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Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?


   This Week’s Data


    Before getting too jiggy with yesterday’s GDP report, read this:

    And this (medium):

    Banks still are not lending--which does nothing for economic growth (graph):
    US railroad car loadings are still declining (short):



  International War Against Radical Islam

The Market

    Powerful rally yesterday.  At the close, the DJIA (9962) had returned to a level above the lower boundary of its March to present up trend (9845-11827), but the S&P (1066) had not (1078-1322): gold traded back above the short term up trend line it broke on Wednesday and the VIX traded back below the down trend off its October 2008 high, but the dollar remained above the upper boundary of its down trend.  So despite the power, the technical picture is not entirely clear.  To be sure, another day like yesterday and all doubt about Market direction will be removed.  But before seriously considering reversing Thursday’s trades, I need more technical clarity than we have.

    I thought this a good (and timely) article from The Street.com on technical analysis, in general, and volume, in particular:

    If people out there are still comparing volume figures now to what was "normal" over the past many years, they're missing the big picture. Volume is not going to average 1.6 billion shares on the NYSE anymore (as it did when there were 10,000 hedge funds worldwide and prop trading desks at every major sell-side firm).

Virtually the whole rally from the March low to present was done on less volume than the decline in price in 2008 and into the beginning of this year. Does one say that the whole 60% rally is null and void because it was on low volume? Of course not.

Welcome to a new era -- not of low volume, just lower volume. Fewer hedge funds. Less bulge bracket prop trading. Less public participation.

I see no technical analysis rules violated. But more important, are there really "rules" in technical analysis? If it's in a textbook, does it make it a "rule"? To me, it is but a suggestion of the author. And when it comes to volume analysis, I can find you an equal number of exceptions for every "rule" about it you find in the textbooks. Getting stuck on what one thinks is a TA rule is a sure recipe for losing money while charting.

If one makes money from looking at a chart, they will take the credit for the right call. If they lose money from looking at a chart, they will say technical analysis failed them. That's part of Behavioral Finance Theory and the Self-Attribution bias -- it's not the chart that failed them, nor the methodology itself. It's the improper interpretation of what one considers "rules,"
Case in point: Yesterday broke the S&P's uptrend line from the March low. Everyone knows that. But ask yourself: 1) Did breaking the uptrend line mean that the uptrend in the S&P was broken? 2) If a key level gets broken on a closing basis, is it really broken if the next morning the security or index gaps higher and then trades up all day to close back above the key level it broke the prior day? How you answer those questions will provide a clue as to how much you understand what charting is really about as opposed to reading TA textbooks and claiming that you're a technical analyst.

    The latest from Trader Mike:

    Up date on the ‘beat’ rate:

    This is a bit long but a great discussion on gold in the present environment:

One of the biggest disadvantages of putting your bets down in black and white everyday is that when  you are wrong, everyone knows it.  And it sure looks like yesterday’s move to raise cash was W-R-O-N-G.  The only possible good news is that I only raised cash by 5%--so I was stupid but just by a little bit.

    Actually, as I noted above, the technical picture, at least at the moment, is less clear than it appears on the surface.  In addition, today is the last day of the fiscal year of many mutual and hedge funds; so there is some pressure to make fund valuations as of 10/31 as attractive as possible especially in light of their performance over the last year.  I am not suggesting any ‘funny business’; but all other things being equal, if you were a fund manager would you want the prices of your holdings up or down at the close of this week? 

That said, yesterday’s action makes me ponder two questions. First, does yesterday’s pin action (brought on by the better than expected GDP number reported yesterday morning [see Thursday’s Morning Call]) reflect an improvement in investor attitude on the economy?  Following investors seeming indifference to the better than expected revenues reported this quarter, my assumption was that the 60%+ rally that we have had pretty much discounted the continuing but sluggish recovery expected over the six to nine months.

If Thursday’s Market performance belies that assumption, then I will have been wrong on more than just the technical picture. However, I am not  going to concede the point after a one day Market move that might suggest otherwise.  Let’s see how investors react to the economic data over the next couple of days--and if I am wrong, I’ll adapt.

The other question is, will the solid inverse relationship between the dollar and stock prices continue?  As I pointed out above, while the dollar declined yesterday, it nevertheless closed above the down trend off its March high.  And stocks smoked; so the relationship (down dollar, up stock prices) was there but just not as strong as I would have expected.

Perhaps I am splitting hairs, but I point out this minor inconsistency  because I am having an increasingly tough time believing that the dollar/stock inverse relationship can go on ad infinitum.  I believe that loose monetary policy and out of control spending have significant inflationary implications.  I believe that this implies a weakening dollar. I believe that a weak dollar likely means higher gold and commodity prices.  But I don’t believe that a declining dollar is good for stocks in the long run.  I have no clue when that relationship breaks apart, although I had my self convinced it was starting earlier in the week. But may be not; may be there is another leg to go.  As I said above, if I am wrong, I’ll adapt.

       Thoughts on Investing from Cramer—Five big mistakes investors make

    NEW YORK (TheStreet) -- In a special episode of his "Mad Money" TV show, Jim Cramer showed investors how to avoid losing money by noting the most common mistakes investors make.

He stressed the importance of investing with discipline, using rules to better recognize opportunities and avoid losing money.

Cramer said his first rule for investors is to not dig in your heels when you're wrong. Quoting the great economist John Maynard Keynes, Cramer said "when the facts change, I change my mind."

Digging in your heels and refusing to acknowledge that your investment thesis is wrong is a sure fire way to lose money, said Cramer. It's natural to be angry, but when the market's turned against you, investors need to adapt. Cramer said he's been repeatedly been chastised by critics and the media for changing his mind. In March 2009, Cramer called a bottom in the market at Dow 6,500 and came under intense scrutiny for his bullish call. But he said the facts were that unless most of the stocks in the Dow went to zero, the average just couldn't go much lower.

The facts changed, he said, and so did his outlook. A month later, the Dow was 1,500 points higher.

Cramer said investors must swallow their pride, admit when they're wrong, and move on if they ever expect to be successful.

Price Matters

Cramer said his next rule for investors is that price matters. He said even the companies you don't like at all can be bought, if the price gets low enough.

Cramer said he never advocates buying a stock where the fundamentals are deteriorating, but in between the best of breed companies and the worst of breed companies, there is a lot of room for opportunity if the price drops far enough.

Cramer said knowing the right price to buy a stock should be a sliding scale, based on how good the company is. The better the company, the more investors should be willing to pay for it.

Cramer said at their very worst, both Bank Of America (BAC Quote)which he also owns for his Action Alerts PLUS portfolio and Sprint (S Quote) were priced for bankruptcy.

That means that anyone who felt bankruptcy wasn't going to happen was able to get these companies at tremendous prices and has been rewarded handsomely.

Investors should also look for companies trying to raise capital through secondary offerings of stock, he said. Often these secondaries are priced below the true value of the company, allowing investors to buy in between 5% and 10% less than the previous day's closing price.

Cramer said price forces investors to make new judgments about bad merchandise, and investors need to be ready.

A Dose of Skepticism

When it comes to investing, don't assume everything you hear or read is the truth, said Cramer. Stocks themselves aren't misleading, he said, but the companies behind them can be.

Cramer told investors that there are strong and weak players in every sector. He said the weaker ones will almost always blame their problems on the entire industry. He also be skeptical when a weaker player said their shortcomings are due to an industrywide slowdown.

Cramer said investors can't assume every company in an industry is the same. He said some companies are better run than others, some sell overseas, others don't, the possibilities are endless. Cramer said investors need to look out for excuses.

True Upside Surprises

Cramer's next rule for investors was also about misdirection, only this time to the upside. He said that not all upside surprises are worth getting excited about. Cramer said that often what the media reports as "better-than-expected" results are not what the professionals on Wall Street were hoping for.

It can be confusing and frustrating for investors to see a company report what the media claims as an upside surprise, only to have shares plummet immediately after.

According to Cramer, there are two types of upside surprises: organic and manufactured. Organic surprises are ones stemming from higher-than-expected sales and improving fundamentals, while the latter comes from just a better bottom line, with no top-line growth.

In the case of a manufactured surprise, Cramer said many factors could be coming into play, such as cost cuts, changing tax rates, or stock buyback programs.

It's not a surprise if a company's "better" earnings come from fewer shares being on the market, he said. A true surprise, said Cramer, comes from better-than- expected sales and nothing else.

So-Called Expert Advice

Cramer's final rule for investors focused on TV pundits who criticize the market and tell you to avoid stocks at all costs.

Cramer said investors should never assume these "experts" are any more honest than those hyping up stocks. Having a negative outlook, he said, does not equal credibility.

Cramer said those who criticize the markets may not be trying to help you. While it may be hard to believe, he said mutual and hedge fund managers may actually want the markets down to short stocks or buy in at better prices.

    News on Stocks in Our Portfolios

    CME Group (Dividend Growth and Aggressive Growth Portfolios) reported third quarter operating earnings per share of $3.35 versus expectations $3.29 and $2.81 recorded in the comparable 2008 quarter.

    Colgate Palmolive (Dividend Growth Portfolio) reported third quarter earnings per share of $1.12 versus estimates of $1.11 and $.99 reported in the 2008 third quarter.

    ExxonMobil (Dividend Growth Portfolio) reported third quarter earnings per share of $.98 versus expectations of $1.08 and $2.58 reported in last year’s third quarter.

Posted 10-30-2009 8:32 AM by Steve Cook