Session of 03/07/2007

[KCScott]

I believe that the market is bearish for as long as the SPY is trading below $141.69.

David,

Why 141.69?

Thanks,

KC Scott

[David Randolph]

INSM was on fire ... I'm glad I didn't buy it just because of that, down 50% today (I hope nobody here has it). Biotechs are really dangerous.

[David Randolph]

I believe that the market is bearish for as long as the SPY is trading below $141.69.

David,

Why 141.69?

Thanks,

KC Scott

141.69 is the midpoint of the red candle that started everything. That day had such huge volume that to me it was a key reversal day. According to the candlesticks theory, that day's indication is valid for as long as the market doesn't close above the midpoint of that big red candle (midpoint is calculated using just the open and close, that is, the body of the candle).

If the market is able to close above that midpoint that day loses significance, since there was no follow through to it. For the motives that led to that sell off to remain valid selling reasons the market can't close above that midpoint.

If it does it tells me the market shrugged off those concerns and is set to head higher. I have my theories, but above all, I listen and respect the market.

[bourbonstreet_crawdaddy]

Thank you for the heads up on CPNE.ob David.

I dropped it like a hot potato with a tiny loss. I did not read your reasons for selling and need to read all of your commentary more closely.

Thanks again!

Bourbon   

[realcoolhead]

Is there a reason whey gap likely needs to be filled? If there is a "reason" for a technical pattern, I think it will be more solid. For example, I can relay psychological behavior of people behind support/resistence etc. But I have a hard time thinking of this gap fill.

Dave do you think FMCN could close the gap at $62 on 11/20? Is there a statistic out there on how many gaps that get filled?

I don't know about that statistic prodigykid6, but I do think FMCN will go down to close that gap (and more).

[cctabla]

David,

I hope you are feeling better...please can you take a look at AHM, I am itching to short it. 

Thanks,
cctabla

[David Randolph]

I bought the April GOOG puts as it was so drummed into me never to buy same month expiration .. those who think it will go back down (as I do) but not right away, you could get April puts that may well offset the March losses.  Just a thought.

David, what you do really really really well is to analyze those small cap stocks and spot the winners.  Now you seem to think that in a bear market, this skill will be fairly useless as small caps do not perform well in bear markets.

Two things:  first (as previously stated in other posts) I do not see the bear market starting now .. it will start a few months from now.  In the near term, we will go up slightly, back down, then up again and soon it will look like everything is rosy again.
Then ... in May, August, maybe Sept or October .. the real bear will begin in earnest.

But second, and more important, (as opinions are worth next to nothing - especially if mine  ) ... even in a prolonged bear market there are always some stocks that perform well.  Many of these will likely be small caps.  I can easily see more little TASRs and HANS rising out of even the deepest bear market.  And our best hope (maybe our only hope) to spot them early on is .. you!

So I hope you will keep doing what you do best, which is continue to analize the small cap stocks.  It may get harder to find the gems but when we find them, they could be real winners if bucking the trend. 

"If it ain't broke, don't fix it"  - and the strategy behind 3SoF is far from broke. 

I vote to continue with the original plan, even tho we can take occasional option trades or counter trades if a really good setup comes along.  I still think you are the one who will find us the next TASR or HANS .. and we only need one or two of those to make us all gazillionaires :D

Thanks for the nice words and support TraderStar

I've been thinking about it ... if, even in a bear market, the best strategy isn't to find great small cap companies that are bound to rise a lot, because of their growth in good or bad economic times. But I would need to take a much more in depth look at each stock ... it couldn't be "the chart is great, no balance sheet problems, positive and strong fundamental trends, here I go!"

It would take a lot more than that to spot those winners in their early stages. I would need to analyze the stock from a business perspective. To do that one needs to know the business very well, and I guess that takes at least 1 day of study.

Well, I could eliminate most of them by just looking at the financials, I guess, even though financials change, and it is their change or perception of change that makes stocks move on a long term basis.

It is an open debate, thank you for your contribution.

By the way, why do you have those timing thoughts about the general market? I view the current downturn as the beginning of something more serious, just as in March 2003 the "bull market" started with an 8 days bull run with huge volume. Whenever there's a very sharp one or two days move I pay attention. My experience tells me things change that way. But you're right, the market can claw back up and get stuck in a tight range again, as it waits for more information.

Hard to predict, but we had a very strong technical signal, the market is the most prominent leading indicator, so I listen to the market. On that day the market said "sell".

[TraderStar]

Is there a reason whey gap likely needs to be filled? If there is a "reason" for a technical pattern, I think it will be more solid. For example, I can relay psychological behavior of people behind support/resistence etc. But I have a hard time thinking of this gap fill.

What I learned, there is no reason, but .. historically .. many stocks (like IBM) seem to ALWAYS fill their gaps.  This is useful to know.  I was told 4 years ago about IBM always filling gaps so I watch it, when it makes a new gap, I watch more intently for a setup that looks like it could fill it (like recent plunge to 88).  I've played it half a dozen times, always with great profit.    
So if a stock you are following makes a gap, check its historical performance and you can get an idea how likely it is to fill the gap .. and how long it usually takes.  You still have to wait for the right setup unless you can afford to hold.

[David Randolph]

hi Dvid,
what do you think about shorting JADE?
THX
Achim

We already wrote a great deal about JADE, as you can check on the Stocks Covered List. I have some issues with the stock, as I think it might be somewhat overvalued (basically I'm concerned about dilution), but I like the long term business opportunity of selling jewelry in China.

I wouldn't go against that one, market cap is so small that it can run a lot, it can even have another bull run, surpassing those $12.64 highs. Here's a stock that I would like to study more deeply.

But it sure can go down to touch the 50 days SMA, coming up at $7.24, good luck

[eggman11]

David,

I agree with your use of options (They can definitely get us closer to $150,000), but would also suggest in the future that make a rule to buy at least 2-3 months out, the time crunch can just kill you.

I also suggest that we still use part of the money toward bullish small cap positions. Stocks that you have mentioned that you like are actually up, since you discussed them in light of the recent downtown, like EXM, BTJ (I know BTJ wasn't an official pick, but you really liked it) and WCG (these are just the ones I remember from the portfolios and recent discussionss., which is from the main portfolio and hit new highs today. (I am still holding WCG long term). I am a big fan of companies that get recurring revenues from a subscriber base i.e. WCG, MCO) as long as the revenues and profits are growing. Yes, It's harder to find small caps stocks "on fire" in a bear market. I believe if the fundamentals warrant it, we should allocated some portion to a bullish stance, we could just keep tighter stops or something. If the focus a little bit on some stock "on fire", we will only be focusing on stocks "cooling off", and forgoring some great opportunities.

If GOOG can close under 455, below its 10-day average. I see it dropping futher t0 the 448 - 450 range.

Keep up the great work

[David Randolph]

David, you say we're in a bear...but how do tell the difference between what you call us being in a bear as opposed to us just being in a correction?

Only time can tell. If we go down more than 20% from the high it was a bear market. If the top to bottom drop is less than 20%, then it was a correction.

I say we've entered a bear market (some European folks might say we've never been out of that long term bear market that started in January 2000, at least not in Euro terms).

But there's conflicting information. For example, I was really bearish in late 2001, after the comeback of the September lows (I was a bull after September 11th, even though I was a long term bear back then). I said the market would go down and break the post September 11 lows, which it did.

But at that time economic news were very good and almost everybody was optimistic. Now there isn't such a contrary opinion setup. But I guess maybe that is happening because this is a mini bull market top, or even a second top of a secular bear market that started in January 2000.

Kind of what happened between 1966 and 1982. By the way, I need to ask Ramsburg for that long term Dow Jones chart, I know he still has it, history can be informative of things to come.

[Stocky2000]

great bull run 

[BigSully1]

Mortgage defaults begin to spread;

http://finance.yahoo.com/loans/article/102536/mortgage_defaults_start_to_spread

I think the market is counting on a Fed interest rate decrease. I just don't see how in the world they can do it the way things are now. They're caught between a rock and a hard place, IMO. Without a decrease, I am almost certain our economy goes into recession or worse very soon and I think the Fed knows it. However that would just put another bandaid on the situation and would just create much deeper trouble further down the road, IMO. I don't expect alot of cooperation from the Chinese or the rest of the world for that matter either.

I regularly get Credit card offers (checks to use as please) in the mail. Yesterday I received one from my National City card. Believe it or not, they are offering 2.99% fixed APR for life. Yes there is a transaction fee, but it is 3% or a maximum of $75, so not much at all if borrowing a very large amount. I haven't seen offers this low for a couple of years.

I think we should debate if and when the Fed cuts rates (can they or will they really do it?), because I think that will determine where the market is headed.

The doo doo just keeps getting deeper......

[David Randolph]

Hi Dave,

One of your old friend,  HEPH  seems to be on fire since a few minutes(News is leaking???), waiting for the HHS award confirmation today after 4 different delay!.

"This coming week promises to see some fun volatility as Hollis Eden's (NasdaqGM: HEPH) "tentative date" for an award under Project Bioshield on March 7th approaches."

Yes, I remember HEPH. Once it broke down 20 or 30% in one single day because it didn't get one of those awards or something. I remember buying it exactly on a setup like you're saying, something like "buy the rumor, sell the news". The problem was the news was negative, or, there was no news

Let me make a few tests on it, just to see if one has anything to hang on if the news isn't good or not good enough. Well, the chart isn't saying much, as the stock has been stuck in a trading range. But volume is nice today, perhaps it will breakout. Let's make a few fundamental tests (not that they're very useful to predict the short term):

- Market cap is $140 M. A development-stage pharmaceutical company engaged in the discovery, development & commercialization of products for the treatment of diseases & disorders in which the body is unable to mount an appropriate immune response.
- Of course, being a biotechnology company it has an history of diluting shareholder's value.
- Balance sheet looks strong at this stage, with $47.45 M in cash and just $4.5 M in debt. I say they have cash to burn for ... let me see the quarterly losses ... losing $7 M to $8 M a quarter, so enough money for about 6 quarters (of course, they'll make another private placement before running out of money, increasing the number of shares outstanding, hence increasing the market cap, without the share price rising).
- Revenues are incipient, just $255 K over the last four quarters.

The question was: is there anything to hang on to if the news is negative? My answer is no. So the reward/risk relationship doesn't look compelling to me.

But thanks

[TraderStar]

It would take a lot more than that to spot those winners in their early stages. I would need to analyze the stock from a business perspective. To do that one needs to know the business very well, and I guess that takes at least 1 day of study.

Well, I could eliminate most of them by just looking at the financials, I guess, even though financials change, and it is their change or perception of change that makes stocks move on a long term basis.

Maybe just analyze one or two a day, tops, based on the chart patterns you like best.  We can focus on bringing you only small caps that have shown good relative strength in any pullback.  In a bull market, there are thousands to choose from on any given day; as the market turns bear there may be only a few, but among those may be some real winners (or they wouldn't stay strong in a down market).

By the way, why do you have those timing thoughts about the general market? I view the current downturn as the beginning of something more serious, just as in March 2003 the "bull market" started with an 8 days bull run with huge volume. Whenever there's a very sharp one or two days move I pay attention. My experience tells me things change that way. But you're right, the market can claw back up and get stuck in a tight range again, as it waits for more information.

Hard to predict, but we had a very strong technical signal, the market is the most prominent leading indicator, so I listen to the market. On that day the market said "sell".

The market's big one day drop was also due to a computer glitch, Asian markets & some other unrelated events.  Sources I have learned to trust are saying that although the market is ridiculously high & way too exuberant with respect to the reality of the US economy, still the "powers that be" (Bush....) cannot afford to allow it to tell the real story .. yet.  If possible they will try to keep it going until they can get another Republican elected.  If they feel they have no shot at that, they will let it go.  Either way, there should be one last 'Cinderella' recovery and the real drop should not occur until later this year or maybe even end of next year.  Although I'm not sure anyone can keep it going that long!
In other words, I have come to trust those who believe the US market is so heavily manipulated, nothing you see happening is real.  
So the only way 'we the sheeple' can make our fortunes is either to learn how to follow the market movers (and do not question why...)
or
use David's genius to find the small caps that could become humongous.  

If you only analyze one or two a day and it takes us 3 years to find just one that goes from 50 cents to $130 (splitting 4 times along the way) .. hey, that's good enough for me!  I can wait!  In the meantime, we can capture smaller profits with options, shorting, etc.  But we never stop looking for the next little one that is destined to make it big.  And you know there will be more .. as baby boomers retire, the hispanic market grows, China ... there are a ton of business opportunities out there that will make new billionaires.. and we just want to get their stock when it is still cheap!   

That's my vote.