Another lesson...

It seems I'm not going too many days without learning a new lesson in this game. I don't know if that's good or bad. I'm making money but without some of the mistakes I would have made a lot more. Well this past week was no small exception. End of last week I decided that Sandisk (SNDK) had been beaten down long enough and that it was attractive enough for a purchase. I bought some and placed a tight 5% stop loss on it. My rationale for the purchase was simple the company is a quality company with several quality products that seemed under priced. The technical indicator had shown signs of turning around: the RSI was in the low 20's and turned upwards at the same time the MACD looked like it was heading for a crossover. Well that was the signal to buy and I did. The rationale for the stop was that I normally go with a 7.5% stop loss but the market had been showing a lot of overall weakness. So I decided 5% kept me a little safer if the stock decided to continue to freefall down to $30 or whatever. Well the very next trading day the stock dropped like a rock 6.4% triggering the stop. Trade closed. Well I never wanted to time the bottom quite that accurately. I like to be in after the trend has shown indication of reversal. I played the trade right. The stop is what killed me. You see Tuesday SNDK killed their earnings estimates. The stock went up 12.8%. Only I had been stopped out just two days earlier. If I had played my normal stop loss it wouldn't have triggered, and I would have made a lot of money. Lesson learned. If you have rules, stick to them...don't make exceptions. The rules were made to protect you. Not just from downside risk, but also from yourself. Not wanting to miss a good thing I bought some SNDK after the earnings because I believe that the trend is now broken and that the stock will be back on its way to where it once was. The pounding it had taken was overdone, both in time and severity and the way up will likely be slower but well worth it. I bought at 45.94 and I expect the stock to trade into the $50 range this coming week and on its way to the $60's in the next several months. For research reports on SNDK check out http://www.billcara.com/archives/2006/07/more_differing.html#more.

I also decided to open a position on GG towards the end of the week, I bought it at $28.68. The stock had bounced off its 200-day moving average and had risen from an RSI of 40 or so. All indications from the Fed point to one last rate cut before a pause or drop. That will send gold through the roof. So both the technical indicators and the fundamentals indicate that the long term trend for gold is alive and well and this position (a hiccup away from the 200 day MA) is a small price to pay for the major move coming the next month or so. I'm thinking gold may go up exponentially like it did from late March until early May.

Anyways, here's some great articles I read during the past week...

http://bigpicture.typepad.com/comments/2006/07/strong_opinions.html#comments

http://bigpicture.typepad.com/comments/2006/07/new_more_string.html#comments

http://finance.yahoo.com/columnist/article/richricher/7810

Out and about...

Well I got stopped out of my GG and SLW trades both for gains (4% and 12% respectively) which was a bit of a surprise. I expected them to stay in their uptrend trading range. The metals came back hard Friday and Monday and it looks like my comment regarding the "short-lived" rally in the metals might be true. You'll recall I discussed how the GLD was outperforming (up strongly) the metal stocks (down mostly) towards the end of last week and how this may be the markets indication that the leverage offered by the metal stocks was not considered valuable in relation to the metal itself. If the overall market can stay flat to up, the prospects for a metals rally will be strong. I'm not sure though. The Dow is teetering right at a key support level at 10,700 which if it breaks will likely crumble down much further. Then again, if you read the post last week http://theskinnyreport.blogspot.com/2006/07/this-week.html you would have known the bottom was going to fallout again. The possible continued breakdown could be entirely driven by what happens in the Middle East. Interesting how the fighting broke out just as the G-8 nations were meeting to discuss the worldwide energy crisis. Trust me, oil companies are licking their chops. A full-out war in the middle east will easily mean $100+ oil and gas at $4 at the pumps here in the states. Which means the fat cats at the oil companies can continue to pay themselves those ridiculous salaries.

Anyways, I'm actively looking for some bargains and perhaps some hedged trades (buy a stock and short the market where I'm confident the stock will outperform the market). If the trend in GLD itself breaks I'm willing to go short, the market is awfully volatile and there is likely the potential to make money in either direction. Perhaps the better play may be to short the stocks since they seem to be underperforming the metal. Some heavy due diligence this weekend should come up with some trades.

On another note I was talking to an individual in real estate here in Baltimore who said the local governments are "busting their asses" to keep foreclosure numbers down. Check out Barry Ritholz's article today about ARM's and I/O loans (http://bigpicture.typepad.com/comments/2006/07/the_impact_of_v.html#comments) . I think we could be looking at a major problem in key markets. I'm smiling though, it only makes for more potential gains later. We'll see, this could be next year's big story.

The GLD - KaChing!

Well, I got stopped out of my PEIX trade for a 2% loss. No big deal, the GG and SLW trades are more than making up for that and seem like they will continue. Gold was up today, on a day where everything else was getting battered. We are back in major rally mode for the metals and my trades will follow the metal's rise. Today, I noticed that GG and some of the other gold stocks were down while the GLD was up, which to me says that the markets believe the leverage associated with owning the company's rather than the metal will not pay off as much (i.e. a short-lived rally). I'm not buying it. I expect to see GLD at it's early May highs by September. I'm heavy in the metals now with tight stops, but I think they should be safe. I'm thinking tomorrow could be a big day for the stocks and the metal based on today's show.

Anyways, some other ideas I'm contemplating...SNDK is a good company that has been battered but I'm not sure the battering is done given the broad market weakness. SHLD is a very good company that would be very attractive on any pull back and is an excellent long-term holding.

Great article on Barry Ritholz's site... http://bigpicture.typepad.com/comments/2006/07/making_insider_.html#comments

This week...

Well here's my thoughts on the upcoming week...

I'm pretty worried about the downside risk of the overall market as well as my holdings. Friday was a bit of a scare and I think we could be seeing the beginnings of a repeat of the May Meltdown (the one I forecasted...see post http://theskinnyreport.blogspot.com/2006/05/spxa-knockout-coming.html). Anyways, the shorter-term indicators are turning negative right around the point where the long term indicators are indicating a long term breakdown. The long term prospects are seriously in jeopardy. Martin Pring, perhaps the most well-known market technician, is now forecasting a major bear market. Take the time and read through the history lesson and support for his argument in the following link. (http://pring.com/articles/return.pdf). I've moved up my stops again so that I'm protected better. These trades have worked out pretty well for me so far and may improve but I'm thinking not, and preparing for that by limiting my risk and leaving my positions open in the chance that my current take is wrong.

New position and update...

Back from vacation and back at the game...Today I added PEIX at $25. I liked the action in $WTIC since last week and the alternatives tend to act in concert with oil. I've been very happy with the action in my other two holdings, GG and SLW. GG is up 11% from my purchase about two weeks ago and SLW is up 23% from about the same time. Anyways, I've moved the stops up so I won't lose money on these investments. I'm going to make protective stops a regular practice on all trades from now on. I do most of the time but in this market (a bear indeed) I don't want to take any big losses on swing days. Anyways, here's some links to recent articles by some of the writers I really respect...

Mutual funds suck (http://finance.yahoo.com/columnist/article/richricher/6720)

Housing market collapse? (http://bigpicture.typepad.com/comments/2006/06/haefling_on_hou.html#comments)

Margin accounts heading lower (http://bigpicture.typepad.com/comments/2006/07/margin_drops_6b.html#comments)