3SOF

Good morning

Yesterday we've had the second biggest drop of the year for the general market (and also the second biggest fall for the Main Portfolio ), so I believe I should make a few remarks about the current general market situation, even though I'm not a market timer.

Fundamentally, there are basically three motivations for the sell off:

1) Very weak housing market, with new home sales falling 6.6% from the year ago level and average home prices falling 2.2%. There are also reports and forecasts saying the sub-prime defaults are spreading to prime borrowers too. Country Wide Financial (CFC) specifically said that and that stock went down some more.

Home builders also reported huge losses, reversing previous very fat profits.

I don't see where's the surprise in all this. We knew this was going to happen for more than a year, and yet, the stock market kept rising. Home builders were trading at less than 8 times trailing earnings for a reason, right?

2) Credit crunch

Interest rates were starting to get a bit high, so it was getting tougher to finance projects with an expected yield that compensated the risk. I mean, if 10 year bonds give you 5.2% a year without any risk of default, why would you invest to get an even higher yield, with all the risks that carries. Some people were happy with a 5.2% return, so that started to cripple investment.

But guess what? Yesterday's stock market slump and bond market rally took interest rates down below 4.8%:



This was a blessing for the credit markets and it probably tilted the FED more towards cutting rates again, since the 10 year T-Bond is way below the FED funds target rate of 5.25%.

My view is we'll keep going like this, in a goldilocks economy, not too hot, not too cold, the ideal economic environment for a bull market to live and last, climbing a wall of worry. At the start of the real Bear Market there won't be a single worry in the sky, just optimism and euphoria.

3) Oil

Oil has been a concern for several years, it's an oldie. The Oil price is high because demand is high, because economic growth around the world is strong. Businesses and governments are investing in cleaner sources of energy and that will keep the price of oil contained between $60 and $80 for years to come, in my view. Oil didn't prevent the bull market in stocks until now, and it won't be this time that it will start being a factor.

Technically, as you can see on the chart below, the QQQQ hit a triple support zone with its highest volume ever, with 318 million shares changing hands

The trend is bullish, a strong support area was reached, the candlestick on the chart shows a short term trend reversal from bearish to bullish ... I would say that was the bottom and the market goes higher from here. Nahhh, not so fast, bottoms are almost always unpredictable, even short term bottoms, so chances are there will be some more pain down the short term road, but over the longer term I have no doubts the chart is bullish and bear's motives are unwarranted, so I remain a long term bull.

Have a nice day

What are some characteristics of a market turning bear?

Good post David thank you!

I'm bullish for the long therm and see here a good buying opportunity. DOW could find good support above 13000. Very healthy this correction IMO. Also some good opportunity's in Asian markets. I'm buying Nikkei and Kospi.
Great stocks in the SOF main portfolio for the long therm.
Good luck everybody and be patient. New market highs are coming end of year. JMHO

NVTL the big boys wants get out...dont forget we went up since july 06 without correction exept in March a bit.

I don´t know what to think about 3SOF performance  this year. SP500 fall down today -1.63 % and main -2.29 %. There are the same manners of nearly all 3SOF holding over last week –  3SOF was always worse than index? Maybe it is time to modify buying/selling strategy. IMMR was totally overbought at time of purchase. I suggest better timing as you did in PFSW. What about ZERO COST BASIN? Selling enough shares to recoup all of your initial investment, while leaving your profits invested in the stock for the long-term or reduce amount of stock before earnings or when the stock is overbought? What about 3SOF stock performance statistic - gain/loss after earnings?  I know patience is necessary. Have a great weekend.


Look at the chart of SDS. Bears are going to rule for the rest of the year.

Not in the business of predictions and crystal ball gazing, but the follow excerpt from Louis Navellier latest market analysis. They make some very pertinent points in relation to  last week especially i relation to emotion, the media and what is driving the market. A good read and supports David's overall view as well:

Credit concerns dominated headlines and stock prices this week. The Dow had its worst week in more than four years, down 4.23%. The Nasdaq was fell 4.65% and the S&P 500 plunged 4.95%. The S&P 500 Financials index was down 5.67%. That's what caused most of the damage this week, as the financial sector commands about 20% of the S&P 500, easily the largest component of the index.
What's been surprising is there really hasn't been much news to justify these results. In fact, there was a lot of powerful news that had little impact. Specifically, the first GDP estimate for the second quarter was a healthy 3.4%, and consumer sentiment ended July at 90.4, according to the University of Michigan. The sentiment result was five points higher than June's. As you know, consumers represent about 70% of the economy. As such, their improving attitudes have a big influence on the bottom line.
But none of that matters at the moment. Instead, investors are becoming emotional, largely due to the media, and as a result stocks are getting shot. This happens at times, especially after several months of big gains. Markets rarely continue to climb unabated for long.
Last summer, investors got concerned about commodity inflation and Mid East tensions, in February it was the yen carry trade, now it's a credit squeeze. Should we believe it this time? After all, tighter credit will slow private equity deals. But will this be enough to derail the global boom, and the strengthening U.S. economy? It is far too early to make such a call. There is nowhere near enough information, which is why the stock market has become so volatile and emotional.
We have to stick to what we know, and that is the economy is rebounding, corporate balance sheets are very strong, earnings are accelerating again, and the Fed is likely to cut interest rates this year, in our opinion.
If you can separate the emotional tendencies we all have, you can start to identify a strong buying opportunity, which is what we believe is developing. Great buying opportunities, by definition, occur when the masses are selling. That said, start looking for great stocks that have no reason to get hammered. There are plenty of them. Investors have a bad habit of selling their winners in emotional markets.
We believe most of this will be over next week. The Dow will likely test 13,000 early. If it fails, it will want to test its 200 day moving average, which is at about 12,750. If we get anywhere near there, we will scream that a buying opportunity is at hand, especially if we get there without news that has substance.
Hang in there.

would you say than that Cramer from Mad money does have a point?
he usually recomends to sell part of your position to lock in profits. This way when your stock goes down, if it is indeed a good one, you already have some shares but are able to buy more with the gains you already have and your portfolio performance doesn't get slaughte

Quote from: babouk on July 27, 2007, 05:26:16 PM
I don´t know what to think about 3SOF performance  this year. SP500 fall down today -1.63 % and main -2.29 %. There are the same manners of nearly all 3SOF holding over last week –  3SOF was always worse than index? Maybe it is time to modify buying/selling strategy. IMMR was totally overbought at time of purchase. I suggest better timing as you did in PFSW. What about ZERO COST BASIN? Selling enough shares to recoup all of your initial investment, while leaving your profits invested in the stock for the long-term or reduce amount of stock before earnings or when the stock is overbought? What about 3SOF stock performance statistic - gain/loss after earnings?  I know patience is necessary. Have a great weekend.


Look at the chart of SDS. Bears are going to rule for the rest of the year.

Just one point to note here.  Sure, 3SOF stocks went down more than the S&P this week, but they also were going up more than the S&P when it was going up.  I think we notice the differntial more when its down of course.  Not to say that I dont agree with some of your points, buying overbought stocks can be dangerous as we saw with IMMR.  Just wanted to say that the sword cuts both ways.

I think the bull market is intact as David put it. Whatever is driving the market down I have seen ppl in my office jettery with their 401k and if the pension funds start liquidating it may be the real melt down. I think after short lived bounce we may have the real sell off. But as happened last year it may lead to the market going higher eventually by the year it. Though bottom fishing may be as dangerous as panic selling now. So the best thing may be to HOLD and if you are on sidelines then wait out atleast a week. Just dont let your emotions run you.

nice daily financial market commentary imho:

DK REPORT

quotation:

Saturday, July 28, 2007
Bottom Quest

The worst thing about last week is that the there are so few signs that a bottom is near.

Both the mainstream press and the blogosphere offer some excellent reading this weekend. There's also large amounts of windbag speculation and a fair amount of bellyaching. While this all makes for titillating journalism, an evidence-based approach to the market tends to be more productive for your portfolio.

As investors ponder a sea of red, below are five sets of market-based observations:

1. Panic

All rumors to the contrary, there was no evidence of panic selling this week. Even though the Dow shed 585 points in its worst week since 2003, trading was orderly, no curbs were tripped, and from an historical perspective, the declines were chump change. This correction might accelerate into panic, but it hasn't happened yet. On the left below is a chart of this week's NASDAQ. On the right is the Composite during the LTCM scandal in the summer of 1998. From the July high in 1998, the NASDAQ tumbled 33% in 12 weeks. In the last two weeks, the NASDAQ skidded a sickening 23% (imagine the Dow falling 3100 points in eight days).That felt panicky, especially because --doh! -- everyone thought the bottom had occured four weeks earlier (red arrow).

2. Bottoms

I received numerous e-mails, comments and questions this week about identifying bottoms. Of particular interest was whether the IBD100 offered an edge. The short answer is no, the IBD100 is essentially useless at calling bottoms. Most leading stocks are bloody stumps at market lows. Most recover; many don't. However, other indicators are helpful. When these are used in combination, they're generally accurate (but look again at the red arrow on the 1998 NASDAQ chart just above). While some are crying oversold! this weekend (and the odds for a ST bounce next week are actually pretty good), almost all of the popular "bottom finders" show a market still above a Queen-approved bottom. Below are three classic proximity alerts. There are others, but those aren't there yet either. Despite the HUGE surge in New Lows this week, the blue 10-week on both the NYSE and COMPQ High-Low Indexes remains well above important bottoms. Below are 5-year charts of the High-Low Indexes, which include the Oct 2002 bottom as reference. Historically, the blue 10-week line crosses below 40 -- and even below 30 -- before a meaningful bottom is in. The percentage of NASDAQ stocks trading above their 50- and 200-day is still high for a bottom. NYSE versions of this metric produce similar results. NASDAQ market breadth as measured even by the unforgiving NASI is still above the rising trendline off the Oct 2002 bottom. NYSI offers a similar take.

3. Crash Alert?

Regular readers know that I'm hardly an alarmist, but -- believe it or not -- important market evidence emerged this week that raises the chance for a 1998-type stock market crash. First of all, we're not there yet and the odds are still long. [Re-read the previous sentence]. However, as I was preparing notes on this, I read Adam at Daily Options Report quoting Jason Goepfert on the same thing. NYSE New Lows spiked to severe levels this week. In fact, New Lows have been this high only four times in the past 10 years. Making matters weirder, the NYSE is just 7.1% below an all-time high. Also, the Dow wasn't the only chart that set a 4-year record this week. The VIX surged an ear-popping 43% to a new 4-year high, even though the SPX fell a relatively meager 4.9%. In fact, the SPX is up 6.9% from the March low, but instead of falling, the VIX has skyrocketed 160%! The VIX is now parked 36% above its 10-day, a very unstable spread for the VIX. This week, option traders priced in something ferocious -- and still unseen. Given the New Low spike and a 24-handle VIX, my observations mirror Goepfert's about what stock market history says are three plausible scenarios:

--- the worst is over, and it's time to go long for the mother-of-all short covering rallies

--- this isn't just a correction, but the 4 1/2-year bull market is done and we're grinding lower into a lengthy bear market

--- the market detects something bad on the horizon, and we're about to see a rapid, convulsive selloff

The odds of a crash are long, but the market itself has thrown these scenarios onto the table, and not just the guys at Safehaven. Below is a 10-year chart of NYSE New Lows, along with the VIX.


4. Decent Economics

Juxtaposed against the doom and gloom is that the underlying US economics are surprisingly good. GDP is recovering, earnings are solid, valuations are nominal, employment is high, inflation is stable, and yields are low. If the market does plunge wildly lower, the economics point to it being a superb buying opportunity. It's worth noting that, as subprime contagion and a rising yen threatens the US economy, the 2-year/10-year yield spread detects nary a whiff of recession. In fact, it's printing a 3 1/2-year low.

5. The Penalty Box

Below are the six worst performing groups this week. Housing is no surprise, but it's noteworthy that the metals continue to offer no refuge despite a dollar perched at the abyss. The next two losers -- energy and cyclicals -- are the most troubling economically. Utilities took out the 50- and 200-day in five sessions, and small caps lived up to their reputation as the style to avoid. Pullbacks separate the wheat from the chaff, and one useful feature of this correction is that it started during earnings season. Companies that beat estimates are holding up better than the broader market, and the fresh earnings data is useful in preparing high-quality watchlists. No single investing strategy works for everyone, but stocks that pull back the least are typically the ones first out of the gate when the selling stops. Historically, they also run the farthest.

The week's best performers? Biotech, down 1.8%, followed by the NDX, down 3.9%.

Also, it's useful to track which stocks closed higher on a week like this. It's a great set of stocks with which to start a new watchlist.

--- On the NDX, 13 stocks closed higher on the week: AAPL, AMAT, AMLN, AMZN, BIIB, BMET, CELG, CHKP, GRMN, GENZ, ISRG, TLAB, VRTX, WYNN.

--- On the OEX, 6 stocks closed higher on the week : CL, IBM, MRK, PEP, PG, T

--- On the MID, 23 stocks closed higher on the week: ADVS, AJG, BEC, BRL, BRO, BSG, CCMP, CVD, DCI, EXBD, FFIV, GGG, GPRO, MFE, PAS, PLT, RFMD, ROL, RSG, VARI, WOOF, WPO

It should be a lively week ahead, as investors learn how good they are at following the ball in the other direction.


link:

http://dkreport.blogspot.com/

charts:

Hello, I hope everyone is having a great weekend, despite the awful week we've had in the markets. As most of you know, before being a stock's investor, I've been a futures trader for several years. I especially traded stock index futures, like the PSI20, the DAX, the S&P 500 futures and the Nasdaq 100 futures. I met with hundreds of futures traders and read dozens of books on the subject.

One of those traders, a man in his 40's with 20 years of experience trading the futures markets (he was actually more of an investor, he had a long term perspective), used to talk about one of his favorite indicators, the Commitment of Traders Report. Once, when we organized a lunch with about 80 traders and investors, he even brought a lot of printed charts and tried to show them to me in a table, with both our wifes pushing our arms in other directions ... we stood there for some time and that stuff really seemed to have prediction capabilities over the long term, as he was showing me historical evidence.

This lunch was somewhere in 2001 and we were all bears back then. At the 2003 low of the S&P 500 I was long with all I had, long and strong, because I knew the beginning of the war in Iraq would be an awesome buying opportunity (I just didn't think it would be so good ) ... but, after the initial very strong run up, I thought the bear market would continue and went short the markets. As it went up some more, I sold some more. Everybody in our community of traders was short back then, everybody except two guys. One is an exceptional trader that uses a self developed automatic trading system (but I heard his system stopped working a few years later and he just bought properties with the capital) and the other was the guy from the lunch, because, as he called me: "can't be Cesar, look at the COT report, commercials are long for the first time since 2000 ... this is a new and prolonged bull market" (there was also a girl that used a technical system that was also long back then).

And they were right. Especially the lunch guy ... what was his name? I can't recall his name but I remember his face and the conversations we've had perfectly.

Since then, because of historical evidence and those experiences, every time there's a stress in the general market, I go check the commitment of traders report. There are books written just to explain how to analyze the report, but for us it is enough to know that commercials are nearly always right and speculators are nearly always wrong. So, if commercials are net long and speculators are net short, the market will go higher over the medium term. If commercials are net short and speculators are net long, the market will probably have a severe correction or even a bear market. This for the S&P 500 futures.

Now take a look at this week's Commitment of Traders Report:





Commercials are long and "non commercials", or speculators, are short. Over time, commercials always win, I've seen it happen several times. Inversely, when the market rises a lot and you see commercials shorting, shorting, and speculators buying, buying, then you know a general market top is coming. Not this time, not now.

Another evidence that the long term bull market will prevail is the VIX. Look at the dates on points 1, 2 and 3 in the following charts from the VIX and the S&P 500:





The high points in the Volatility Index (also called the "fear gauge") corresponded to the bottoms in the general market.

Also, technically both the SPY and the QQQQ are at or near important support levels:





I'm a bull in a long term bull market, as it should be. People taking money out of the market, and they are many, are wrong, at least in my view, as they've been wrong in the recent past:

U.S. stock fund outflows highest in 5 years

They're taking money out, the way they did around the long term bottom. Now, when and if the S&P 500 falls 5% in one week and people respond with net inflows in stock's mutual funds ... that's when I'll get worried. It's all about the money in and money out potential. The more money is in, the less likelihood of the market going up. The more money out, the more likelihood of the market going up, as the money needs a home. And where are they going to invest the money? In bonds, now that they're giving just 4.76% a year?

There was a readjustment and I think that overtime the general bull market in stocks will continue. Now, I can be wrong, as I've been in the past, but I hopefully learned something from those mistakes.

Have a nice Sunday

It looks like QQQQ is eyeing the $46 less steep TL below. Hopefully, some of our stocks will resist the general decline.

This was really ugly for the market ..   

On the weekly chart I saw a clear sign last week that the market will drop more and more...

I hope it doesn't go any further ..

Hi fellas

The SPY touched its medium term ascending trendline yesterday:



And the candlestick pattern is a less known one, the Stick Sandwich, which signals a reversal in short term trend, from bearish to bullish:



We'll see what the next few days bring, I remain a bull in a bull market.

Well the SPY is definitely playing with the trendline... Hope it will close on the upside again...

Amarens