individual stocks within this group for outstanding potential, hopefully with minimal risk. So let's do that. Pulling up the section Compare Stocks Relative Strength Against Broad Sectors, Sub-Sectors, and Industry Groups and searching through group 834 we find a couple of interesting situations.

GNSS - Genesis Microchip Inc Del – Relative Strength Ranking 88 trading above its linear regression line against both its sector and group, but that linear regression line is relatively flat.
MRVL - Marvell Technology Group – Relative Strength Ranking 93 trading in line with its linear regression line but that linear regression line is rising and has been for about a month.
WFC - Memc Electronic Material – Relative Strength Ranking 96 trading slightly under its linear regression line which just recently turned positive.

The Relative Strength Ranking is the stocks performance rank over the last six months as measured against all stocks closing above $10 per share. This was just a quick selection of 3, there may have been others more appropriate or suitable to your individual needs and criteria. Remember now these are look backs from a week or so ago!

Will the following two stocks in the same industry group act in a similar manner? Is Marvel leading or a special situation? This is where your research time needs to be spent, IMHO. If Marvel is not a special situation then the other 2 are probably buys.

This group or any of its stocks may or may not continue higher at this stage. Any of the stocks shown above may or may not have been of interest to you either at the times shown or now. That was not the purpose of this exercise. The sole purpose was to show what is possible for you to uncover, with believe it or not, in a minimal amount of time and effort.

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.