P5

The Dow Jones Industrials lost 0.69 points on the day, closing at 11,842, the Nasdaq lost 20.35 points and closed at 2385.74. The more broadly based S&P500 index gained a whopping 0.07 points, closing at 1318. Volume was down significantly across the board. This should come as no surprise though as we have come off of some more volatile trading leading into Monday, and we have the two day Fed meeting starting today. Nothing is expected to come of it rate wise, but people will be keying in on how the Fed is looking at the economy and the markets at this time.

Technically speaking both the Dow Industrials and the S&P500 Index traded in very narrow ranges, in fact the narrowest ranges of the last 7 trading days or more each. Often times an NR7 occurs before a large trending move in one direction. Often these only last one day, but they can present great opportunities for short term traders. If we happen to get a large gap, up or down, over the next few days in the markets a trend day is more likely.

The story of the day yesterday continued to be two fold. First, and most important as far as I'm concerned is the continued meltdown in the financial group. Financial stocks remain over owned and over loved by institutions and continue to drip lower nearly every day. So many people are trying to pick the bottom in this group its becoming as silly as those who thought they could find the bottom in the Internet stocks in 2000. Bottoms are not events, they take place over time. The best thing to do right now as far as I'm concerned is to not be playing chicken with freight trains and wait until a good bottom with proper follow through is put in. Once the “real” bottom is in there will be plenty of upside, but I don't see it happening anytime soon, a lot of people, including the “smart people” at big institutions and hedge funds have yet to puke up their positions, and when the bottom comes they will. Wait for it.

The next story was Oil. I follow nearly 200 equity groups each day, and of the top 10 strongest groups yesterday 9 were Engery stocks. Caution should be taken with these right now since there is a large degree of political risk, however when I scanned over 2500 charts last night that majority of the good setups I was finding belonged to this group. That's not something to ignore, so, I will be looking to put small positions on with strict risk control in stocks like FSLR, APA, OIH (Oil Services ETF), MUR, and DRQ. These positions will be taken only in the event of a breakout on above average volume, and will account for around 10 to 12% of my AUM.

I will have more to say about Energy later today, most likely this evening. It will be updated on my blogs.

 

Write-up for Almost Family (AFAM) from Saturday evening.

Almost Family (Nasdsaq:AFAM): Last closed at $26.45 per share, with an average daily volume of 92,000 shares. Almost Family is a small cap name in the fast growing home healthcare sector. The companies business is devided into two segments, Visiting Nurses, who provide skilled medical services in a patients home, and Personal Care, home health aides who provide custodial care. They recently acquired Patient Care, Inc for $46.5 million, giving them a good footing into the lucrative markets in New Jersey and the rest of the Northeast. The company has a 3 year EPS of 45%, the last three quarters seeing ESP growth of 36%, 42% and 75% respectively. Many times a company will have high ESP growht, but significantly lower sales growth that suggests the growth might be from measures that will not carry forward, AFAM however has healthy sales growth as well. The company is good with its money, as can be seen by the Return on Equity of 25%. This is a lightly covered stock, with only three analysts (Avondale Partners, Jefferies Inc. and Stephans, Inc) providing coverage. As such this is a relatively undiscovered name on Wall Street, institutional ownership is between 8% and 15% with indsider ownership of 15%. One of the things I always like to see in a small company is strong investmet on the part of management. I look at it this way, when people give me money to manage they would like to see that I''ve got a good stake in it as well, and I feel the same about small cap and mid cap stocks. Finally the company has a history of beating price targets set by the analysts, most recently by 25% which is a trait seen in the strongest of stocks.
When we move to the charts Almost Family is starting to show the signs of a stock about to make significant gains. We see a large unfilled gap higher on May 5th, then a break higher from the base on May 21st. From May 21st until last Thursday the stock had been in a tight base near highs, finally breaking out with a large thrusting bar on Friday. This is often what we see in the most powerfully moving names in the market. There are a few drawbacks, most noticably the low average volume that the stock trades with. In addition to that the most recent breakout was not accompanied by the heavy volume I typically like to see. As a result of the lower volume on the breakout I will only be putting on half of my normal position size at first, and will then wait and see what happens on this breakout. If it performs well I will pick up the rest of the trade on the next pullback or breakout from a base that the stock shows. The last risk we see in the company is a risk to earnings, and its one we are seeing across the economy. Since Home Healthcare workers have to drive, and much of Almost Families money comes from Medicare and Medicade, rates that are set, the company could see that set them back in the short to intermediate term, although my own opinion is that fuel prices have topped significantly for the time being.

 

AFAM Regular Candlestick Chart

 

On the heels of a rather dovish Fed yesterday and $140 oil today the major market averages fell sharply. The Nasdaq, which had been the clear relative strength leader fell the most, losing 79.89 points (3.33%), closing at 2321.37. It was no day at the beach for the S&P500, which lost 38.82 points, closing at 1283.15, or the Dow either, which lost 358.83 points and closed at 11,453. The selling accelerated into the close, which is often a sign of institutional based selling. Volume was up 7% on both exchanges, which while above the recent average volume figures is not a panic number that would indicate any type of capitulation on the part of investors.

Right now we remain in the clutches of a bear market. In fact, as I look across the market sectors and at individual stocks the only area of significant strength left is in commodity based groups such as Steel, Fertilizers and Oil. Many stocks in these groups are showing great strength and will likely present buying opportunities on pullbacks and breakouts. The financial group continues to show the worst performance as investors confidence sinks in the honesty of the firms. The Fed and Congress are also showing themselves to be inept at dealing with the situation. Finally we have an election cycle, where both sides have a vested interest in making things seem bad and telling us how much better it would be under them.

When markets are down sharply though it presents a very good opportunity for astute investors. The stocks that hold up best in the times when the overall markets have a strong likelyhood of being leaders when there is a recovery. Names like AMED, DV, DRG, V, I.H.S and MORN continue to show strong patterns and each of them also have relatively solid fundamentals as well. Almost Family (AFAM) which I wrote about this weekend has fallen since the breakout and I have gotten out of it for the time being. It's still showing decent strength as compared to the overall market, but at this point there is no reason to stand in front of a speeding train. I'll continue to watch it closely for buying opportunity.

 

American markets ended the day Tuesday with mixed results. The closed under 11,000 for the first time since July of 2006, it lost 92 points on the day, closing at 10,963. Meanwhile the S&P500 lost 13.39 points, closing at 1214.91 (a two year low), while the NASDAQ managed to close slightly higher, gaining 2.84 points, closing at 2215.71. Oil had a wild day, at one point futures were down nearly $10 per barrel, however lower oil prices could not ease the markets fears of a worsen situation in the financial markets as US banks start to close. Both exchanges saw a sharp increase in volume. Oil saw its largest decline in over 17 years.

A number of things are worth looking at right now. Chairman Cox of the SEC has announced that regulators plan to make it harder to short troubled financial's such as Fannie Mae, Freddie Mac, Lehman Brothers and Wachovia Bank. Mr. Cox told legislators that the SEC would issue an emergency order to stop “naked shorting” in important financial entities. It will be very interesting to see how the markets take this news. It could easily cause a sharp rebound in these names as shorts scramble to cover positions, yet at the same time it could also offer a shorting opportunity if this does not occur. A good rule to follow is this “That which should go up, had better”, because if it doe not its pretty surely going to go down. With this new rule coming into effect the most logical thing would be for the effected stocks to rally. If they do not then the SEC may learn the lesson the British learned trying to hold up the Pound over a decade ago against George Soro's and other Global Macro funds, the lesson being that the market is going to do what its going to do, regardless of what officials would like.

With the failure of Indy Mac bank many people are worried about their own banks and what the future may hold for accounts they hold. Many are worried they will lose accounts, and in some cases this fear is made worse by a poor understanding of the FDIC rules. First of all, if you have less than $100,000 in an FDIC insured bank you have nothing to worry about. Even if you have more, in some situations you still have nothing to worry about. For example a married couple can have $200,000 in a joint account and that will be insured for the entire amount. Each person can further more have a $100,000 account, bringing the total insured amount per bank up to $400,000 per married couple if the accounts are structured correctly. For any amount of money over $100,000 (or $200,000 for a joint account, $400,000 for joint and two single accounts) you will get back fifty cents on the dollar above the amount. As an example, if you have an individual account of $150,000 at IndyMac you should expect to get $125,000 back, the first $100k being fully insured, the $50,000 being covered at fifty percent. I hope this helps out as a few people have had questions about this.

Next, the dear old Fed is wanting to put “new” rules on the books that would actually require a lender to be sure a debtor has the ability to pay back the loan. It's an amazingly complex principle, I'm shocked that the government has figured it out this quickly! The only problem is that for the most part these rules are already in place, and the fact of the matter is that if anything the Fed needs to be making it easier to get loans right now rather than harder. We are in the middle of the worst real estate bust in history and most people are finding it impossible to get loans unless they have nearly perfect credit. It gets even worse if you want a jumbo, which nearly everyone living in coastal areas or a large metro area such as Boston, New York, San Fransisco, LA etc will have to get in order to buy a suitable home. Just another example of the brainiacs in DC making things so much better for the average American.

As I've been saying for some time the sharp decline in the market presents great opportunities for the astute. Leading stocks will hold up, showing better relative strength than peers during periods of market weakness. This gives us the best opportunity to isolate them from the dismal crowd. Right now there are a few stocks with superior fundamental and technicals showing up on my radar. Names include AFAM, CELG, AMED, MMSI, TRLG, PMFG, FCN, CIR and FORR. You must keep in mind that we are in the midst of earnings season, this can make risk higher. Also, keep in mind that stocks such as MMSI, for example, are well into breakout mode. In a stock like this tomorrow is not likely to be the time to buy, however as you see the stock rest by trading sideways or down slightly, then upticks from there are generally excellent entry points for traders. I'll put some charts up with details of the trade on a few of these later on my blog at www.brandonfredrickson.blogspot.com

Brandon

 

FTI Consulting (Nyse:FCN) provides litigation, forensic, restructuring, finance and economic consulting services. This is a group of stocks that have generally held up well during the resent market meltdown, and FCN is a leading stock in the group. You can see on the chart that its generally in an uptrend, making higher highs and lows. Right now its working on a cup type of pattern in an area of the prior highs, and has held up much better then the overall market the last few days as stock prices have fallen sharply. FTN's finances are strong, with EPS of 64% last quarter, 20% before that and 46% the prior quarter. In addition to strong EPS growth the company is also showing strong sales growth, which indicates that the EPS growth could continue. A return on equity of 13% shows a company that is well (though not spectacularly) run. Like CIR Institutional ownership is a little high, but the stock is showing some very good action and it should not be ignored. I'll be buying FCN if it moves above $73 on strong volume.

I have charts and a writeup of CIR on my blog.

 

I used to make a pretty good living sharing hard won market lessons with other people, and though I'm no longer in that particular business I still do like sharing lessons I have learned. Here's one I hope none of you ever have to use: If you happen to be in a situation where you must see an oncologist and she says something is going to hurt a lot, BELIEVE HER! If she offers you pain medication BEFORE the painful procedure even starts, don't think that your doing yourself any favors by trying to be conservative on the pain meds!

Speaking of pain meds, how about the market huh? After falling below 11,000 on the DOW for the first time in a few years on Tuesday, yesterday the market did an about face. The small cap index was up nearly 3 ½ %, the Nasdaq gained over 3% while the DOW and the S&P500 both put in gains of just over 2 ½ % on the day. More spectacular were gains in airlines, which gained 25%, regional banks gained 17% and the beaten down financials put up a 12% on the index alone. Well's Fargo (WFC) was up 30% on earnings. Where did this come from? Pretty simply that markets do not go in one direction forever, and bounces in bear markets tend to be the most violent of all bounces. In fact 8 of the 10 largest up days ever in market history have occurred in the middle of bear markets.

Do I feel bad for missing out on a lot of the moves yesterday? Well I certainly wish I could have had today's WSJ at about 7:30am yesterday morning, but on what day is that not the case? Because neither I nor anyone else has the ability to forecast the future (hell I don't even know what I'm having for breakfast yet and its already 7am, I'm not going to beat myself up too much over. If you look at the charts of key stocks that rallied yesterday you can see that a lot of them are some of the most beaten down names in the market, and its hard to find a point to buy those. At what point during the 70% decline it has seen in the last several weeks do you step in and catching falling swords with a stock like Fannie Mae for example? I don't, and thats the only way I know how to stay profitable.

For me profits start with losses, specifically keeping them in check. I keep losses in check by following my rules. If I don't follow my rules it would have been very easy to jump into the market after the strong accumulation day that we saw on July 8th, but with in a day that moved gave way to the downside again. There is simply no gain in that for me. I have always thought that a managers true value is shown when markets are not easy, and you can see how well does the person running my money do at holding on to it while everyone else is giving it up. While Anthony and I have not produced huge gains this year, we are up, and actually would rank in the top 5% of managers this year so far. I'll take those results.

Now, all the pooh poohing above not withstanding we do have a POTENTIAL rally to keep an eye out for. I would consider yesterday to be day two of an attempted rally (Consult Investors Business Daily for the definition). I will be watching very closely for a follow through day in the next several days, and should that occur I will be a buyer. Over the last several letters I've published I've talked about down markets being the best time to isolate the very strongest names, and should we get a follow through day thats exactly when I will put that list to work. Even though I think it will be nothing more than a bear market rally, if its catchable following the rules I'd still like to catch it – bear market rallies are the strongest rallies of all in most cases.

I'll get you a pretty long list of stocks either this evening or over the weekend. Good trading.

 

As recently as Tuesday US Equity prices had fallen to two year lows and fear of further failures in the banking group had a lot of people fearful of what even worse times lay just around the next corner. People have been getting checks from the new IndyMac Federal Bank, however banks are not clearing the checks for long periods of time. Last night, however, I was watching the 10pm news on our local CBS affiliate and the newscasters were wondering out loud if the bear market was over, after all how could such a huge move occur if the underlying weakness was still there? It's tempting to write to them, letting them know that eight of the ten largest up days in the market resulted in nothing but losses for those who bought into them since they turned out to be nothing more then bear market rallies.

American equity markets put in solid across the board performance yesterday. The S&P500 and the Nasdsaq Composite both gained 1.2% for the day and the DOW, aided by powerful moves in AXP, BAC and JPM (who's gains made up nearly half of the entire DOW move) closed with a gain of 1.8%. With investor confidence somewhat returning on the heals of oils drop of over $10 per barrel in the last few weeks volume rose on both exchanges, up 14% on the NYSE and 10% on the Nasdsasq. Volume has been running above average now on the NYSE for over a week.

The last two days I have heard with a number of people who are upset with themselves for missing this rally, or not gaining as much from it as they thought they should. Nearly everyone seems to have convinced themselves that they should have been able to stand out and catch swords without getting hurt despite most experience saying otherwise. The worry seems to be that “the bottom” is in and “I missed it”. So what!? If this is truly “the bottom” (which I doubt, but that does not mean I can not be wrong) then there are going to be plenty of stocks that go on to produce stellar gains during the course of the move higher, and not only will there be plenty of stocks moving but you will have setups that present you with a positive reward to risk payoff. Even though looking back it's “easy” to pick out the bottom and say “I should have been in”, doing so in the real world and doing so in hindsight are two different things. Now I'm seeing people who have had bad years running around like headless chickens. It's natural to want to make up the losses by chasing momentum, but sadly your most likely to do by taking this approach is make certain that your equity and self-confidence both suffer greatly. Again, just because something is going up does not mean you should buy it. Certainly you can, but I CAN jump off a tall bridge in the middle of winter if I decided to do that, but the simple fact that I can does not mean I SHOULD. Same thing goes for chasing momentum.

I have been trading since 1996, since I was 21 years old some of the countries smartest and most wealthy individuals have trusted me to manage money for them. I've been trusted with this money because I've shown good judgment (although not good spelling) over time. I follow my rules and do not put capital at risk simply to have a position on, or because I feel bad about a missed move. I treat capital preservation as the single most important objective because I know for sure that I can't make money tomorrow if I blow up today, so during difficult market periods I have problem standing aside and waiting for better opportunities. I may not be the fastest runner on the field, but I won't take a nap in the middle of the race and I always make sure I can finish the race, usually in good time. Now, many people say “Well thats all well and good for you Brandon, your “rich” and can afford to sit in cash, waiting for the market to come to you”. That's a nice way to rationalize a trading addiction or the simple fear of missing a gain, but I can assure you that I would never have gotten the chance to get rich in the first place if I did not have a willingness to get out of the markets at certain times. Over time gains need to be made, and since people pay me well they expect not just gains, but superior ones as well. The most important aspect of doing that is capital preservation and following your rules.

So where does this leave me right now? There is no denying that the gains over the last few days have been spectacular, but the move down before it was also. I will continue to watch the market very carefully for a follow through day. I'll also be watching very closely the price and volume patterns that show themselves when the market has its first pullback from this move higher. If these things line up, then I'll go into the market more aggressively and be looking at leading names such as EZPW, CIR, MMSI, AFAM, MA, JBHT and many others that look like they do. At the same time I'm a bit like Ole Jolly Saint Nick, always making my list and checking it twice. In this case, as the market has rallied I've been paying extra close attention to former leaders like RIMM, AAPL, and GOOG that have not played along with the rally. A lot of leading commodities, both the physical commodity itself and many stocks effected by the prices of them have very weak over the last few days, several of them are in my opinion putting in important intermediate and possibly long term tops.

Any questions or comments feel free to email me brandonfredrickson1@gmail.com

 

In the book Street Smarts, Linda Raschke and Larry Connors talk about trading the news from page 131 to 147. They spend more time on the news than on any other situational type and for good reason.For my money news trades provide some of the easiest and most consistent profits of any setup out there. Most people will not agree with this, but that's because they do not trade the news correctly. Most of the time a person's logic works this way "Wow, XYZ has some great numbers, I'm buying". When XYZ starts to trade lower they dig in saying something like "Look at those idiots selling XYZ, don't they realize that the numbers were FREAKING GREAT!" and they buy some more. Trading in this manner is a way to almost gaurantee you won't be around long.




Today there was a great news trade opportunity in Wachovia, which I traded entered for my own and client accounts, as well as gave in Toni Hansen's free Othernet chatroom. Wachovia Reported horrible numbers last night, a loss of around $8.9 billion, and the stock gapped lower on the open with most traders probably thinking it was the start of yet another leg down in the financials. This would be the most logical guess, especially with the significant gap lower, however thats not what ultimatly happened. Wachovia did at first continue lower, but it quickly found its legs and then moved higher. Once it managed to trade over $13.00 per share WB was yelling pretty loudly that it wanted to move higher, the news be damned. I got greedy with my limit order and missed the first entry there, but as the day progressed Wachovia provided another opportunity for entry (stocks almost always offer another chance if your patient, this is another lesson that many traders do not ever learn and as a result go broke)when it based for a good part of the afternoon and then broke higher. I managed to get long shares of WB from 14.21 as it started to move higher. One of the great things about using this intraday entry to get into the swingtrade is that I'm able to use the lower daytrading stop to have the potential of a swingtrade. Wachovia went up much more than I had thought it would today, so I did something I do not often do, take partial profits on a position and daytrade. I got out of 1/3 of my position though at 16.77 and am fairly happy with the trade so far. I hope that the people in Toni's chatroom are also. If you have any questions about this trade or setup please feel free to ask.

For the chart of WB as well as my execution log on the trade please visit my blog at http://brandonfredrickson.blogspot.com/

 

I'm going to try to make this thread more active here as I have been feeling better the last couple of weeks. My biggest problem is that my hemoglobem levels tend to tank out then I have to make like a vampire and get blood. But, I think I should be able to post at least several times a week, hopefully every day. If you have questions, comments, suggestions please ask as for whatever reason ya'll actually provide me some sort of purpose in my life