OPPORTUNITY and Market Psychology....

Stocks Surge to Start Q2; Dow Soars Almost 400 Pts

TODAY WAS A GREAT DAY TO BE A BULL. CONGRATULATIONS IF YOU READ THIS ONE CORRECTLY.

The three lessons from today:
Market Psychology

Opportunity

Stick by Your Rules

Spectacular day in the market today if you went LONG. Especially in a bear market. Why?
Market Psychology

Today was New Years Eve as the first quarter was over and it time to start afresh. Any excuse to party was enough to send stocks soaring. In a bull market today would not have been as robust but with stocks looking cheap and oversold all it took was something anything...
And the possibilities were:

• The manufacturing index was under 50 meaning contraction but was less than expected and greater than last month. http://biz.yahoo.com/ap/080401/economy.html
  
• Banks are going to be able to bail themselves out. They are issuing more shares and there is "buying interest"
• The Fed won't allow this market and economy to fall. Not during an election year. No way. No how. The tax breaks will kick in. The employment is still high. The government regulation will bring transparency and trust back into the markets and help resolve the financial crisis.
  
• The Chinese market, while projected to slow this year, is still on pace to grow at at least 8%. http://biz.yahoo.com/ap/080401/china_eco...
• Too many shorts. Too many bears. When this happens the market has to go up.
• We've found a bottom in the markets. The dollar is getting stronger. All will be well.

Some of these points hold merit. And thus being too bearish is a mistake. Some of them are a bunch of BullS***t. Now let's look at the data that came out and was largely ignored:

• UBS announces huge writedowns. One quarter of its total Market Cap in one quarter
• Duetche Bank Ditto on huge writedowns. No end in sight. http://biz.yahoo.com/ap/080401/european_banks.html
• Ten percent of total finance jobs expected to be cut (200,000) at least
  
• GS predicts more losses and cuts by MER and C. http://biz.yahoo.com/ap/080401/finance_analyst_note.html
• Auto Sales posted double digit losses, with worse to come, even Toyota... http://biz.yahoo.com/ap/080401/auto_sales.html
• Consumers are hurting. Most of this economy depends on healthy consumers:
  =
  "Between high debt levels, trouble in the real estate market, trouble in the stock market, deteriorating labor market, high energy prices - the consumer's spent," Platt said. "They have no place left to go but cut back." http://wcco.com/national/economic.pinch.upper.2.628576.html
• Many more negative posts. You can't miss them even if you try not to find them.
  

So what does this all come down to... imo
1. Don't fight market psychology. Let this bull market flow and stay away from adding shorts until the momo turns (could happen as early as tomorrow) and if comfortable participate in the rally with tight stops on the right stocks.
2. Opportunity- There are some stocks that have been beaten down too much and may make for good trades with tight stops...
Even more though... the fundamentals are not healthy. The government can only do so much. The credit/leverage is of enormous proportion and we are no where near resolving this yet (see my post on why the economy is so dangerous.)

So the real opportunity here in my opinion: When this Bull rally ends, and it will because the fundamentals, especially in the US market and eventually in parts of the global market, are weak, the opportunity to get into short instruments at tremendous bargains will occur.

This Dow is now only about 10% off of it's all-time highs, the Naz 16% (recent high), and the SP 13%. The higher these goes the harder they'll fall.

3. Stick to your rules
One of my main rules in this market is to take profits when you have it. If you made a lot of money from this rally I highly recommend paring some positions. I made the mistake of not listening to my own advice and not selling the TWM at 83 yesterday when I had the chance when I heard that the manufacturing data was slightly better than expected. The rules I have made (I will share the list on another post) I have found work very very well overall. The more I do and do not follow them the more I learn this to be the case.


The most important rule I will share once again here: Opportunities Knock Stocks. That is what the market is all about. The next big opportunity? The collapse of this bull run. Don't fight the tape. But when it turns it will turn hard.

I still hold:
CMED
TWM
DUG

I got burned on TWM and DUG today but was partly bailed out by CMED. I lowered my stops on TWM and DUG because I think that smart longs will want to take profits but if the rally shows too much more short term strength I will stop out and reload when the time is right. I do not plan to sell my core CMED position unless the rally really gets excessive. That is a long term play and the stock is still undervalued. However if it shoots up too much too fast I will take profits.

Best,
Jon

P.S.
Here's a n interesting post on Seeking Alpha from a Wall Street Professional. I don't know anything about him but I think he does offer an insightful opinion...
http://seekingalpha.com/article/70476-act-now-it-s-the-psychological-rally?source=yahoo

Note: This blog is for informational purposes only. It does not give investment advice.