 |
In
This Edition... |
|
We've got a
double-packed newsletter for you today. We're first going to take
a look at the market's recent action, and Friday's trade specifically.
The
glimmer of hope we saw in the late part of Friday's trading is actually
even shinier than you may realize. After that, we're going to revisit
three of the most important things you can do to remain a successful investor,
but probably aren't doing.... not right now anyway.
First though,
a handful of blog entries that you may have missed:
|
 |
Building
Permits, Housing Starts Down |
|
|
Based
on Monday's through Thursday's action, the bears could make a solid case.
Friday's trade though - as tepid as the gains may have ended up being
-
spoke volumes about the lingering optimism that may well stave off a double
dip.
 Let's
face it.... if there was ever a day to sell stocks, it was Friday.
Four straight nasty selloffs for the first four days of the week sent -
or should have sent - a convincing message that something was very,
very wrong for the market. Add that to the fact that a few more traders
than usual tend to be willing to dump shares on a Friday (since they're
otherwise stuck with them until Monday.... a big risk for most), and Friday's
potential bearishness could have made the prior four days look like child's
play.
But, it didn't
happen. Instead, we saw a little buying pressure. Were it a Monday or a
Tuesday, would we have seen more? Maybe.
The semi-favorable
financial reform bill was named as the culprit for the bullishness, though
a multi-year high in consumer confidence may have served as a bullish catalyst
too.
The thing is,
the cause doesn't really matter. This environment has been one of
"follow
the crowd, and ask questions later".... actual valuations are secondary.
And, now that the buyers have tipped their hand, odds are good we'll see
another pile-on to crank the market upward again.
What's most
telling about the current bullishness, however, was Friday's volume.
 Yes,
the NYSE saw a bullish volume surge on Friday, and yes, a big chunk
of it was provided by the buying of financial stocks (Citigroup and Bank
of America held the no. 1 and 2 volume spots, while Wells Fargo took the
no. 8 spot). There was far more breadth (rising stocks) than just the financials
though, and far more depth (volume) from non-financial arenas than most
may realize.
Only about 40%
of yesterday's volume from the NYSE was that of a financial stock. Don't
misunderstand - that's a lot. However, considering that most financial
stocks are NYSE-listed, and considering that the financial sector
makes up about 17% of the total market, the strong volume from a few select
stocks wasn't that extraordinary.
For comparison,
only one of the NASDAQ's top-volume stocks yesterday was a financial stock...
E*Trade, and it only ranked 31st on the NASDAQ's high-volume list (and
only made up 2.9% of the NASDAQ's total volume).
The point is,
if
you think yesterday's pop was an "all financial", one-day-wonder show,
think again - most sectors participated in the rally, and most saw
solid volume increases. That may not solve the market's bigger, underlying
problems, if they really exist. It does, however, deflate the certainty
of the bearish argument. As such, the odds of more upward progress from
here just got much better.... even if it's just a quick, volatility-based
ride.
Bottom line?
Don't
throw in the towel yet. In fact, with all the manic pessimists out there
right now screaming at the top of their lungs, our contrarian side suggests
we may be at or past a trade-worthy bottom. We'll revisit the market's
encounter with this inflection point sometime around mid-week.
In any case,
the nuttiness over the last two months has prompted the Micro Cap Press
to repost the biggest tripwires that frequently mean the difference between
making and losing money. Enjoy.
|
|
Three
Things Most Investors Do Wrong at Some Point.... |
|
|
....without
even realizing it.
It's tough to
make money in the market, but it sure is easy to lose it, isn't
it? Ironically, the things that really make or break investors are the
things that are rarely discussed.
With that in
mind, here are three of those realities that have resurfaced thanks to
the May implosion, the June bounce, and then last week's downside reversal.
Conceptual
Investing
 The
original message was pointed primarily at biotech stocks, though the premise
has wide applications.
Investors are
often lured to the promise of a cancer-beating drug, even if it's for a
very specific kind of cancer. Many of these drugs show great promise, which
is exciting, but the actual market size for that particular treatment may
actually be very, very small. Indeed, we've seen companies with market
caps in the hundreds of millions of dollars working on one - and only
one - drug to treat a kind of cancer that only a few thousand people in
the world have at any given time. The potential revenue for the market
may only be a few million dollars per year; actual net profit potential
is even less (and never even mind the fact that the company still has
to penetrate the market by gaining acceptance in an arena where competition
is stiff).
In other words,
the maximum ROI on some biotech investments is almost laughable.... if
these investors ever actually crunched the numbers. And eventually,
the market will crunch the numbers, and price the stock competitively
by sending it lower if need be.
With that as
a backdrop, how many conceptual investments have you made over the last
year?
China-consumerism
is a hot one. Chinese consumers are still spending briskly, though loan
defaults and late credit card payments are soaring (sound familiar?).
That's great for retailers, but not good for banks. Point being, 'investing
in China' is a concept, but it's incomplete and misleading. Investing
in Chinese retailers and distributors is a strategy, as is avoiding
the country's financials. That's too specific for most to bother with though.
How about this
concept that the American consumer is dead in the water (according to
the media anyway)? Have you decided to shun retailers and cyclical
stocks as a result? RV-maker Winnebago - and RVs are probably the single-most
'excess spending/bad investment' expenditure out there - saw a 165%
increase in revenue last quarter, and swung back to a profit..... despite
persistently-high unemployment, and so-called uncertainty about the U.S.'s
future.
Folks, the 'generally
accepted concepts' are incomplete at best, and wrong at worst.
Using Short
Term Data to Make Long Term Decisions (and vice versa)
This one needs
little explanation. We will offer an example though.
How many of
us have centered our trading lives (and perhaps personal lives) around
Thursday mornings' announcement of weekly unemployment claims. Worse, how
many of us have come to conclusions - and traded stocks - as a result?
There's a reason
economists calculate the four-week moving average of the data.... because
the week to week numbers are volatile to the point of being meaningless.
Yet, we assign meaning to them anyway, and act on it quite quickly. That's
fine if you're a trader, but many of those who profess to be traders are
simply investors who feel the need to react to everything new. New and
ongoing claims have gotten no worse and no better for three and half months,
yet the assumption is that any weekly uptick in the figure is a sign that
we're double-dipping. Short term data --> long-term decisions.
How about the
other way around, where long-term data drives short-term decisions? Be
honest here.... how many of us plowed into stocks as quickly as we could
following Q1's strong earnings season (at least in the beginning of
it), without much thought as to sustainability, or the already-excessive
valuations? Long-term data --> short-term decisions. That knee-jerk reaction
was part of the setup for May's big dip, which we're still dealing with.
Use monthly
data to make monthly decisions, use weekly data to make weekly decisions,
and use daily data to make daily decisions. The market always reflects
the economy's underlying data within the appropriate timeframe.
Not Paying
Attention to Sector Strength/Weakness
 No
surprises here, given our strong focus on hot and cold industries over
the last few months. It's not just an academic exercise though.... it
has real alpha potential when executed effectively.
Care to guess
- in percentages - what the averaged difference is between the top
and bottom performing sector in any given year (e.g. if the best industry
gains 24%, and the worst gains 11%, then the difference is 13%)? Most investors
guess a 10% disparity, but that's not even close.... it's usually between
30% and 40%.
Since 1990,
had you left out the worst-performing sector of your index fund portfolio
each year, you would have outperformed the market average by 3% annually.
If you had-doubled up on the top-performing sector, you would have added
another 3% to your annual gain. Take out the worst two sectors, the average
annual gain improves by 6%, and if you also double-up on the best two,
then your alpha (outperformance) stretches to 12% per year.... more than
the market's average annual gain.
While nobody
can predict with perfection which sectors will be hot and cold, it's still
possible to do so very well - if you just pay attention. [Yes, this
is why we focus so much on sectors and industries.]
Last Word
None of these
ideas are new to those who've been reading the newsletter for a while,
but sometimes it's good to remind ourselves of the potential pitfalls that
steer us wrong. And, with all the noise and volatility we've been through
lately, falling into these traps has gotten much easier.
Enjoy your weekend.
|
Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
