Wednesday, June 14, 2006
The market slide we have experienced this week has been brutal. The drop has been so sharp and the slice downward so steady that it has provided virtually no bounces to sell into. A writer from Real Money made this interesting remark yesterday, which sums up perfectly this week's market environment: The action since the first week in May has been some of the most challenging that I've faced during my trading career. What has made it so difficult is that we have had so many days in a row in which things have gone straight down. Typically, when the market starts to break down, I will continually lighten up my holdings on a bounce. Usually the first big technical breach results in a fairly fast oversold bounce. If you are caught with long positions, that is often a very good time to sell down positions. This breakdown has provided few opportunities to escape long positions on strength. We had one bounce that was fairly limited and that was it. You either sold into weakness or suffered some tremendous pain while waiting for a better exit point. My feeling that this breakdown has been unusual in the degree that it has failed to produce any bounce seems to be backed up by James Altucher's QQQQ crash system, which failed for the first time after 61 prior successes. The idea behind this system is that when the QQQQ is more than a certain level below its 10-day moving average, there is a very strong likelihood that it will bounce back up at least temporarily. In this case, it didn't happen, and that has really made this meltdown much more difficult than ones we have suffered in the past. The good news here is that this correction is much more typical of a corrective move in a larger bullish trend than it is the start of a bear market. Bear markets tend to tease and tantalize hopeful bulls as they slip down a path of hope. Bull markets are known for fierce pullbacks and this can certainly be categorized as a fierce pullback. We would like to remind folks here that as tough as this year has been and as tough as the last few weeks have been that it is important to know when to take advantage of the market's opportunities. After the crash in 1987 many investors spent the remainder of the year looking to get out of the market. The crash was just too scary and the feeling of losing money was just too painful. These same folks didn't buy in again until the market was back in the news again in the late 1990s. The problem is that the crash of 1987 spelled opportunity and those who read the writing on the wall got rich by buying when there was blood in the streets. Take Microsoft for example. In 1987 MSFT was trading as high as $128 per share. After the crash in October of that year it traded as low as $37. Those same shares today are worth $3000 each (calculated for the splits). Right now it is time to start searching for the babies that have been thrown out with the bath water. We don't believe the low in the market has yet been put in, but we are close. Gold stocks are one of the babies that have been taken out to the woodshed in this market and we believe that these stocks are cheap at the current price. Remember, it's ok to get out when the market is falling but it is also important to remember to get back in again. Don't wait until the market starts to look good to get back in. You don't need to try and pick the bottom, but you don't want to wait until everything is rosy again either.