Bottom Performing Sectors;

What we are seeing right now is a day to day rotation which is typical of market tops. We are getting 1 day pops in sectors, then the money rotates to the next sector that has sizable short interest.

Last week the Financial Brokers lead the way, this week we see them leading the way down. Its important that we don’t watch TV and get lost in the hype, thinking we are missing the boat.

Its important to keep our focus narrow and on actual sectors with visible earnings power.

Investors piling in to some of these sectors thinking they are going to get 20% upside, will find themselves upside down on that trade very quickly.—Jon

Lets look and see what $10,000.00 of our retirement money invested in the S&P, the most watched index by Wall Street, would have grown to over the last 7 years.

Our retirement fund would have increased by zero dollars over the last 7 years.

I will say it again, this investment game has a 95% failure rate. Please be careful where you put your money, and when you put your money there.

Long term the data will show an average of 9% return, but we cant get back 7 years of our life. The markets live forever, we dont.--Jon

I wanted to post this chart to show that the DOW was the only index last week that was up every day. It is typical towards market tops to see indexs make new highes, while the bigger majority of sectors are making lower lows.

Indexs are market cap weighted so the DOW for example can have 25 stocks move lower, 5 move higher, and still make a new all time high.--Jon

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Stock Market Poker April 22

I don’t really like the word Trader. Trader is an action word that implies constant market participation. Novice investors are also further confused by TV shows and stock recommendation sites that cater to the novice investors inexperience and lack of understand of what it takes to be a successful trader.

These TV shows and web sites give their viewers or subscribers anywhere between 4 to 10 stock trading “ideas” every single day. They do this because it boost ratings and boost subscriptions. They cater to the lack of understanding the novice investor has as to what it takes to make it on Wall Street.

Being a trader is exactly like being a professional poker player. I think a better term should be stock better, not stock trader.

Betters on card games, sports events, etc have a better understanding of why they are making the bet or even better, why they are not making the bet. Betters use odds, previous history, weather, and a whole host of other factors in order to place what they think is a higher probability bet.

The stock market works exactly the same way. The laws of the universe of betting are no different. This is why at the Trademechanic, we don’t do 4 picks a day, or 7 stocks “ideas” every day.

If you are playing black jack, and the best hand is 21, and you have 7, you wouldn’t go all in against the house. Yet people do it everyday in the stock market because they think being a “trader” implies action being taken every day.

Lets look at Monday as an example. I have several stocks that I favor their set ups right now. There are also stocks that did well on Friday, which will carry over to Monday; this I am also aware of.

However, what I also know is the market on Monday holds all the cards. We have no idea what the sentiment is going to be next week. We have no idea if the market will take out 13,000 on the DOW. What do we know?

We know that we had a good week last week, thus some profit taking would not be a surprise, in fact is likely. Thus the probability of profit taking is very high, and which sector will have the biggest share of profit taking is unknown.

So what we know is the house, the markets, have all the cards on Monday. This is why we don’t have a trade alert for this Monday.

What do we know about the summer months? It is a fact, that if you invested $10,000 over the last 100 years only during the months between September to March, you would have $500,000 dollars. (I don’t remember the exact numbers). However, had you invested that same amount of money, over the Summer months, you would have $12,000.

Now these figures are not exact, but you get the point.

Being an accomplished trader is knowing what to do, when to do it, where to have your money, and where not to have your money.

Being a trader does not mean you like 4 stocks or have 7 “ideas” every single day of the week, regardless of the probabilities working against you.

This kind of crap is nothing more than TV ratings and membership drives that ultimately boost their bottom line, and keep you doing a 9 to 5 job you hate.—Jon

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Looking for Low Volatility with Boillinger April 21

One forcast tool I like to use is low volatility. Low Volatility precedes high volatility and vice versa. I like to run Boillinger Bands via a 5 day chart on the focus list together with the Anthony Scale to forcast possible spikes in stocks.

We are looking for points where the Boillinger Bands come close together which is a picture of low volatility. This is the limit of Boillinger because the break out could go up or down. This is why you need additional tools to forcast the movement. But for sure you can expect a spike, one way or another.

Teso

NRG

CSX

I pulled in the reigns last week, only doing 1 trade alert because the sectors we were playing were not performing well. Financials, Housing and Food were getting the bulk of the investments. Never trade against a trend, big mistake.--Jon

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Trademechanic Looks Under the Hood April 20

Ok, time to do our weekly market stats check. This is our running score of where we are at in the cycle.

As you can see by the chart, the number of distribution days point to the beginning of the underlying base for stocks starting to crumble.

Historically, we will see 3 distribution
days before a big market decline. A quick check of the top industries all include energy, metals, etc. Clearly the money is narrowing its focus to big cap, value plays.

You wont be able to tell this by watching TV. That makes it appear tech is rallying, biotech, etc.

This is the classic bear trap, we will continue to avoid these areas and be ready to pull the trigger on the short ETF.

—Jon

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Schlumberger profit spiked 63 percent April 20

The numbers are starting to come in for oil companies and the news is good. We need to continue to look for strong plays in this area.—Jon

As traders, sometimes we have to step back and do some self examination of our system, and the decisions we have made, especially in a trade that has gone wrong.

Now this is not a kick me time, this is an attempt to keep our head out of the clouds, get our minds refocused, and remind us to stick to our trading rules of engagement.

Self Examination and keeping a score card is so important, I would rank it almost on par with knowing your trading rules.

In the case of OEH, I was so determined to be long the stock by the weekend, I couldn’t see the reality of the action in front of me.

If you have been with us for a while, you know that some time back we missed an easy $10 gain, because we sold shares of TRI before they were purchased. We knew they we being looked at as a take over, we had calculated the price to be around $49-52, and we knew mergers almost always get announced on Monday.

So, we went long, waited for about 3 weeks, got tired of it, sold and moved on. The next Monday, TRI bought out at $49 a share. I wasn’t going to let that happen this time.

Now for our target price portfolio, this is a mute point. But, I wasn’t allocating that money, I was spending our swing trade money.

The reasons we look at for purchase of stocks for the swing trade and target price trade portfolios are the same.

We first look at the over all market conditions we are trading in. Second we look at the world dynamics as it relates to the industry we are looking to trade. In the case of hotels, it doesn’t get any better.

Falling room availability, rising demand, pricing rates power, consolidation and leverage buyouts. These are the conditions that push stocks higher.

However; this is where a long term purchase and a swing trade purchase part ways. Our entry criteria for swing trades, is totally different than our entry criteria for target price trades.

I allowed the great prospects for OEH on a long term basis, cloud my judgment for the short term trade.

We will come out of this one smelling like roses, but for the error, I do apologize.—Jon

Looks like everything moves lower starting this morning. GROW is especially weak because of some analyst comments about one of the funds. This is normal trading 101, we have been here before and can expect to be here many times again.

Let things play out this morning, lets see if we have options after that to raise some cash. This is the reason we avoid tech this time of year, and only trade stocks with underlying positive reasons for going higher.

You can bet oil will move higher, gold will move higher, price of aluminum is going higher, etc. Ultimately the stocks will follow.—Jon

We are strength traders only at Trademechanic. The term “bottom fishing” doesn’t seem to apply to our style of trading. However, this is not the case. I think the term gives a visual that is harmful and ultimately gets a person trying to catch a “falling knife” as Wall Street likes to say.

Probably if you read a book on bottom fishing, it might indicate that you should start by scanning the 52 week low list. However, when doing this method, you have to look at your probability of catching a bottom in a stock or sector. Experts will tell you, despite your qualifications, the chance of guessing a bottom is less than 10%.

The better way to bottom fish is to look at the top % performing sectors today, top % performing sectors the last 5 days, top % performing sectors last 13 weeks, then finally, the bottom % sectors year to date.

What am I looking for? I am looking for sectors over the last 52 weeks that are some of the worst performing sectors, not the worst performing, yet over the last week or 13 weeks, are showing up on the best performing list.

This is how you bottom fish. You have to get out of your mind, bottom fishing in terms of finding an absolute bottom price. What you have to look at it is a sector that still ranks in the bottom of all sectors in terms of performance, even through it may be up 20% from its bottom, that now is on solid ground and will become an out performer over the next 52 weeks, offering you greater upside potential.

Never look at the % gain that you missed, look at the % gain that is left to go. That is the only thing you care about.

If you have the classic signs of a long term bottom, as we see in this chart of the coal/alt energy 2 year chart

This sector put in a nice 7 month bottom base, broke out of a W bottom pattern and has retraced to a possible break out area. Yet the sector on a 52 week basis is still one of the worst performers.

We will watch for stocks from this sector on our current momentum stock scans, and give them a higher value because we know the sector still has a long way to run. This is the proper way to bottom fish.—Jon

This article was posted in Britain by The Telegraph, a news paper website, on Feb 2nd 2007. I think it is worth a look to use a measure of where we are currently given the current data on Housing, CPI, Oil, Interest Rates, etc.

Merrill sounds alarm on global liquidity

As you can see the bulk of the move today was housing related. Does this mean the worst is over and time to load up in housing stocks? No it does not. This market is under owned like I have been saying as institutions have sat this one out because they did not get the 10% correction they have been looking for.

Here at the Trademechanic, we have been booking profitable trades calling the first bottom at 12,000, while institutional money sat out the move from 12,000 to today.

The big money locked in profits today from their shorts in the home sectors, in order to put money to work in everything.

For a short period of time starting today, tech will work, everything is fair game. However, we are not going to play with fire, and risk the 15% slam, by continuing to buy high growth, high consumer demand areas like oil, gas, aluminum, etc.

My indicators show we are now very close to putting on some ETF shorts.—Jon

Ok, we have been looking at todays markets as a repeat of 1946, thanks to a wonderful longtime market chart technician that brought this to my attention about 6 months ago.

Lets put the charts once again together to see what we see

You can see how this trend started with a fast move up. Then trended upward at a slower pace during the mid-part of the trend and ended with a fast or exhaustive style of trend. The top consisted of a new high, a fall below that high to bring in some shorts and a final thrust that included the classic short covering rally. Followed by a collapse in prices. You can see the “pattern of trending” is exactly the same.

The 1946 bull campaign lasted 4 years and 32 calendar days. Our current bull campaign is 4 years and 31 calendar days.--Jon

Notice the 25 year bear market from 1966 all the way to 1980, 25 years going down. Young people today think markets always go up.

I keep saying the good investors, the ones who stand the test of time, know how to make money when the huricanes are raging and the bear is in control. It takes time, and patience to go through enough market years to learn this game.

You wont find the magic in a book.

--Jon

Currently for the first quarter 2007, Traemechanic members are up over 15%, based on 100 share purchases. Here are some figures from markets around the world to compare our performance against, which is something we need to do on a regular basis.

As you can see we are getting killed by Zimbabwe, up over 600% ytd. However, we outperforming almost every country in the world, trading USA stocks which are flat for the year.

Given the fact that we trade in the USA, trading USA stocks, I would say we are doing extremely well.--Jon

On a day when shares of RIMM drop almost 10%, because of disappointing fourth-quarter earnings and saying they are being investigated by the SEC for options issues, Bear Stearns ups the stock to “outperform” and puts a price target of $177.

Now in case you haven’t figured this out yet, analyst up grades and down grades are terrible trading tools as the analyst is not looking out for you and me, the common investor.

This is a very wacky call to me and smells of an attempt to get a client out of the stock at the best possible price.

However, once the selling is done and the clouds clear, probably end of September, this one might offer some big time upside potential, especially if we can get it under $90 a share.—Jon

When one of our swing trades exhibits extended weakness, we need to check our data to make sure the reasons we purchased the stock still exist.
Lets look at a 5 year hotel/motel sector chart.

A stocks movement is 60% dictated by the sector it belongs to.

As we see, the sector moved higher above $26 out of a 2 year consolidation. When doing price targets, always use in order from your base set up, Base price x 15%, 25%, 40%.

If you take breakout price of $26x 1.15% you get $$29. Ok we have taken that out. Now lets move on to $26 x 1.25% = $32.50. This is where we find ourselves now

Therefore, we would expect to see profit taking at this level and we are getting it.

Now, this could be the top for the sector or once the consolidation at the 25% level is done, we can expect to move to the 40% from base level.

Only time will tell for sure, but for now I like our odds to move higher. This sector is currently experiencing full capacity, decreasing avaiable rooms and properties, increased business levels, and many mergers, of which our play is at the top of several shopping list for a take over.

Given the data we have in hand, the trade still holds.--Jon

From sec.gov, "Margin" is borrowing money from your broker to buy a stock and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it. But margin exposes investors to the potential for higher losses.”

Margin issues are not limited to regular guys like you and me. Wasn’t too long ago the CEO of MCI had to sale something like 50 million dollars of stock because of a margin call.

Take a look at this chart of the current margin status for the US market and notice the date of the prior peak;

Now scroll back down and review the 1946 comparison charts to our current market on a previous blog. Even though we are green light, all in trading right now, it is smart when trading stocks to always be looking to make a case for the opposite side of the trade.

This helps remove the emotion from our trading and keep us from being too negative or too positive, either of which can cost big money if were wrong.—Jon

The market today gave us distribution day number 2 since the March 21st follow through.

Historically the stock market will give 3-4 distribution days within a 4 week period before changing direction. This is not absolute of course, but going back 100 years, this pattern is very consistent and as traders, we always trade probability.

For now, we will continue to look for defensive, takeover and turnaround plays. If the market can make 1 more leg up, I would like to add some short ETFs.—Jon

This is the kind of report we were expecting, and that is what we got. All though this is great news for our energy plays, we need to make sure as we add more trades, not to get too heavy in any one specific sector.

So, you might see on the focus list some stocks ranking above a 7, which means they are tradable and over due for a snap back rally, yet we wont take them down just for purposes of diversification.

Our swing trade portfolio is sitting very good, I am very pleased with it.—Jon

Nice 9.5% gain today in shares of GTI.

These are great trading stocks in this portfolio. If you trade in and out of them using the sma lines as your guide, you can really pump up your yearly returns. Don’t over stay your welcome, as we keep adding these stocks in almost daily. Rotate your purchases and you will do very well!—Jon

Looks like our current swing trade portfolio is positioned well for additional profits if we can get some favorable numbers tomorrow. Alcoa just reported their most profitable quarter ever. That’s great for our Energy plays.—Jon

Nice 7% move in shares of VII today from the under $10 portfolio.

This is a fantastic list to make some serious money in, which is why we provide it. It’s worth keeping an eye on.—Jon

We are pushing to get long C because we believe they might start taking steps to right the ship starting Wednesday.

This is not a swing trade, and there is a big risk that what Citi has to say will not be sufficient to please Wall Street. Please don’t trade these shares unless you are prepared to take a hit.

My hope of course is the lay off numbers will be greater than expected and even a hint at the removal of the CEO.

We will attempt entry again tomorrow morning above pivot price. If we don’t gain entry, we will buy them on the close.

Ok, we moved into cash last Thursday because I was afraid the jobs number would come in hotter than expected, effectively removing any chance of a Fed rate cut. That is exactly what happened, yet the market didn’t rally, didn’t fall???

We clearly now are left with a bull/bear stand off between no Fed cut bear camp, and already priced that in, looking to good earnings bull camp. Its hard to say at this point who will get the upper hand.

Attached is a nice chart that shows average analyst growth expectations have come down from 7% to just over 3%.

Lets see what Alcoa has to say tomorrow and better yet, what the market reaction is. Until then, we are playing pricing power, take overs, and turn arounds.—Jon

From Briefing-Exactly what I am looking at, no need to add to it. We are picking our spots.

"10:11 ET Market View: Major averages pause near Fib extension target A typical technical target to watch for a potential pause or profit taking is based on the 1.272% Fib extension of a corrective pullback. Based on the March 23 to March 29 advance the 1.272 extension targets for the three major averages are at 2477.13 Nasdaq Comp (high 2478), 12584 Dow (high 12583) and 1447 S&P 500 (high 1446.65). As note in The Technical Take the Dow and Nasdaq Comp were up six in a row headed into today and that it is not too unusual to see some profit taking take hold after a strong run and in the wake of a data related spike such as Friday's jobs data."--Jon

Because the market has been up 6 days in a row, I limited our focus list to 18 stocks this week, and about 80% focused in the energy sector.

We don’t want to over exposed in this market, thus we remove temptation by narrowing our focus. The energy sector is prone to fast moves down, then long recoveries.

Despite our best efforts the last 2 weeks, we have not been able to get long this sector. I am hoping it will cool off this week, giving us a buy opportunity.

Other than that, we are playing take over targets and turn around stories.--Jon