Breaking News! Tycoon Slays a Bear For You!
Tuesday, July 15, 2008 | Chris RoweRating:
Good day folks, Chris Rowe here. Today you want to forget ALL PAST MISTAKES you've made playing this stock market. You will look forward, because the future is the only thing you're able to impact (and looking in the rear view mirror - while difficult to avoid - is nothing more than an expensive and common distraction).
TODAY, WE WILL SLAY A BEAR!
These days newsletter services send you e-mails that are hardly newsletters at all. Instead, what you open and read is 80% marketing copy! I've been blocking my competitors' e-mails more and more lately, which says a lot because I like to study my competition's actions. But lately? Pointless. (Can you tell they're in pain?)
The other 20% of their e-mail will talk about what's going on, reinforcing what's already public knowledge with a hyped up spin that has no real solutions - just promises. You need to read less about WHAT is going on and WHY, and read more about what to do about it, and about the near future.
So here's what we'll do for you:
1. We'll give you what you probably want: Solutions for this crazy market. Ways to profit from it. We know this is what you REALLY want.
2. We'll slip in something that everyone on earth can afford more of even if they're not in the mood: Education.
Below, I'll give you a road map for this market with commentary, as well as links to a few past articles. I'll show you how to slay this bear market the way we did in the early 2000's while reviewing an old lesson.
What we know (besides the daily story of how the world is falling apart and why):
The market is in a long-term down trend. (Gee thanks Chris, that's almost as much help that I get from the media telling me we're now officially in a bear market AFTER A 20% DECLINE.)
But what do we need to know to profit in this kind of market?
1. Stock markets tend to decline 2 and sometimes even 3 times as fast as they rise. For example, it took roughly 24 months for the S&P to go from 1,225 to 1,560 ... but it took only about 10 months to go from 1,560 down to 1,225 again.
2. Markets don't go straight down. There are a few advances along the way where most investors get sucked into the market right before the next decline.
The reason they get sucked in is understandable. They watch stocks jump 30 - 50% in a month off of a market bottom while the evil media - yes, I really just said that - forces them to regret missing what might have been "THE" bottom. Investors want to join the party. But that party is short lived, and to make money on intermediate advances in a long-term downtrend you have to know when to quickly get in and, more importantly, quickly get out.
I'll show you how to profit BIG TIME this way, but doing this is called "attempting to catch a falling dagger" for a good reason. Most people, including myself, discourage average investors from doing this because they trade on emotion more than anything. You have to be disciplined enough to get in and out very quickly, listen to your indicators - even if they say to sell at a loss - and to play with smaller amounts of money (because this is the riskier way to play this market).
The best way to play this, for the risk averse trader, is to wait for a stock market advance, and when it looks top heavy again, make bearish plays (position yourself to profit from another downside move). This should also be the primary focus of the more aggressive player (above) who likes to profit from the intermediate advances in the long-term downtrend.
By the way folks: My head wants to EXPLODE when I hear the media and investment professionals (who I want to choke) telling people that playing the downside (profiting from declines) holds higher risk, and playing the long-term upside holds lower risk. It's just plain false - especially in a declining market - and if you don't believe me, ask the 85% of individual investors who trusted that theory over the years.
3. We know that eventually this long-term (declining) stage ends - and there are plenty of ways to identify when "THE" bottoming process is happening. But most are in too much pain to even care at that point. They don't want to look at the market, charts, indicators etc. Y'know why? Because they sat on their hands the whole way down and didn't make bearish trades, and by this point they tend to feel like they just fought Mike Tyson. I hope you'll listen when I tell you that time has come. But let's shelf that conversation, because "THE" bottom won't be here for a while.
Here's the plan folks:
In short: Step1 is get slightly bearish, Step 2 is get bullish with small positions and Step 3 is get heavily bearish. Read on...
Right now we are in extreme oversold territory. That doesn't mean we can't go lower. It can certainly (and likely will) drop steeper and faster before the next rebound higher. But the spring is already somewhat coiled, and it's coiling tighter and tighter. It is here that the beginning of the most popular mistakes are made. I say that because the market can easily drop another 10% before the next intermediate bottom. (I'm not forecasting that because I don't forecast - I evaluate probability and act accordingly. But further down you'll see why I say this.)
Here, people tend to either sell their bullish positions (because they just can't fathom the idea of a steeper and faster decline) or they get very bearish right before the market has a sharp advance generating a loss and killing faith in future bearish trading.
STEP1
The way the market looks right now, it makes sense to make bearish trades, but do it with a very small amount of money. Want to know the smartest way to bet on declines? If you haven't done so already, I BEG you, for your own good, to read my old article titled "Why "In-The-Money" Puts Are Not as Risky as Shorting Stock" by clicking here.
All I ask is you remember that Chris Rowe at Tycoon showed this to you.
The market is heading lower, but after the next intermediate bottom, it will spike higher very quickly and I'll show you how to identify when that will likely happen. Don't get ahead of yourself though. Wait for the signs of a bottom before acting. Don't anticipate. (And keep reading The Tycoon Report).
As a side note, the NYSE interest recently hit an all-time high, which means there will be a lot of institutional money buying back shares that they sold short. Over 40% of the volume on the NYSE are hedge funds. So the next spike higher will probably be fierce.
Okay, you probably want to know the signs of a bottom, right? Two weeks ago I wrote an article titled "How To Pick the Next Bottom in this Bloody Market". You should click there to read it. You can use the VIX to find market bottoms. Please read the article carefully - twice. Note that the VIX peaked out in the high 30's in 3 out of the last 4 major bottoms including the last 2 bottoms. (You'll see the chart in the article). On Monday, it hit 29.30 and it's moving higher. You'll see a huge spike in it when the market is making the intermediate bottom.
When the VIX gives you the signal, start exiting your bearish positions (remember, you have a small amount of money in these positions) and start entering bullish positions. Bearish positions should be on financial stocks and bullish positions should be on energy stocks and drug stocks.
Just as you had a relatively small amount of money in the early bearish positions because they hold a higher degree of risk at this point, you should only invest a relatively small amount - but slightly more that of the bearish trades - in the bullish positions. This is because we should play the intermediate trend (at the time it will be advancing) with less dollars, and we should play the long-term trend (which is declining) with larger dollars.
For the best way to profit from the next advance, click here for a must read from last year titled "No, Seriously - Profit From Options"
And if you are not very active in the market, I would skip the first steps above of slight bearishness today followed by bullishness at a bottom and wait for the next top and get bearish. Again, find out how to play bearish positions by reading "Why "In-The-Money" Puts Are Not as Risky as Shorting Stock" by clicking here.
A great way to know when the next top has been hit is to look for MACD sell signals. Long story short, a MACD sell signal is when the (faster) MACD line (blue line at bottom) crosses from above to below the (slower) signal line (brown line at bottom).
You should look at daily MACD as well as weekly MACD.
Below is a 10 year weekly chart of the S&P 500. When you look at a weekly chart, you'll see a weekly MACD below it. When you look at a daily chart, it will show a daily MACD. The two are different. Weekly MACD gives LONG-TERM signals. Here's one reason I think we have more downside before the bounce...
Notice in the 10-year weekly chart below that I drew red lines connecting the weekly MACD sell signals to the point in time, on the S&P 500, at which they occurred. Look back in 2000 - 2002. Each time we saw a weekly MACD sell signal, the market dropped significantly lower. Now look to the right at today's market. Sure, we already dropped nearly 5% since the most recent sell signal. But compare that to the one seen in late October 2007 where the market dropped 16% to the next intermediate bottom.
On May 27th, I gave you a head start to the 3 steps I'm writing about today. Remember, if you own the S&P 500 put option that I recommended in my May 27th article (which is up 73% in less than 2 months), you should click here for instructions on when to sell it and take your profit.
Interested in more market education? Go to www.thetycoonreport.com and click on the "about the editor" tab and read my past tycoon articles. You can sign up for The Tycoon Report free there if you haven't already. Save it to your favorites or if you're cool and you use a Mac, add to your bookmarks. Forward this to any friends you owe favors to. And finally, tell me what you think about this market by clicking below.
(Please let us know what you think about Chris Rowe's article.)
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
