Battered Investors Ditching Mutual Funds

By Tom Lydon | November 26, 2008 | 3:48 PM | 0 Comments

Mutual funds are having a bit of a PR crisis this year, as the market collapse has left investors beaten, battered and bruised. The downturn has seen funds lose at times 40% and more of their value. But despite that, some mutual funds could potentially be dishing out capital gains distributions, kicking investors while they're down.

Having a Stop Loss Plan Protects ETF Investors

By Tom Lydon | October 23, 2008 | 5:10 PM | 0 Comments

This market has been painful to watch, for plenty of reasons. Last year, so many areas were flying high and investors were riding a wave of unprecedented returns.

Recovering Market Losses

By Brad Zigler | October 23, 2008 | 1:42 PM | 0 Comments

Looking at the screen this morning, it's hard to find uptrend lines in anything except the U.S. dollar, the Japanese yen and the short end of the yield curve. Stocks and commodities have both been battered, catching many investors by surprise. Weren't these two markets supposed to be negatively correlated? When one went down, wasn't the other supposed to go up? Wasn't that supposed to even things out in our portfolios?

Negative Technical Pattern Evolving

By Jerry Slusiewicz | October 22, 2008 | 5:27 PM | 0 Comments

Historically, it has happened every time, investment opportunity follows disillusionment. It is also widely held that complacency precedes bear markets.  Many investors today are very disillusioned by recent market events.  However, I still feel that there is a remarkable amount of complacency from today's investors.  It seems every pundit or investor that I hear from is acting as if it is a certainty that the bottom for the stock market for 2008 is in.  Is that a good thing or a bad thing?  The answer is that it is uncertain, but while great deals may be had at today's levels, technically the market is still in a negative environment.

First the good news: It is widely known that Warren Buffett is buying stocks and the only times in history he went publicly to state this, the markets did extremely well after.  It is important to note that Mr. Buffett is down almost 15% from the first of October.  Since he sits on top of the charts of the US wealthiest individuals, he can withstand a healthy drawdown or two on his capital.   Also contrary to what he's saying, I don't remember any bull market that had to be caught early or you'd miss making money. 

Now the bad news: It isn't rocket science to understand that the worst housing meltdown in 30 years, the worst financial crisis since the Great Depression, the worst consumer debt bubble ever, the worst government debt exposure in history, and a few other ‘worst ever' conditions, would result in a severe bear market and an economic recession.  Unlike the last couple mild recessions of the early 1990's and early 2000's, this is an equal-opportunity recession, everyone is feeling it.

Even more important are the technical factors that are adversely affecting today's stock market.  We have been in "Flag with a Pennant" formation on all the major market indices over the last three weeks.  The particular chart formation is known as a continuation pattern. 

Translated in to English that means that the recent market decline from September to October of over 20%, has taken a rest where we have seen higher lows and lower highs as the market has gyrated around the last couple weeks.  The rule is that the rest will be followed by a continued downward movement of about an equal distance when the market is done consolidating.  That means that if we break down, the market could technically fall another 20% from here!

Does that mean that this will happen?  Absolutely not, but the conditions are ripe that it could happen.  I know that many investors and advisors that are still holding most of their positions firm.  Bear markets are not known to end until every last investor swears off stocks forever.  That hasn't happened yet, and as stated, the markets internal technical pattern calls for a continued decline.  Technical analysis of markets still works in times of fear and panic because it is more of an analysis of greed and fear of market participants' behavior.  Today's market is not trading on fundamentals.  Investors were just as greedy and fearful at other major market lows such as 1929, 1974, 1987 as they are today. 

This does not mean the market will go all the way down to 6500 on the Dow, but the signposts are there.  I recently wrote about the obvious signposts that you may have missed along the way, but if we take out the recent market lows, the washout could still be significant (20%)!  Use an investment plan that has a risk management plan at its forefront.  Use stop losses on every position.  This may turn out to be a false signal but when it comes to the money I manage it is more important to be safe than right! 

Weekly Sector Wrap-Up (Oct 13-17)

By John C. Lee | October 18, 2008 | 2:32 AM | 0 Comments

The important thing to note is that there may be considerable volatility next week. This is especially true with the XLF with a 35% consolidation range. Traders/investors who cannot stomach volatility are better off in cash. Next week will be difficult to trade because of the market's neutral stance.

How Another Country Handled a Similar Crisis

By Tom Lydon | October 16, 2008 | 5:48 PM | 0 Comments

It appears that we've entered a period in the market where truly no one knows what's going to happen next. We've had days with 1,000-point swings, days of record losses, days of record gains. Who knows what tomorrow, next week, or next month will bring? We're not the first country to have a financial crisis, and we won't be the last. One thing we can do to try and gauge where our economy stands and what the future might look like is to look at some other industrialized nations that faced their own problems and emerged out the other side relatively unscathed.

What's All This Volatility About?

By Jim Farrish | October 16, 2008 | 9:47 AM | 2 Comments

Yesterday the market had the single greatest loss of any day since 1987. Why? Recession fears was the headline data. The rumor was hedge funds liquidating to meet redemptions. On the tape was the mutual fund liquidations as individual investors take their money out of the market personally and in 401k accounts. Why all the selling? Fear is part of the equation, but the lack of confidence in the US markets has to be the worst I have seen since I started investing nearly 30 years ago. The work of Paulson, Bernanke and Washington can't do enough to restore the confidence in the markets. Is that there fault? In many ways yes, but at this point they are trying. The yes part is each of the guilty parties were living in denial at the size of this problem. They all underestimated the leverage that existed. Not how much leverage was in place, but the degree the underlying assets that supported the leverage would devalue. The assets pledged as collateral are where the problem lies and where everyone missed the boat. My opinion.

A quote I heard from the superintendent of schools where I taught applies here, "We have diarrhea of words and constipation of ideas." There is plenty of talk happening and plenty being written about it, but in reality little has been done to restore the confidence of the investor. The level of cash on the sidelines continues to rise and will do so until which time they have confidence enough to put their money to work. Mutual funds are being hit with large liquidation requests and hedge funds are dealing with similar issues. And as I have stated many times in my posts here, I am one of those on the sidelines looking for the confidence I need to put my money to work.

So, where does this leave you and I as investors? Frantic. I am not a trader by nature and that creates a problem in this type of market environment. The traditional methods of investing as markets build bottoms and taking advantage of trading ranges, etc. aren't the right strategy for the current volatility. Therefore, I have to follow my discipline and sit on the sidelines until I have a strategy that I can implement in the current market environment. Logically that makes sense, but emotionally I go through the gyrations that I am missing out on some opportunity. In reality the only thing I am missing out on is the merry-go-round of emotions that come with trading this type of market environment.

Last night I listened to a professional investor discuss a strategy for playing Citigroup. The best I can state this is as follows: Buy the underlying stock and then buy the puts against the stock with a spread strategy to hedge the excess premium priced into option  due to the current market volatility. Now if I sit back and think through that strategy I understand it intellectually, but to implement it would personally give me a headache. That does not make the strategy bad, it simply means it doesn't fit my style of investing.

This means as an investor you have to know you! You have to define your strategy of investing and what discipline you will play by. The challenge this market faces is simple. Charts are blown up technically, fundamentally everyone is throwing darts as to what the fourth quarter will look like, not to mention the first and second quarter of next year. This means earnings and revenue estimates are suspect at best. And quantitative models are being redesigned to meet the current volatility levels. Leading me to the conclusion that those playing this market have defined strategies for this type of market cycle or they are just plain crazy and hoping they are right.

I personally am looking forward to a return to some since of a normal market. Whenever that may be.

www.SectorExchange.com

Weekly Sector Wrap-Up (Oct 6-10)

By John C. Lee | October 12, 2008 | 7:53 PM | 4 Comments

How To Trade Power Spikes

By John C. Lee | October 10, 2008 | 11:05 PM | 0 Comments

Today is one of my favorite days, not because it’s the end of the worst week in market history, but because the end-of-day rally created so many trading opportunities for next week (yes, can you believe it?). I’m talking about trading power spikes, one of my favorite patterns. A stock exhibiting a power spike is one that displays an immediate and forceful change in sentiment from the previous day. Whatever the reason, traders instantly changed their minds on the direction of the stock…a very powerful signal indeed.

Holding Steady With ETFs In the Market Storm

By Tom Lydon | October 09, 2008 | 5:53 PM | 0 Comments

The events of the last several weeks, and especially the last seven days, have struck fear into the hearts of the most daredevil of investors. The government is scrambling to find a cure for what ails the markets while the Dow continues to fall. Times like these test our mettle as investors. The natural inclination is to go into all-out panic mode, making decisions based on fear instead of through rational thought and research. We've been getting lots of questions from investors about what they should be doing,  as well as what we're doing.