May

Wild Week in the Stock Market – Research Lab Members Blog – Week of May 10th, 2010

“There is a fifth dimension, beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man’s fears and the summit of his knowledge. This is the dimension of imagination. We call this the Twilight Zone.” -Rod Serling

Some time back we referred to the market as the Twilight Zone market, in which anything is possible. This week reinforced that notion as the “systems” went haywire. This dislocation caused a rift in the time-space continuum that will have lasting ramifications. Not only will certain trades get unwound, but behind the scenes the PTB will be scrambling to do “damage control”.

At this point we don’t know if any Hedge Funds “blew up” or if the “systemic malfunction” will cause any serious financial losses or derivatives to go haywire. We can only hope the containment crews are able to sweep up the mess without doing further damage to the sentiment. The worst thing is the psychological aspect that will prolong the cycle of mistrust. 77 Million Baby Boomers own essentially the same 700 stocks and they are going to need buyers over the next decade.

Aside from the Greek Tragedy, the entire global financial system was still healing after being on the brink of disaster at the end of 2008. I distinctly heard more than a dozen “US leaders” from the top down utter phrases like “economic meltdown”, “global financial disaster”, and “collapse of the financial system” in 2008. Just when they thought they had us convinced it was under control, these damn computers have to go all haywire. I won’t even get into the currency shocks reverberating around the globe since we can pull up a chart of the Euro or Yen anywhere.

Before we get into some charts, I wanted to do a quick review to bring new readers up to speed.

Most people would find slogging back through each previous blog post quite tedious, so I decided to post some highlights.

This will provide some insight into what we have been thinking recently.

Let’s start with last week, the first trading week in May 2010, and work backwards.

“After eyeballing well over a thousand charts this weekend I must say that we have hit a rough patch.”

“The volatility is definitely picking up and the risk is to the downside…”

April 26, 2010:

We know the market is toppy. We know the system is fragile. We know the game is rigged. We know it’s a traders market and NOT a time to “invest new money for the long-term”.

We know it’s a game of musical chairs and we’re always 6 clicks away from taking the trading account to ALL CASH.

April 19, 2010:

Honestly we have been suggesting the market is about to correct, and as usual we were about four weeks early.

Friday’s big red candle looks similar to the one back in January that kicked off the pullback to the bottom of the channel.
Things do not look so well for the overall market and we are 10 trading days away from “sell in May and go away”.

April 12, 2010:

Some will not trade into the “buy zone” and all are quite risky due to a potential or inevitable market pullback or correction.

March 19, 2010:

Unfortunately, as we have been saying for almost a week, the market is due for a pullback.

Investors would be wise to evaluate the potential drawdown on their portfolio if the market were to test those key long-term areas.

So there’s a few recent comments that hopefully caught your eye. Sometime you have to read between the lines as we balance our enthusiasm for trading stocks with our perception regarding the bigger picture.

Speaking of a crazy market, let’s travel back in time to Feb. 2009 to see what we were thinking:

“Recent events in my opinion have removed a certain level of confidence in the overall stock market for the near future.”

“It is not outside the realm of possibility that we get a fantastic rally here at some point…”

“We characterize the current market environment as the “Twilight Zone”.

Remember the March lows in 2009? We shared some interesting thoughts…

“The gloom and doom economic and market rhetoric reached a virtual crescendo Monday March 9th, marking the bottom of the near-term cycle.”

April 2009:

“People that think you can “invest” in a traditional sense in this environment are taking this tape way too seriously.”

“The current day to day stock market seems to have morphed into more of a a video game and the market feels more and more like a casino rather than a serious institution.”

“The overall market is unstable and irrational at this time and logic is pretty much out the window. If you are going to trade stocks it’s best to approach it for what it really is, pure speculation.”

January 2010:

“Since we are not particularly constructive on the overall market or the idea of long-term buy and hold investing, we will focus on trading. Trading is where the money is made and the safest investment of all is when your trading account is all cash. Cash is king. Hit and run trading is our strategy because we don’t trust the market one bit over the long-haul.”

So there you have some prior random statements to give you an idea of our ongoing skepticism. Click the dates to read the entire posts to see the context of our statements.

Researching this trip down memory lane, I stumbled across the Trade Plans from May 2008, two years ago.

Ahh…those were the good old days indeed. The market was well behaved and in a proper cycle that allowed us to ramp up the Trade Plans in a big way.

Unfortunately in the current environment, a repeat this May is unlikely, however there is real good news.

We take the spider approach as Jeffrey says. We wait patiently for the right opportunity and when it presents itself, we are not hesitant to take advantage of the situation.

I am confident there will come a time when we can trade like mad to the long side, but that time is not now. Capital preservation is key in the trading account as stated above.

Surprisingly, many of the talking heads on CNBC this week actually had good advice. Trade small if you must trade. Hedge your bets. Stay on the sidelines a lot. Cash is a position. Gold is real money etc.

Let’s take a look at the Weekly and Monthly charts of SPY.

Note the price in relation to the 10-period and 30-period moving averages on both charts. Note the trendline break.

On the Monthly we see in January of 2008 we got an EOM close below the 10-month moving average, where the red arrows shows our “long-term timing strategy” exit. The green arrow shows the signal to get back in. The current arrow is for demonstration purposes only as we have not closed this month yet.

We will discuss the implications and support levels to watch on this weeks Wednesday night show. Should be a nail-biter.

I’m about to run the scans and dig into about a thousand charts again. I am guessing next week won’t present the type of opportunities we had in May 2008, but you never know…haha. There may be a couple charts out there that aren’t “busted”. The world is always our oyster going forward. There will be times to trade relentlessly and there will be times better spent observing and getting some fresh air.

So this year the old axiom holds true. They sold in May. The question is, “have they gone away?”

Join us first thing Monday as we present some great speculation trades Live on the broadcast.

See you there.