ETF

Market Bulding Strength–WW-GMI: +3

@ 8:34 pm

The market continued to strengthen today and the Daily QQQQ index turned positive.  Please note that this indicator can go back and forth before the trend is solidified.  I am very pleased by the market’s action.  Many of the growth stocks I follow broke out today.  I have sold all of my puts and  have taken some long positions.  Index509 There were 115 new highs today and only 49 new lows.  The Daily SPY index continues to be positive.  There are 31 stocks that hit a new high 10 days ago and closed higher today than 10 days ago.  This is the highest the successful new high index has been since April 12.  The GMI is now +3 and tells me that I have a rally that I can trade.  It remains to be seen whether this uptrend will last months or just weeks, or days. 

The bottom line is that the odds have shifted towards owning stocks.  And many of the stocks I am watching have moved up.  Among the stocks I like are: IVGN, SHLD, MHS, CVD, MW, SWN, HANS, TOL, ORCT.  These are not recommendations, although I do own some of them.  These stocks are all trading near their highs and such stocks can reverse direction quickly.  I always place a sell stop order immediately after my purchase goes through.  That way I can sleep nights.  I also make small initial buys and wait to see if the stock moves up as I expected.  I never average down (buy more as the stock falls) and I do not average up too quickly. I am not looking for a stocks that will climb for a day or two.  I am hoping to ride a stock up for weeks or months.  I am buying stocks that are behaving well and that seem to be earning money.

Another tactic that I use is to buy an ETF (exchange traded fund) that reflects a market index.  There are many benefits of ETF’s, compared to mutual funds.  Perhaps the biggest is that ETF’s can be traded like stocks in the middle of the day.  A mutual fund can only be bought or sold at the end of the day after the market is closed and the fund’s assets are tallied.  Thus, with an ETF, you can get in or out quickly if the market should become volatile or violent.  The fees of an ETF are cheap and if you use a deep discount broker the transaction costs are small.

So, if I think the S&P 500 is turning, I can buy the SPY which reflects this index.  The nice thing about buying the SPY is if the S&P 500 goes up SPY will go up. How many times have you seen the market go up and your stock doesn’t move or falls!  At least I know that will not happen with the SPY. 

One big mistake to avoid is to buy for technical reasons and then when the stock fails to rise or declines, to hang onto it for fundamental reasons– because good earnings are expected to come out or there is a really great product or the market is strong.  If I buy because of good price action I must sell because of bad price action–no excuses or rationalizations.  I have violated this rule many times, and paid the penalty.

Sometimes my biggest winners have been stocks that keep coming to my attention over and over.  One such stock is NSI (click on chart to enlarge), a diet and fitness firm.  Nsi NSI has gone from a low of $1.09 last August to a close today of $11.20.  The monthly volume is at an all time high since it came public in 2001.  Its revenue is increasing at a fast rate and there sure are a lot of obese baby-boomers who are looking for the fountain of thinness.  I don’t like to buy cheap stocks like this but I sure am going to watch it.  There is a planned stock offering and this could be affecting the stock’s price. (I remember reading that it is legal for underwriters to stabilize a stock during an offering–sounds like manipulation to me.)———————————————————————

Every morning I want to know if the stock futures are indicating a strong or weak market opening.  I found a web site called, morning call, that tells me if the futures are trading above or below fair value.  Above fair value indicates buying pressure that could lead to an up open, below fair value, to a down open.  Hope you enjoy this site as much as I do.

Send me your feedback at silentknight@wishingwealthblog.com.

Please remember that the stock market is a risky place, especially now.  I am not providing recommendations for you to follow.  My goal is to share tools and methods that I have used over the past 40 years of trading, so that you may learn from them and adapt them to your trading style and needs.  While I do my best, I do not guarantee the accuracy of any statistics computed or any resources linked to my blog.  Please consult with your financial adviser and a mental health practitioner before you enter the stock market,  and please do not take unaffordable risks in the current market environment.  See the About section for more statements designed to protect you (and me) as you navigate this market. Past performance does not guarantee future results, but I would rather learn from a former winner than a loser.

Put me on, IRA

@ 10:46 pm

Well, the market didn’t collapse today.  So what. Did you really think it would just tank like it did in 1987?    Most people hope it is over, and think that a further decline is not justified by the state of business, and especially, with all the bargains that have now materialized. However, the market always goes further than everyone thinks is justified–up or down.    This bear has plenty of time to smell the roses before it hibernates again.  It will take its own time.  Especially ominous–the short term interest rate index I follow jumped today–as much as it did when this rise in rates began in the first week of January.  Is something going to convince the Fed to become more aggressive?  Stay tuned.

Experienced traders do not care which way the market goes, as long as it moves in a trend.  Do you really believe the old adage, "Don’t sell America short?"  While the market spends most of the time going up, when we can buy stocks, why not profit in those periods of decline, when we can sell stocks short?  A good bear lasts 10 or more months and prices decline quicker than they go up–fear is quite a motivator. Why play only one side of the game.

Selling short scares people.  You ask your broker to borrow someone elses shares so you can sell them at the  current price.  He puts the proceeds in your account, but you can’t touch the money until you give back the shares you borrowed. When the stock falls, you buy the shares back at the lower price and give them back to the broker. You, however, get to keep the difference between the price you first sold the shares at and the subsequent buy back price (sell short at 80, buy back at 70–you make $10/share). What scares everyone is the idea that if the stock rises, you have to buy it back at a higher price and the price could theoretically go to a gazillion.  However, when you own a stock, the most it can fall is to zero.

Now, this fear of an infinite loss from a short sale is unrealistic.  When you buy a stock at, say 50, you place a stop order to  automatically sell your shares and "stop your loss" at an acceptable price, say 48.  If the stock falls to 48 you get sold out and take your loss.  You just reverse this for stocks you have sold short.  Sell short at 50, place a stop order to buy if the stock rises to 52.  Either way you have a strategy in place to limit your losses.  (Note, if the stock gaps up or down–jumps up or down in price and skips over your stop price–you may have a larger loss than your stop order would indicate.)

Now, to sell short I must trade in 100 share blocks in a margin account.  Margin, because the broker will charge me interest when he lends me the shares to sell short.  But I can’t trade on margin in my IRA account.  However, some brokers allow customers to trade options in an IRA.  Enter the Put option, IRA. 

A put option gives me the right to sell 100 shares to someone at a set price for a set time.  Thus, if I think stock XYZ, which is trading at 50 is going to decline, I could purchase a put option to sell 100 shares of XYZ at 50 (or 55, or 60 etc.) good for a few weeks or months.  I could then buy the stock, if it declines, to say, 45 and put them to someone at 50.  But I do not have to purchase the shares.  If XYZ declines, the put option (which trades like a stock on the option exchange) will increase in value and I can sell the option at a profit.  But if XYX rises, I can sell the option at a small loss or let it expire worthless.  Either way, if the stock rises, the most I can lose is the cost of the option.  So much for the myth of the infinite loss from selling short.

I can even buy put options on the stock market indexes (QQQQ, DIA) or ETF’s, if I think we are in a bear market–all in my IRA.  I cannot possibly cover all of the ins and outs of options here.  I am just trying to whet your appetite and show you how I profit from a declining market.  For a primer on options go to the learning center at www.cboe.com.  I disregard the media pundits looking for the rare rising stock to purchase and bet on the many stocks that are declining.