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.

Breaking News

You don't see this very often. Goldman Sachs has just been downgraded to a "sell" by Ziegel Analyst & Co.

A sell rating is not a rating you see very often. (remember my views of analysts, they will always say to buy no matter how bad things are). But a sell rating on big name Goldman Sachs is now bringing the other big brokerages down. Who would have thought we would ever see a "sell" rating on 'ol Goldman Sachs..

The market is a tennis match

And we are all sitting right in the middle of the court. We are in the middle of a war here in the market right now. We have a situation where the markets are "trend-less". It is trading in a range of indecision and any news sends the bears or the bulls running. Only to have another piece of news switch the ball to the other side of the court.

When I sold all my open positions last week it was to protect the gains I had accumulated up to that point. And I have not recommended taking any new positions since that time because when the market is lost, like it is now, and trying to find a road to take we don't know if the trend will go up or if the trend will be to the downside once it makes up its mind.

When the major indices are trading in a range between two points it is pointless to try and take new long or short positions until the market shows us her cards. The key is when the indices move up or below the current range they are in. Only then we can determine some sense of market direction. Until then it is safer to wait it out. I feel the only thing that will have a large enough impact on the market direction will be the FOMC meeting announcement on Thursday. The wording of their statement will be pivotal in helping set the market on some sort of course. Until then we may have some more extreme swings in the markets. And trying to swing trade while these emotional fluctuations in the markets are taking place is just asking for trouble.

Some would say that since the market seems to be in trouble here should going short be the best thing to do? Yes, if the market trend was to the downside. But we don't have a trend here. What we have is fear and greed battling over every morsel of news thrown into the pits. At some point either the bulls or the bears will be driven out and what were left with will decide how we should position ourselves for our financial benefit.

An example of the feeding frenzy today is the news that came out around 2:30 that Goldman Sachs may have some problems relating to the sub prime woes. That news sent the bears charging into the pits and devoured all the bulls within a couple of hours. The chart shown here is a 5 minute chart of today's trading on Goldman Sachs. Pretty scary chart.

Now what happens next to Goldman Sachs will depend on what the details are of this sub prime issue. The sell off in Goldman Sachs today was more of a "sell and I'll worry about it later" reaction. People did not want to take any chances and they sold out quickly. Now it may turn out that the news is not so bad after all and then we will have a surge of bargain bull shoppers running in to grab up the pieces left by the bears. But only time will tell.

The financial sector was a big downer today (helped along by the GS story). When financials start selling out then that sends a new type of fear into the markets. And a type of fear that we have to watch and see how it unfolds. Adding more salt to the wound was a report that the SEC is looking into Bear Stearns and their restatement of losses at one of their hedge funds.

And to top off the day (actually started the day off) the housing data was released and it showed that existing home sales fell to the lowest level since 2003.

Just where does all of this leave us? A lot of people are licking their wounds tonight. They got burned big time by the massive drop today. At mid day we were having a bull rally and then all of a sudden panic fear took over and selling took over in force. Left a lot of people with wounds to take care of tonight. Tomorrow should be a lighter than normal trading volume day because nobody knows what the market is going to do next. And because of this more people are going to nurse their wounds instead of getting back on the horse.. just yet.

Fp80

An earthquake through the financial sector just hit

Reports that Goldman Sachs may have some issues with the sub prime woes are crossing the wires. Don’t know to what extent it is but the report alone is sending tremors down Wall Street. Will this be a small tremor or are we going to have a blown 8.0 on the Richter scale?

People are dumping shares of GS here right now like they were hot coals. This is sending bad vibes through the market here big time. Another situation going on right now of “sell now and we’ll ask questions later”