Break in Momentum

This week witnessed a major break in the favored momentum names. Maybe it was attributed to the federal government shutdown and subsequent political standoffs. Maybe it was the uncertainty of who will sit as the next Federal Reserve chair. Maybe it was the weakening jobs and economic data. Or, maybe it was just about time.

We'll probably find out in a few months but right this moment it does not really matter. What matters is that the selloff in the high flyers is real and quick.

On a more balanced view, the pullback is good int eh grander scheme of the trend. It tames greed. It refreshes bullish risk takers no-loss views. And, more importantly, it gives bears some fodder to keep them interested and in the game. Give-and-take is required and necessary for uptrends to continue.

It was prudent to raise capital the last several weeks and months since the summer swoon. After this week, selling is probably not the wisest move. More and more of the uncertainties mentioned above will be vetted out.

Traders and investors will be more interested in the market in November and December. Until then, keep your powder dry. Be studious with homework and get yourself ready to nibble and bite back.

Roaring Back at the Helm

Wow, it's been several years since my last blog post but I am now back from another career as a full-time private trader.

The recession ended a couple years ago and we have entered into a fledgling recovery. The markets have been in a nice uptrend over the past year but we are now at a tipping point. The main impetus for today and the near future reverts back to the Fed stimulus that was put in place during the financial crisis.

After much market speculation over the last several weeks with most traders positioning for some sort of taper, the Fed emphatically told us this past Wednesday that the expected QE tapering will be delayed. That gave the market a green light to ramp up.

We have at least 6 more weeks of Bernanke's yellow brick road until the next Fed meeting. And, that is a great thing for a trader! I was nibbling into the pullbacks over the last several weeks as the market was pushing stock prices back down because I didn't think the Fed would be tapering given the most recent economic data since their last meeting. It paid off.

I did sell down a good deal of positions on Wednesday and Thursday's rising tidal wave to capture gains and replenish my cash chest. On Friday, I started a couple new positions and will look to deploy more cash as the weeks unfold into year end. I expect to see a continual buoyant market.

Stimulus Withdrawal

We know that 2009 was the year of the stimulus. Our economy was pumped and propped up through both fiscal and economic policies that staved an in-bounding depression. Whether that was good or bad will be debated over the ages, but the fact remains that it happened. What we need plan for this year and next year is the removal of this $2 trillion of play money. That's a scary thought.

Realistically, asset prices will see a reset. This will include stocks. Be alert and be cautious.

Getting Harder to Defend Zero

As the markets continue to move up and the economy seemingly recovers, the Fed is faced with the difficult decision of raising interest rates in 2010. This will be a difficult process because unemployment is still very high and personal balance sheets are still damaged. Most major banks have repaid TARP whether for the right or wrong reasons, yet they continue to be stingy on lending money. Stimulus dollars are still at work but sooner rather than later that well will dry.

These are just some of the currents that are criss-crossing in today's economy. It's ugly and confusing. But, that makes for opportunities to reveal itself when the time arrives. I think 2010 will be more of a trader's year as opposed to the buy-n-hold year we had in 2009. Here's to 2010...

Dennis Gartman's Rules of Trading

There are a lot of trading rules that have been espoused through the ages. Some are worthwhile but most are just not that useful. I came across Dennis Gartman's "not-so-simple" trading rules and found them incredibly sage.

Rule #1: Never, ever, under any circumstance, should one add to a losing position...not EVER!
Rule #2: Never, ever, under any circumstance, should one add to a losing position...not EVER!
Rule #3: Learn to trade like a mercenary guerrilla.
Rule #4:Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Rule #5: The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
Rule #6: Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Rule #7: In a bull market we can only be long or neutral; in a bear market we can only be bearish or neutral.
Rule #8: "Markets can remain illogical far longer than you or I can remain solvent."
Rule #9: Trading runs in cycle; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
Rule #10: To trade/invest successfully, think like a fundamentalist; trade like a technician.
Rule #11: Keep your technical systems simple.
Rule #12: In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.
Rule #13: Do more of that which is working and do less of that which is not.

I know there have been tweaks to these Rules since this particular list was published but if you can master the Rules here you will be a much better trader.

Glut of Homes

Here's the deal. Recently, I've been following the Chicago real estate market and things don't look so good. Why? Well,for one thing there are a lot of homes listed on the market. Another thing, foreclosure and short sale listings splatter the pages. Moreover, asking prices continue to go thru corrections, i.e., price reductions, after being on the market for 3-6 months with no bids.

Chicago is littered with high-rise apartment buildings and if you were to find one apartment for sale in one of these buildings you are likely to find 5 others available for sale. Competitive pricing is key if you want to really move your home. But, this doesn't bode well for any of the sellers or the other residents who own in the same building. Home values are still being re-priced.

Single family homes in popular neighborhoods that fetched $1.25 million 3 years ago are now priced to sell at $750,000. That's a 40% reduction in asset value. Ouch! But, the sad part is that no one wants to buy despite the "deal." Frugality is en vogue and having a 4 bedroom, 3 .5 bath home is just too excessive. These homes are just not getting moved.

What this says is that overall home prices are still trending lower. Owners are still holding steadfast to property values attached from 3 years ago. They are just hoping for a rebound while trying to hold on as long as possible. What homeowners fail accept is that there are very few buyers right now and that there are even fewer buyers with the cash to make the deal happen.

Reality will catch up one day when price and demand meet.

Dow 9000

The markets have been more volatile as of late. Swings of 200 points have occurred more than once in recent weeks whether it be red to green or vice versa. The result is a combination of technicals running ahead of fundamentals, performance anxiety, fund withdrawal, etc. On top of that, there has finally been a blip in negative sentiment. Economic data coming in is painting a more clear picture. Things aren't as rosy as most want to believe.

I reckon that most money managers have been riding the easy train this year after a disastrous 2008. I bet that most have been late to the party as well and are trying to keep this train moving. But, they're riding on hope and that only gets you so far.

Data was released today showing over 500,000 people initially filed for unemployment claims within the last couple of weeks. Stimulus is being extended. Homes are stuck in an inventory glut. Personal assets are still way down. Small businesses are continually shuttering doors. This is what we are faced with and it's not getting any better.

I expect the Dow to come back down to 9,000 or below before it shots up. That's the call.

Easy Money Made You Lazy

We've had an easy market for 9 months. You didn't have to think to win. All you needed was a little money and some risk appetite. Everything floated up and up. You just had to buy something. You nibbled and it paid off. You bought more and it rewarded you more. Then you got used to thinking that you couldn't lose.

Well, think again. I've been reiterating the disparity between the stock market and the real economy. We know that stocks price in the economy 3-6 months ahead of time. The rally 9 months ago made sense early on with all the stimulus talks and monetary easing. Then it made less sense during the summer run-up. Now, we're faced with stocks that have appreciated 1-4 fold and the real economy is not any better off than it was at the beginning of the summer. What gives?

Blame will go around the table more than once. There's plenty of it. But, I think it begins with you, the individual. You suffered a horrible 2008, arguably the worst of this generation. You were so down that you were willing to stick with anything that provided a glimpse of hope. After losing so much getting a little back was heaven. And when that hope grew a bit brighter you latched on for good, no matter what.

All the while, it didn't matter that jobs were being lost. It didn't matter that people were going months and even over a year without incomes. You bought a new car just because the government paid for some of it even though you couldn't really afford it. And, you bought a new house, also with the government's aid, thinking it was a good time to buy even though renting provided more value. You may have upped your savings but it didn't hit you that you're debt load was overwhelming. Worst, you thought you'd win against Mr. Market so you plopped some dough on the line and bought Apple, Google, Amazon. Well, let me tell you something...so did everyone else. It's payback time and you're not ready for it.

Making My List

We know Christmas is right around the corner as the year winds down into the winter months. It certainly feels cold outside already. And, I started making my list last week. No, not a Christmas present list but a 2010 stock list of what I would own if the market allows me. I will reveal some picks over the next few weeks.

No doubt the market has been riding high. Dow 10,000 is a reality. What continues to bother me is that Wall St is celebrating by drinking dollars but Main St is held hostage to unemployment, lower wages, lower asset values. Main St is not healthy but Wall St continues to price in what she expects to be a much healthier economy.

I see no signs of that yet. Companies are still routinely missing top line numbers. Unemployment is still increasing albeit it at a decreasing rate. Banks are still not lending despite historically low rates. Existing banks still wrestle with ugly balance sheets that are riddled with credit issues that only they know of, if they know. The FDIC continues its torrid pace of taking over troubled banks. The list can go on.

Some market strategists have indicated that we're not going to see another big correction this year. The strongest point pronounced is that since the market has run so much this year that those fund managers underperforming will be buying any and all "intraday" dips. Of course, retail traders will in exchange see what they perceive as a strong market. Same old story. Good luck.