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While this will undoubtedly end badly at some point, it can continue for a considerable amount of time. There may be opportunity to take advantage of the next Apple or Google, but at this late stage in the Bull Market, it is unlikely that throwing darts at a board will be very successful. Rather, it would be best to concentrate in sectors that are in a confirmed bull market and keep position sizes small enough to avoid a lot of fluctuation risk. Then hold on tight. Who wouldn’t gladly trade all of the commentary on homebuilder over-valuations for 500 shares of NVR stock, which could have purchased for $2,500 in 1996? The 500 shares are now worth over $400,000 in tomorrow’s market in spite of my fundamental views. Where’s the next NVR to be found? Maximizing the Probabilities – 1 - Select a Sector in a Bull Market I was recently asked if I thought there was a possibility that a further bull run in the stock market could be supported by fundamentals. This is unlikely in practically all of the sectors that led the recent bull market. For example, with real growth rates slowed or stopped completely, are there some fundamental information or news that could justify technology companies climbing the same ladder from about Nasdaq 2,000 to 5,000 as they did in 2000? It is probably more likely that most of the technology sector will eventually be assigned market price to earnings multiples that more closely track slow-growth Dow stocks and cyclicals. This probably means that the Nasdaq will drop significantly relative to other stocks (which are also richly valued by historical standards). Similarly, although retailers did well this Christmas, it is unlikely that there will be a fundamental factor that will expand their already historically rich valuations. Can the homebuilders rise another 700 percent? Unlikely! However, if there is a sector that is likely to lead a bull run based on fundamentals and produce the next NVR Homes, it would likely be in energy-related shares. Looking at the long term chart of the price of Oil, this becomes apparent. While the bull market in oil is over 5 years old, the bull trend is still intact and it shows no signs of subsiding. Always give the trend the benefit of the doubt. It is in oil and energy related stocks where the probability of large long term stock market gains are most likely in my view. And with the trend of the Greenspan Fed market is parabolic up for stocks sporting consistent good news; it seems likely that the next NVRs will be oil-related companies.
2 – Set Position Size to Low Pain during Market Fluctuations The average American is free to get into as much debt as he or she can or can’t handle, while the average speculator or on-line account holder is free to take a position in a stock that is too big to handle. When investing in a long-term trend, it is best to keep each position size and sector exposure at a level where fluctuations will not result in significant losses in net worth. As long as a stock trend is intact, fluctuations should not cause much hand wringing. With trends intact, a 20% correction in NVR homes would have resulted in a paper loss of $500 for a holder of 500 shares in 1996. In retrospect considering the long term gains, taking that relatively small paper loss would have been well worth the long term ride. 3 – Hold On – “It’s a Bull Market” In a bull market, the most difficult thing to do is hold one’s position through fluctuations. This is colorfully described in Edwin Lefever’s, Reminiscences of a Stock Operator, a novel about the life of legendary trader, Jessie Livermore. The story describes the holding of a stock by a successful old pro trader, Mr. Partridge (“old Turkey,’-an endearing term in the 1920s), through a bull market against the advice of an amateur tipster, Elmer Harwood. Excerpts of the book are quoted in blue. “…I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ‘em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells, he’ll lose his job. What do you know about that?” “I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you (for the tip) as if I had the money in the bank. It’s a bull market, you know.” And he moved away leaving Elmer dazed… ….And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got That? My sitting tight! ….Men that can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance. The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. This is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight. Today, investors with the patience of “Old Turkey,” get a potential bonus, courtesy of the fed’s loose money policy and speculative behavior of the stock market – the possibility of riding a parabolic up wave. Wise and patient energy investors - hold on to your hats and don’t lose your position. It’s a bull market, you know! Today’s Market Those stocks that led the Bull Market from October 2002, which recently became the New Year’s laggards, sparked a fairly broad stock market rally today, including transports, biotechnology, technology, semi-conductors, and (especially) homebuilders. At mid-afternoon, Pulte Homes said that earnings from operations may grow by an average of 20% per year for the next 3 years. With compounding, this would result in yearly earnings increases of 73% over the next 3 years. They suggested that “anticipated higher interest rates would have some impact,” but Pulte would make up for this impact by gaining market share. The stock market reaction to this unsolicited statement was quite predictable by these highly shorted stocks. Pulte was up by 9% whereas the entire homebuilders’ index was up by over 5%. Conspicuous by its relative lack of participation in today’s homebuilders’ rally was the much more illiquid NVR Homes, an $800 stock, which was up only 1% today. The Dow was up 75 (0.7%), the S&P 500 up 9 (0.8%), the Nasdaq up 20 (1%), the S&P Midcaps up 1.1%, and the Russell 2000 up 1.1%. Volume was relatively high thereby confirming that there is probably some more gusto left in the rally in the days-to-week time frame. In spite of the rally, Cisco is in a precarious position, having closed at a multi-month low today. I think that Cisco is an important stock and a technical breakdown of Cisco will have bearish implications for the entire market. The point and figure chart shows a quadruple bottom breakdown and the loss of another fraction down to 17, will produce a point and figure price objective that is significantly below its current level. Aside from the general market, which is rallying in the short term time frame, this stock would be an excellent short in my view. But the cynic in me is figuring that Cisco will see a major Wall Street upgrade to “strong buy” tomorrow morning before the opening bell.
Another important stock, Yahoo, appeared to be in free fall this morning, yet somehow buyers moved in and put the stock up throughout the day. As it was it only finished down 2%, yet note the bearish technical intermediate picture for Yahoo. The bearish chart of these and many important stocks probably suggests that rallies should be sold.
Gold and silver were little changed down 0.27 ($334.75/oz) and 0.09 ($7.42/oz) respectively, while the XAU was down 1.2% and the HUI down 1%. The dollar is in a short term bearish pattern yet is now challenging the much-watched 50-day moving average.
The action in the bond market was quite telling on this trading day. The typical action in the bond market over the last few months was that it rallied on news of economic data that didn’t meet expectations. That script was followed this morning as weekly jobless claims and factory orders disappointed the Street. Yet in spite of this apparent reason for bonds to rally, they sold off throughout the day. It seems as if following two days of Greenspan last week, bonds now want to go down. Today’s rally was sold! Below is the daily candlestick chart of the exchange traded 7 to 10 year note.
Have a great evening! Martin Goldberg
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