Economic Numbers February 19, 2009 The Daily Stock Report

This stock market could get ugly here the next few days.  There was no follow through with the buying in the banking stocks USB, WFC, BAC, C, JPM, and IYF and that was obvious in the first 15 minutes of the regular market opening.  And the financials are so important to the Dow30.  The first clue was yesterday (Wednesday) when the trading volume in USB was not higher than the previous day.  It showed that there wasn’t a high degree of interest or buying frenzy going on to carry the buying through to the following days that typically create a strong and sustainable V bottom.  And that was one of the highest probability ideas to come along in weeks and it fizzled. The Dow30 daily chart looks vulnerable here and could get a couple more frightening days down.  There isn’t anything to give investors confidence and it is still dark at the end of the tunnel.  The jobless claims, economic numbers and stats from the public companies aren’t showing improvement yet and the government hasn’t inspired confidence with the new administration.   There is an old saying in Wall Street that basically says that if you want to have the highest quality capitulation where stocks have a powerful reversal in direction, then there needs to have near panic or “blood in the streets.”  Days like November 21, 2008, October 10th and July 15th in the financials were those type of days and there were very powerful rallies that gave big gains in many stocks of 40-60% and the drop in USB was starting to show that pattern. There will likely be a good bounce with these financials but nothing near as big as these past notable dates last year.  This daily report is not set up to give you real-time stock ideas but we eventually will have that service but it was obvious that USB was going to fizzle with the rest of the market.  My verbal comment in the first 15 minutes was to “sell it” because it didn’t do what we were expecting and that was to have a follow through on the upside.  It didn’t go past much $11.50 today which was lower than yesterday’s high.  That was my clue.  You want to be flexible enough to change course and make changes if a strategy is not working or acting differently than you expect. It is normal to see stock market indices like the Dow30, S&P 500 and the Nasdaq Composite parallel or mirror each other’s direction but the Nasdaq has decoupled from each other the last couple of months as technology stocks outperformed the banking stocks, which influence the 30 stocks in the Dow heavily.  But the Nasdaq Composite has dropped these last days to finally start “catching up” to the Dow and S&P’s chart pattern. Stand ready to buy long with a substantial part of your portfolio as stocks go down and if there are sharp down days this coming week and there is a sense of panic with exceptionally high trading volume in stocks as well as the indices, that would be your clue to start buying with the remaining of your funds.  It isn’t the same comfortable feeling to buy when the rest of the world is panicking but that is the time to make the most money. To quote myself again in a book I wrote in 1997, “You don’t make a lot of money doing the same thing most everyone else is doing at the same time.”  Warren Buffet says it differently and that is “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Oil prices moved up today 12% in one day to close at $38.91 per barrel for Light Sweet Crude.  USO moved up only 6.2% today so the ETF must have some chain and ball stocks keeping it from moving up as much.   Consider some of the independent ones like XTO, APA, APC, EOG, COG, HAL, RIG and many others during this bottoming process in oil prices. Intermediate Trade Positions:   New ideas:  None  MOS,  AGU, POT and MON moved up nicely today as the ag-chemical stocks (and other commodities) followed oil’s rise today.  Swing Trades:   New Ideas:  REPEAT:  WFC, Wells Fargo is the next bank stock to consider long.  This probably acts stronger than what we have seen with USB, US Bancorp.  Possibly another 1-2 down days in this stock left but should have a sharp rebound.  Consider buying small positions long gradually. XTO, XTO Energy  was lower today in spite of oil prices rising 12%.  Earnings call was for higher guidance on earnings later in the year as low revenue inventory is moved through the system. Day Traders/Intraday stock ideas:    Intraday trading continues to be the most reliable and profitable trading technique in this market. Continue to watch ICE, BLK, CME, POT, MON, MOS, AMZN, AAPL, FSLR, BIDU, USB, WFC, JPM and any high volume, high volatility stocks.   NOTES:  REPEAT:  Even if the market does what we are forecasting and that is a move upward lasting only a few days, don’t get lulled into thinking the market is turning into a bull market.  It is very likely it is what we call a countertrend rally within a bear market.  Meaning, the market is still in a bear market and has a downward trend but powerful rallies can be seen within that downward trend.  This is what we are trying to profit from right now with the banking stocks and other sectors. I am still expecting some sort of substantial rally in the stock market sometime this year mostly driven by the massive stimulus that has already been poured into the system plus the planned stimulus package being proposed now.  Longer term though, in a couple years down the road, no doubt the taxpayer is going to have to pay for such the high debt amounts that the US government (and other countries) have taken on.   So tax rates probably will rise in coming years, interest rates will very likely have to rise as inflation surfaces and likely the bear market resumes sometime down the road.  But we don’t have to be stuck in a miserable cycle like most investors.  With the techniques and approach to the market, we will still thrive. If you have been uncomfortable shorting stocks, which most people are, learn to get used to it, this will be a useful tool in the coming years. When I list several stocks from the same sector, like the housing industry for example, don’t short all of them unless you are well diversified and it represents a small percentage of your total stock account (in that same account). REPEAT:  Keep an eye out for biotechs; they are building momentum and often do well in January. Thoughts:  Best odds only, be decisive, aggressive, mentally flexible, stay in position size, don’t overtrade and wait a little longer to buy and wait a little longer to sell.  You will find that will make you more money on your trades.  Trade what you see, not what you hope for.  Intermediate trades are really important to have trailing stop losses set. Don’t trade unless the setup is there for you, then use the charts to tell you when the odds are heavily in your favor.  Don’t force anything to work for you, let the setups develop and then take advantage of that.  Be patient.  Stay in position sizes without letting any intraday trade represent no more than 10-15% of your total account value.  As you build your account, your position size percentage should get smaller and smaller to lower your risk. Have a great day and I’ll talk to you tomorrow.