IMO 100% cash is a terrible position in pretty much every enrivonment except a market panic. You are basically limiting your after-tax, after-inflation returns to 1-2% at most, and right now it is probably negative. If you don't like stocks (can't you find *any* stocks or stockmarkets that are good value compared to bonds & cash? Plenty around, you don't have to stick with S&P funds/ETFs), then what about commodities? If you see good stocks but are worried about the market, why not just short the S&P as a hedge, or buy some puts? No allocation to TIPS in this potentially stagflationary economy? What is so good about T-bills that by autumn will yield less than the CPI? Being long cash is like saying "I have no good investment ideas".
IMO 100% cash is a terrible position in pretty much every enrivonment except a market panic. You are basically limiting your after-tax, after-inflation returns to 1-2% at most, and right now it is probably negative With the Dow down about 7% for the year and the Nasdaq down about 15% so far for the year, 1 or 2% is fine by me. More importantly its fine by the people who have trusted me to manage a portion of their portfolio's. I'm not one who believes in "Relative" performance as the best benchmark, particularly since I only get paid on any return in excess of the T-bill rate. So far for the year I'm up a little over 3%. If you don't like stocks (can't you find *any* stocks or stockmarkets that are good value compared to bonds & cash? Plenty around, you don't have to stick with S&P funds/ETFs), then what about commodities? I do not have a Series 3, and so I don't trade commodities on the account. I have had positions in KOL, SLV, and USO at various times this year. I'm very interested in UNG right now on a pullback, and also watching the TLT closely for a shorting opportunity. I'd love to be able to trade Coffee right now, but there is no ETF for it. Being long cash is like saying "I have no good investment ideas". Sometimes, in certain markets, I dont. I think anyone who's honest with themselves would admit the same thing, there are a lot of times in the past I wish i'd had the smarts to realize that cash is a valid position to have.
On Monday US markets across the board closed higher after a strong rally in the last 90 minutes of the day. The DOW gained just under 190 points, while the S*P500 was up about 1.4% and the Nasdaq was up around 1%. Volume was higher on the NYSE, beating out Fridays volume levels by about 8%, while on the Nasdasq volume retreated eight percent. I tend to follow Investors Business Daily very closely, especially the Market Pulse and Big Picture. They are now calling this market as one being in a confirmed rally after having had a follow through day in the Nasdasq on February 13th (IMO A weak one) and then the follow through day today for the NYSE. Typically I try not to fight with IBD, but in this particular case I do not find myself strongly agreeing with them. As I see things we have had very weak follow through days that did not not lead to any new leadership or strong market moves. In fact after the Nasdasq's February 13th follow through day the Nasdaq suffered a distribution day the very next trading session. Additionally, although volume did spike on the Nasdaq and the NYSE's follow through days it did so very slightly. Finally I get to market leadership. What leadership you may ask? Well, I have the same question. I see plenty of stocks that are coming off of lows, thats all well and good, but stocks coming off lows do not ignite bull moves. You need to have area's of strength in the market that can lead higher and generate excitement on the part of the crowd. This is sorely lacking right now. So, for the time being I remain mostly in cash and on the sidelines. If this does turn out to be the real deal and we get a strong rally there will be plenty of opportunities to get on board. No market goes straight up or down for too long. My plan will be that if we do now get a pullback on light volume I'll start tip toeing into a few positions on the long side. For the time being cash is king as far as I can tell.
American Stock Markets started off lower on Tuesday after the Conference Board's Consumer Confidence Index fell sharply to 75, following an 87 reading in January. Next came the Core CPI, the Core CPI excludes food and energy costs since none of us really needs food and driving is bad for the planet so we should not do that either, which rose to 0.4% which was double the expected 0.2%. By late morning though the market was looking better after IBM announced a share buyback program and a talking head from the Fed had some dovish remarks suggesting they are less worried about inflation. This makes a lot of sense, because as I pointed out earlier obviously we don't need food, and Oil is evil and bad anyway. The Nasdaq gained 17.5 points, closing at 2344.99, the Dow Industrials gained 114 points, closing at 12,685, while the more broadly based S&P500 gained 9.5 points, closing at 1381.29. Volume was slightly higher on both exchanges, up about 1% on the NYSE and a bit over 8% on the Nasdaq. For the first time in awhile New Highs led new lows on the NYSE, though on the Nasdaq New Lows still outnumbered NH. Investors Business Daily has already called the market as being one that is now in a confirmed rally. This suggests that Investors and Traders should be looking to add exposure to the long side of the market to partake in a bullish phase. While I've been a bit more cautious overall I can not ignore that the market has now started to rally on bad news, often the best signal of strength. I'm still heavily invested in cash, which is appropriate I feel until we see how the markets handle the inevitable pullback after this rally. Should that pullback be one that occurs with light volume then the obvious play is to be a buyer of strong stocks. I will at that point start building larger positions in leading names to take advantage of an up market. Periods of weakness present traders with the very best opportunities out there for isolating pockets of strength in the market, similarly periods of strength allow for the isolation of the weaker names. With relative strength being one of the few technical measurements that holds up to vigorous testing this is very important. On the long side of the market Housing and related types of names have shown some very impressive strength. Names such as NLY and TOL are doing very well. Transport stocks too, especially the railroads, are performing nicely. Names like BNI, CSX, UNP and GWR have shown leadership even when the market itself was not. Finally some retailers have also shown some good strength in spite of a lot more bad news than good. Stocks like BKE, TJX, URBN. The Euro too has broken out of a long base, while the US Dollar has fallen. Investors and Traders can easily take advantage of the weak dollar with a long position in the FXE which represents ownership of Euro. Isolating area's of trouble and weakness has also proven easy the last few days, and a number of important stocks are not taking part in the rally. They should be watched closely for shorting opportunities, because as I said earlier I do not buy into rallies until after they prove themselves by performing well on the first pullback after the follow through day. Since by my own set of rules then the overall market is still bearish until after this first pullback is well taken, I continue to look for short positions. Names like FRE and FNM, MRO, ADI, BUD, SNDK and GS all have shown poor gains even with the stronger market. Additionally the long bond is looking as though it could break down from these levels. This is playable with an ETF called the TLT. Disclosure. My portfolio is currently about 82% cash. Stocks mentioned here that I have positions in are BNI, GWR, FXE, TOL, GS and SNDK.
Over the last few days several people have questioned, and a few even challenged me on the relatively large cash position I have been holding for most of this month. As I write this the S&P500 is down 3.8% for the year, the Small Cap Russell2000 index is off by 6.2%, the S&P500 is down nearly 6.2%, while the Nasdaq is down over 15%. At the worst levels the S&P500 had shed 15.5% for the year, the Nasdsaq 19.8% and the Russell2000 just over 16%. Since most Mutual Funds and Hedge Funds actually put in worse performance than the Indexes its likely that the majority of them are down more. With all this pain present in the market positive numbers are hard to come by, and those who are lucky enough to have competent individuals handling their money (be it themselves or a paid profession) are happy indeed. My own accounts, both managed and personal are up just under 5% for the year, so while many on message boards complain, I've not had a single client express anything but pleasure in the performance so for this year. Having spent a large part of my childhood in what could be seen as extreme poverty I'm very aware of the value of money. The effect of this is that I've always been much more focused on the worst case scenario than on the best. This has protected both myself and my managed clients on a number of occasions, including this year so far. The biggest danger that an investor faces is that of large losses, either generated by reckless trading or a bear market. In either case the effect can be devastating and very hard to recover from. A loss of 20% requires a gain of 25% just to get back to your starting point, while a 50% drawdown would require stunning performance to generate the 100% gain needed to get back to even. To read the rest of this article, and many others, please visit my FREE blog @ www.brandonfredrickson.blogspot.com. Please note that I have no products for sale at this time, and am unlikely to have any in the future.
On Wednesday US Markets ended the day mixed, while having mostly traded entirely with-in the range of Tuesday's trading action. Federal Reserve Chairman Helicopter Ben Bernake signed that with the most recently released economic data showing a slowdown in the American Economy the Fed is set for more rate cuts. (ADD moment here: What happens when things are still bad and the Fed has cut rates to zero? What ammunition do they then have, rates are already effectively negative if you factor in inflation...Yes, I am including Food and Energy here. I know that Cosmopolitan Magazine is trying its best to make all of the worlds woman anorexic, but most still eat) The Dow closed 9 points higher, ending the day at 12,694, the Nasdaq climbed just under 9 points to close at 2352.78, while the broadly based S&P500 closed down 1.27 points, ending the day at 1380.02. Volume was down slightly on both exchanges. Those of you who follow my blog or have me managing your money know that so far this year I have approached the market with a large dose of caution, staying mostly in cash. This has allowed for the preservation of both capital and confidence when conditions change and are more favorable for putting the money to work. When I'm looking at any market one of the most important things I look at is the news. Not what specifically the news was, or any type of play off that news itself, what I find to be much more important is the markets reaction to any news. For example, it takes a strong market to shrug off bad news and not move lower. I know a lot of people will spend their energy in that type of situation screaming and yelling about how stupid everyone else must be, but in the end they often end up being the one's broken and fooled. Over the last several days/weeks the market has encountered really nothing but bad news, however the general markets, and even the specific sectors effected by the news are more often then not shrugging and moving on, higher. Again, this is a significant sign of strength, one that shouldn't be ignored. So, whats the plan of action at this point: Investor's Business Daily, for the firs period of time in 2008, has the market listed as being in a confirmed rally. This suggests that traders and investors should start building positions in stocks coming out of sound bases and showing good relative strength. Although William O'neil and IBD's work and method have strongly effected the way I approach the market, there are some significant differences. For example, I will not consider the market to be in any confirmed rally until the first pullback. To my way of thinking this is the first important test and it gives some more evidence in favor of the upside. The psychology of a bear market is dominated much more by fear then that of a bull market, one effect of this is that most of the biggest single day up moves have occurred during bear markets, and as a general rule bear market rallies can be very strong. Over the course of the next few days I'll be building a lists, both of relative strength and weakness, to be prepared for which ever direction the market takes from here.
I know that there are a number of people who enjoy reading this thread and I want to apologize for not updating it over the last several days. On Wednesday night I started to come down with shakes, a fever and body aches. Since Weds. up until now my temp has not dropped below 102 degrees, and has been as high as 104.1. I finally decided I should go to the doctor yesterday since I'm due to have the boobs I never knew I had in the first place taken off on Friday and they said I'm just sick from that, but its also possible I have some kind of infection so they put me on antibiotics. I'll keep you all updated as to how I'm coming along after friday. The surgeon has told me that the mesectomy is not too terrible for men and I can probably go home late the day of the surgery or early the next afternoon if I want so long as it's draining correctly and the pain is under control.
First I want to thank everyone who has written to me over the last several days and wished me well with my health. I will email each person back individually to say thank you, but it will take some time, more than I want to have pass before you hear from me. So again, Thank you. Next, it's going to sound like I'm talking out of both sides of my mouth here in this commentary, typical guru crap, it might go up and then it might go down, but that's the place we find ourselves in. The Dow Jones Industrial Average experienced its single largest one day move in nearly five years, closing 416 points higher at 12,156.81. The broadly based S&P500 rallied 47.28 points to 1320.65, while the Nasdaq gained a rather staggering 4% for the day, up over 86 points, closing at 2255.76. Volume was much higher across the board, up 14% on the Nasdaq and climbing nearly 18% on the NYSE. So why all the fuss? Well, on Tuesday the Federal Reserve rode into town with more heroin and the addicts, led by the financial indexes, rallied strongly on the news that the dry spell might be ending. Not only did the Fed ride into town, but it came calling with its friends from the Bank of England, the Bank of Canada and the European Central Bank. The Fed announced that it would be adding more liquidity to the system, $200billion in Treasuries to banks in exchange for their debt. Now, in normal times requires good collateral in order to loan this money to the banks, but, as they did in August the first time they tried this trick, they will be accepting any crap the bank would like to get off its own books and transfer to the Fed (ie. Your's and mine) account. This move comes just ahead of next weeks policy meeting where the spoiled children are kicking and screaming and demanding a new round of rate cuts since the other ones have proven so helpful. So, now that I've gotten all that off my chest, lets have an objective look at the state the market is in at this point, the good, the bad and the ugly. Each of the major indexes gapped up significantly on the open today, in fact each of them trapped. A trap occurs when on the prior day you have a very strong directional move, with the market opening in this case at the days high and selling off all day to close at or near the lows. The next day, if the market goes over that strong selling days highs a trap is created. This tends to lead to very strong short term moves to the upside, and sometimes it starts off something more significant. Today each major index had created the trap on its open, which is an even stronger trap. Traps that occur on heavy volume are something you ignore at your own peril. Now with that said lets come back up a little and try to understand what is going on overall. First, this is not the first time the Fed has ridden to the rescue and allowed banks to unload all their junk on them. In fact, they did it back in August as well. The fact that they are having to do it again is not a good sign for the overall health of the market. The fact that they had to recruit all of the major central banks in Europe and Canada is to my way of thinking an even worse sign. Typically when the Fed is lowering rates and adding liquidity to the system markets will rally (thus the saying ânever fight the fedâ). Right now though the problem is that the cuts and excess liquidity themselves are the culprits to our problem. Adding more of the problem to try to fix a problem is about as smart as, well adding more of your problems to try and fix your problems. The liquidity infusion and rate cuts that started in August have been unsuccessful to this point, and there is little reason to think that this time will be too much different. I do suspect that we are in for some upside from this point, maybe even substantial upside, however I do not see it as long lasting. In the end none of the problems have been fixed, only added too. What the fed is doing is kind of like offering a kid extra recess time if he stops misbehaving in class, sure he will behave until recess, but you have probably harmed him greatly by giving him the expectation that bed behavior begets rewards. One of the most important thinks I look at are setups. What do I mean? Very simply, each evening as I manually scan about 4000 equities I simply take note of how many stocks are breaking out to the upside and the downside. I also try to get an idea of how many bullish setups (even bad ones) there are compared to bearish ones. Typically when the market is in good shape there are a lot of good setups, even when the market is coming off of a low. This is not the case right now, in fact in the S*P100 I only found 19 stocks I'd classify as having anything remotely close to a buy setup, and most of those were not very good setups. So, that's how I see the market technically. I also think that the fact of the Fed having to bring in the Bank of England, The Bank of Canada and the ECB is not a good sign at all. I mean, if our banking system is solid and sound, why do we have to rely on CANADA, England and the friggin ECB to bail us out. Does not bode well. So, what to do from here. I'm personally staying very cautious. If this is a rally that has legs to it that will show up soon enough and there will be plenty of time to make profits off the upside. I have some small long positions in the QQQQ, DIA, URBN, APA. I will try to find some other stocks I can add to my portfolio as the rally moves on, but each of them will have a very tight leash on them, and when the market turns back to the downside, which I think it will in a few weeks, I'll buy some QID and SDS and sit on those for awhile as this all unwinds.
I want to be bullish. I terribly want to believe with rational cause that everything is going to be fine and the markets will see new highs soon, or at the very least that some decent and important sectors will. Much to my displeasure though, I cant say that with a straight face. We had a nice follow through day on the 20th with high volume and nice price action in all major indexes. That would be the good news I suppose. The bad news is that there where very few strong stocks that actually partook in that rally, new names breaking out of bases that could provide us with leadership and the like. Worse still it's only taken 4 days for a negative distribution day on heavy volume to occur after the follow through day to the upside. Important sectors such as the financials continue to look rather putrid, and the same could be said of retailers, semicondutors and utilities. Even the Agriculture related groups are starting to show some signs of strain. Not exactly the pretty picture you'd have in mind for the market to be showing right after a follow through day to the upside off a bottom. And, did I mention I really wanted to be bullish? Because I wanted to be bullish I decided to look at a lot of stocks this weekend, hoping I could find some gem hidden someplace that had so far escaped my eye. No dice! I looked at the 2887 most heavily traded issues on the NYSE, Nasdaq and AMEX (yes all of them) before I gave up in in disgust. For all the looking I did, I was able to find exactly nine, yep you read it correctly NINE stocks that I thought had decent charts and management, enough so that if maybe the market would cooperate I'd be willing to put some of my own and my clients hard earned money into them. On the other hand, I had three pages worth of stocks that looked mighty fine to short, forty four that look excellent. Steel stocks and some oil companies look good (some oil companies also look terrible though). Horay for the incredibly shrinking dollar?!?! So, where do we go from here? I dunno, a bar with good drinks maybe? About the only good thing I can think of to say about Friday was that the volume was the lowest of the year, but that's not the most unusual thing in the world to have happen after a heavy volume distribution day such as we saw on Thursday. What to do, what to do? Well if your like me your picking up your toys and going home. My oldest brother is 6-5 and over 200lbs, I learned a long time ago that big kids who want to whop your butt have no problem doing so, and the only recourse you really have is hiding out with mom. So, my money, my clients money is basically still sitting in cash. I'm still working on getting some positive return out of the market. The accounts remain at their high water mark, but there is not much upside movement going on for us. The good news I suppose is that there is no downside movement which should make it easier for me to get paid when things do turn around and opportunities present themselves, which will happen.