The Day that Was - September 20th 2007

The Debate Continues

Now that 2 days have passed, the debate about the decision by the FOMC to lower the Fed Funds rate and also lowering the rate at the discount window still rages on. Just as people still debate to this day if Alan Greenspan did the right thing when he dropped rates many times in previous years. The actions of Tuesday will likely be debated for just as many years in the future from now.



As Lisa said in her earlier post this debate is a kind of 'noise' which can over time just get under your skin and make you emotional. And emotional traders make bad trades. What is done is done and now we monitor the markets for its effect. For that is all we need to worry about, the effects. If a recession is going to come then we adjust to it, if inflation returns then we adjust to it, whatever the markets do we adjust to it. And the reason we have been keeping you in cash over the past many weeks is because the markets have not adjusted to the situations yet. The market itself is confused and lost and is trying to finds it's way. Technical indications of confusion and uncertainty have persisted and increases the risk of having trades go bad. The market is still in the 'round-a-bout' (our readers in the United Kingdom will understand that one).

An example of a technical indication of a market which is still unsure of itself is in the financials. With all of the hype being pushed at you by talking heads on TV and from some of the other financial sites telling you that everything is fine and now is the time to buy then why is it that people are still selling out of the financials? Rebeltraders is all about reducing risk and increasing chances of a profitable trade. Not betting on 'hope'. If the markets are going to get a footing and start it's way up the bull road then we will be in there when we see signs of this happening. For us when we see dumping of shares in the financials and the housing sectors, even after the rate cut then we are not seeing a confirmation of a bull market. We are seeing continued fear which could topple the market and bring it back down. This is what we mean when we talk about viewing the broad picture. To look at a stock chart and say "this looks good" and take a trade based on that chart alone is being potentially reckless unless you broaden your vision to see the whole picture. Would you want to get on a roller coast ride at an amusement park where the bolts that hold it together are popping out and breaking? Not me! That is why we walk around it to inspect it and kick the tires before we say "I'll buy it", or in this case get on for a ride.

When the FOMC cut the rates so many people have said this will fix everything. Well we are not seeing it yet. The declining financial and housing sectors to us are bolts popping on the roller coaster ride. We will stay off the ride until we see the signs that it is holding together and is not falling apart. Preservation of ones capital is job 1. You only win in the stock market (swing trading, day trading, or long term investing) when you learn to protect your capital and adhere to risk mitigation.

One of the bolts that popped out of the roller coaster ride today was what happened with Goldman Sachs (GS). This morning they reported earnings that were much better than what the analysts were expecting. Even though they suffered losses over the past few months they were able to (at least by what was said in their press release) stem their losses and they performed better than what the analysts were fearing. So if it was so good then why did the Goldman Sachs sell off today? It was the classic "sell the news". Recall a recent post I told you that the pros will always sell into strength. They take advantage of people buying the news to get out. When someone has substantial holdings of a stock and they want to get out they must have the trading volume in order to unload their shares. That is what happened today. With the news of a better than expected earnings report people were buying in on the idea that the stock would go skyward after that news. So people kept pouring money in while at the same time those holding large amounts of shares were dumping out. If the so called 'pros' or 'smartmoney' or whatever you want to call them are selling huge quantities of their shares at the expense of the momentum players and other buyers hoping on a huge gain then that says other people are seeing the bolts popping out of the roller coaster and they want out. We want to see the mechanics come and put the bolts back in before we get on!





Tonight I am showing the Goldman Sachs (GS) chart.