Since March 10th, we've spent a fair amount of time talking about the possibility that the lows of this bear market have been seen. And while we continue to believe that this might just be the case (the successs of the new P-PIP's will hold the key), we should point out that the only way to know for sure when such an event occurs is with a healthy dose of hindsight.
So, why bother sticking our necks out and making a "market call?" In short, our belief is that investors should strive to be more bullish than the crowd at bear market bottoms and more skeptical than everyone else at bull market tops. But to clarify, we are NOT talking about trying to time the market here. No, we are talking about one's overall outlook toward the market, which, of course, drives their investment strategy.
As we talked about last week, my recollection is that approximately one-half a bull market's gains come during the first one-third of the bull market cycle. So, if your strategy is to wait to "feel better" about things before deciding to invest again, you are running a big risk of missing a huge part of the next bull market!
Thus, the reason for making "a call" is to try and convince people that it is time to change their thinking. And while this may or may not turn out to be the perfect time to buy stocks (we'd prefer to see a pullback first), it IS the time to start thinking about getting back into the pool.
The bears have been telling us that the economy is a disaster and that things are likely to get worse before they get better. Heck, even the President, whose job is to try and rally the nation right about now, has been using this line early and often lately. But, let's remember that the stock market is a discounting mechanism that looks forward and not back.
The point is that the declines of -53.8% in the DJIA, -56.8% for the S&P 500, and -59.9% in the Russell 2000 (the declines are measured from each index's 2007 high through the lows on March 9, 2009) represent a VERY large degree of discounting of future negatives. Remember, the current decline in the DJIA is the second worst on record since 1900 - and is eclipsed only by the -86.0% plunge from 4/17/1930 through 7/8/1932. (For you stat freaks out there, we're defining a bear market as a 30% decline in the DJIA after 50 calendar days or a 13% decline after 145 days.)
Thus, it is easy to opine that the current bear has discounted everything except the Great Depression. And with Mr. Bernanke and his central banker buddies around the globe now committed to doing anything and everything to avoid a replay of the 1929-32 debacle, it occurs to us that this may not be the best time to be looking for things to get a lot worse.
In addition, we have suggested at least a couple of times over the past six months that the stock market plunge was discounting the potential collapse in the banking system. And as Ben Bernanke said on "60 Minutes" last week, we came "very close" to witnessing just such a financial disaster.
However, it is also clear that the U.S. Government and the Fed have gone to great lengths to make sure that the banking system stays afloat. They've provided the emergency capital the big banks needed to stay in business. The Fed has cut rates to 0% so as to give the banks a massive profit margin (borrowing at 0% and lending at 5% seems like a pretty good gig if you can get it). One way or another, the government IS going to start buying the toxic assets eating away at bank capital. And on that note, FASB has finally figured out that there needs to be some adjustments made in their accounting rules in terms of marking all assets to market all the time.
When you add it up, it is fairly easy to see that the majority of banks still standing right now ought to be okay going forward. So, the idea of a banking collapse is off the table.
The bears next favorite topic is the housing market. While it is true that the housing market has seen a massive drop, it is also true that buyers are beginning to materialize. And without going into great detail, let's also recognize that the Fed is on a mission to drive mortgage rates down and that the government, whether you agree with their approach or not, is attempting to throw money at the problem of falling home values. So expecting the housing market to get worse is a little like declaring that NOW is the time to start shorting stocks.
Finally, our furry friends are fond of picking on the economy. But the bottom line here is that unless Congress gets insanely stupid (which, of course, isn't out of the realm of possibilities), the economy will indeed recover. And since stock prices have already discounted one of the worst recessions in history, it is hard to see why we should be expecting things to get worse.
Since we run the risk of going on for cyber-pages here, we're going to try and keep the rest of the report short and to the point. So for starters, we do need to point out that this is not exactly the first bear market in history. As such, we can look back at prior declines and try to identify what has been required to turn the game around.
While it is easy to offer up prognostications, which may or may not materialize, it is infinitely smarter to look at cold, hard numbers when trying to make a case for when a market turn is more than just another bounce.
Without boring you with large volumes of data and more indicators than you would care to count, we want to point out that the majority of the indicators we follow (75% to be exact) which are designed to call the end of a bear market are now flashing green.
However, there is a very big distinction between the end of a bear and the beginning of a bull market. And while the indicators we follow do suggest that this bear is about over, we do not yet have confirmation that a new bull market has begun or will begin imminently.
The point to this week's missive is that the game may be changing. Therefore, you will need to make a corresponding adjustment in your strategy. Instead of playing defense, raising cash during rallies, and standing on the sidelines, it is now time to be looking for opportunities to "buy the dips."
Given the severity of the current bear, it is very unlikely that we will see a "V" bottom, where stocks just blast straight up for months. No, we would expect to see something more along the lines of a "W" or even a series of "W's" before the bulls begin to run. Therefore, there is no need to panic and bomb into the market.
So, in returning to this week's title, we wouldn't be looking to head to the diving board for a plunge into the deep end at the moment. Instead it might be a good idea to wade into the pool on any pullbacks and/or retest of the lows.
( SDS)
Date Purchased: None Yet
Price: Over $75.90
Buy Strategy: Although this rally is "more than a bounce" it is important to remember that trees don't grow to the sky. So, we're on the lookout for a pullback in the near-term and would play the SDS (an inverse ETF leveraged 2 to 1 to the movements of the S&P 500) once the move to the dowside gets going.
Active Trader Stop: $71.89
GIS (General Mills, Inc.)
Company Profile
Our Success Trading Group members scored 2 more winning trades this week with winning trades on General Mills, Inc. (Ticker: GIS) and Wal-Mart (Ticker: WMT). With the current volatility we are watching our "regular favorites" for new opportunities for additional short-term trades.
CMI (Cummins--$26.24; -0.69; optionable): Heavy engines
Company Profile
After Hours: $26.24
EARNINGS: 04/30/2009
STATUS: Cup w/handle. CMI made us a lot of money as it revved its engines in 2007 and the summer of 2008, then the engine froze up and it collapsed. What a collapse, falling from 75 to near 15. It bottomed in November and has moved in a $10 trading range since, rolling in big arcs. Over the past 8 weeks it has set up a solid bullish base. It broke over the 50 day EMA (24.16) last week on strong volume, then worked laterally in a tight range on lower, below to finish the week. That tight range formed the handle consolidation, the shakeout ahead of a breakout. Very nice setup for a new start for CMI.
Volume: 2.257M Avg Volume: 3.957M
BUY POINT: $27.11 Volume=5.2M Target=$31.94 Stop=$25.21
POSITION: CME FE - June $25c (73 delta) &/or Stock
RSH (RadioShack Corp.)
Company Profile
This past week $10 Trader closed two winning trades. One of them, RSH showed a 10.8% gain before commissions in just 12 days. The stock has now retraced a bit but still looks like it could offer a good move to close the still large gap on an upturn.
NVLS (Novellus Systems, Inc.)
Company Profile
Those who have been with us know that we were watching the semiconductors set up off of the November low as early market leaders in the attempt at a rebound from the August to November market gutting. The chips set up and bounced first, and though they had setbacks in January and February when the overall market sold off again, they never broke down to new lows. Shades of the 2002 bottom.
We played many semiconductors off the bottom and after the February selloff when they did not break down we were watching them again to see which ones set up bullish patterns for a new run higher. NVLS, a familiar name to many, did just that, posting up with a short double bottom base spanning the February and March lows that held an interim support level at the early and late December lows it tested as NVLS came off the November selloff low. Holding those levels in the double bottom showed us buyers were stepping in and accumulating the stock at that level.
We thus put it on the report on 3-12-09 as NVLS made a definitive move that solidified the double bottom, an above average volume move off that December support that broke through the 50 day MA. We wanted to catch it on a break over the 'hump' in the double bottom or 'W' base, but it gapped up the next session and never gave us a really good entry point. The thing about breakouts, however, is that they almost always come back to test the breakout, and if they hold and continue higher that is a great entry point because it 'proves up' the breakout in that it shows buyers still want in on the stock even at a bit higher level. After that second move up on strong volume, sure enough NVLS came back to test the next two sessions, testing the 50 day MA and the 'hump' in the base on much lower, below average volume. Then the next session on 3-18-09 it surged higher again with volume jumping back above average.
That is when we moved in, buying some stock at $13.93 and some June $12.50 strike call options at $2.50. NVLS put in a great move that day, closing at $14.69. It then started what stocks often do after a breakout, i.e. stair-stepping higher with upside moves and modest tests of near support, breaking higher, testing back, then breaking higher again. Last Monday it broke higher to close at $15.33. It paused, then gapped higher again on huge trade, running up to the 200 day SMA on the close at $16.30.
The 200 day SMA is a key level and can act as resistance and support. It along with the early November peak were roughly coincident and thus they were our initial target on the play as they set up a pretty formidable double layer of ice to break through. So on Thursday's surge we took half of the gain off the table, selling some stock at $16.21 for a 16% gain and half our option position at $4.15, banking 66%. The next session, Friday, NVLS defied the odds gapping higher again and clearing the 200 day SMA. It raced up to $17.46 on the high but then finished the session at $16.96. We were tempted to take more off the table with another gap and then fade off the peak after a good 3-day run, but NVLS held the 200 day SMA intraday and bounce higher to close so we decided to see if there was anymore run in the stock ahead of quarter end and the earnings season early next week. A run up to 19ish is the next resistance level, and if NVLS can run up to that point early next week and is unable to punch through, that would be a good point to sell some more positions, particularly the options. At that point we can either sell more stock OR sell some call options against our remaining stock positions, let them test back to the 200 day SMA, and then buy them back, pocketing the gain.
DRYS (DryShips, Inc.)
Company Profile
Sometimes cheaper stocks also offer option plays with seemingly high potential. DRYS, as an example, as been trending upward since early March but still remains quite depressed compared to highs seen as recently as January. Currently, the stock is pushing against a resistance around $6 and if it could break through, I am considering selling some Apr 6 naked puts currently trading around 85 cents a share. Even if the stock fell back a bit, I might not mind owning it for $6 less the premium the market is willing to pay for those puts. If I sold the puts and the stock was above $6 at expiration I would likely not be assigned the shares and would be able to keep the whole premium.
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