Brandon Fredrickson's Random Rants and Market Ideas

[Brandonf]

Today turned out to be a pretty good day.

I want to have a look at CSCO. My favorite thing in the world when I can buy a swingtrade/positiontrade using a daytrade setup. Why? Because daytrades have small stops (risk) and swingtrades have larger upside potential. By taking a swingtrade but using a daytrade entry you combine those two things. You get to assume the risk of a daytrade and have the upside potential of the bigger picture trade. PERFECT.

If you look at an intraday and daily chart of CSCO you will see what I am talking about. On the 28th CSCO based right under $20 per share. You can see this on the 30 minute chart I have attatched. Once it broke above this resistance level CSCO gave a nice daytrade setup. Because I entered using the daytrade trigger I was also only required to take the risk of that daytrade. I placed my stop under $19.95, risking 5 to 8 cents on the trade. This is apposed to placing it under $19.50 if I was using the daily chart pattern. This allows me to take a much bigger position in the stock so that if I lose money it will be the same in either case, but if I am profitable it will be much more so. The reason for this is because I risk 1/2 of 1% on each of my trades. So as an example if I have $250,00 in my account I will lose $1250 if my stop is hit. By placing the stop under $19.50 per share I would have been able to take about 2100 shares, however by placing it under $19.95 I could take about 14,500 shares. I think you can see the differance in potentail. Now going back to that daily chart, you can see a nice base after the large gap up on Feb 8th. As soon as a stock has a large gap such as CSCO did it goes on my list of stocks to keep watching. I want to see them hold their gap and base, exactly what CSCO did. This base kept running into resistance around $20 a share, so this was the breakout point to be watching. CSCO provides about the closest thing to a perfect example of what I look for. Ideally the daytrade will provide an entry point a couple of cents under the swing/position trade setup. The reason for this is that when the daytrade triggers a tad lower the momentum the daytraders create will often "setup" the break that traders in the larger timeframes are looking for. Then you get a fresh round of momentum as the bigger picture traders enter. This type of action allows you to very quickly move stops up and lock in profits.

Now onto the market, what to say. To me price has always been the undisputed king, everything goes back to price, but VOLUME is without a doubt the QUEEN. All of us know that if the Queen isnt happy the Kings is likely to be grumpy. After the distribution day we had on Tuesday stocks rebounded nicely on Weds, recovering Tuesdays losses and triggering traps. Many of the indexes CLOSED at five year highs. And here in lays what is to me a significant problem. Volume was mixxed at best. It was up about 2% on the Nasdaq but down about 5% on the NYSE. When NEW HIGHS occur on lower volume that is warning sign to you that CNBC Is more interested in the upside than large traders and investors are. New highs on Lower volume are a signifant warning sign and often mark tops. Am I saying to be short just yet? No, In fact I am now long. I have positions on in GLW, CSCO, IWM, BRCM, OATS, NSM and FORM. I am however not entirely comfortable with any of these and am actually already using intraday price points to adjust my stops. This is not par for the course because had we seen good volume on these breakouts I would be willing to give them a good deal of flexibility for the simple reason that technically these are gorgeous looking stocks that have shown superior relative strength and they also have good fundamentals. In short they are the kind of stocks a trader has wet dreams about. I just cant ignore that low volume though, so I have myself in a positon that will allow me to quickly blow out my positions and return to cash, maybe even go down.

 

[Brandonf]

I am getting sea sick. Red Bar, Green Bar, Red Bar, Green Bar. She's up..no wait..she is down....no wait, its up..no wait...just..wait, just a minute, maybe..nope,.nevermind!!

Anyway I am back to cash with the exception of NSM. I made some small profits, not much but enough to get myself a hamburger happy meal @ lunch I guess. Currently I am watching HOTT, if it breaks to a new LOD I will be short. Everything is small at this point. Until we actually break the range I am trading with 10% of my account. That is to say I am trading as though my account is only 10% as big as it really is. Why am I doing this? Because this back and forth type of market is very hazarous to my capital and confidence, so I need to go small. But, I also feel its important to be in the market. So, I resolve that by doing it VERY SMALL and insignificantly. I will not be trading with size again until we clearly break this trading range we have been in since the end of December. Once it breaks, and it will, I then want to see how the volume is, and what the pullback looks like. Lets just assume the breakout occurs to the upside. I will be keyed in on volume. If the breakout occurs on light volume I will assume its likley false. After the breakout I want to see what kind of pullback we get. It better be on lighter volume than the breakout. Only should this criteria be met will I start to get back into the market in a major way. Until then Im sitting. I made 17% in January and 3% in Febuary so my returns are fine for the year, my yearly goal for my accounts is 30%. At this point my job is to preserve capital and wait for the best trades in the best market. If that takes awhile and I have to live with being bored for a bit, I can do that .Bored is better than broke and frustrated.

Brandon

 

[Brandonf]

If any of you reading this have any comments or questions please do feel free to ask away.

Brandon Fredrickson

 

[Brandonf]

On Friday US Equities opened up sharply lower as bond yeilds hit new yearly highs and Intel accounced that it cotinues to lose market share and revenues are falling. It certainly looked like dark clouds on the horizan, however after the open the market quickly found its legs and moved higher with semiconductors (including INTC), networking stocks, some retailers and small caps in general showing a lot of strength. I was starting to position myself aggressively for a bottom in the market because the type of action we saw is how they usually form : A piece of bad news, already baked into the cake, is finally released and the market sells off but it quickly recovers and moves higher on good volume. This is the strongest buy signal I can think of. However, all did not go according to plan and the markets started to leak after the bonds closed and that only accelerated into the last half hour or so. We ended up selling off on very heavy volume and equities put in a pretty clear distribution day. This was the third or fourth one in a very short period of time. YACK!

So what to do? I guess we are really back to square one because the market is not breaking out of its range either way. As I said I did start to positon myself pretty aggressively Friday and took a bit of a smack on the news on it, especially in my index positions. Suprisingly many individual shares continue to hold up very well, for example GLW, CSCO, GWR, AMTD, FIX, JDSU. Each of these looks buyable at this point if they pullback on light volume. These are the best looking names on my pulback list. On my breakouts list there are a number of stocks waiting to setup, some of my favorites include MBT, MW, FSL, MSCC, LUV, LQDT, DBRN, and UPN. However, with the current whipsaw market we are in I am going to play any breakout on the light side and look to get the balance of my positions on in the event of a light volume pullback. This obviously somewhat limits my upside potential, however it does a lot more towards protecting the two C's (CAPITAL and CONFIDENCE) which are the two most important things you got.

My personal opinion about what is happening is just that the market is making time before moving higher. Too many people are bullish though right now, so something needs to happen to get them out of the mraket. Nothing is more likely to get folks to give up and walk away than when the market just whips them around. One way or the other this whipsaw will resolve itself, it always does, and most likely when it resolves the following move will be HUGE. In the mean time tread light so you can come back and put up with it again tomorrow

On the short side there are also a few names standing out. A couple to look at are BBBY, ANF, DELL. Each of these are among the weaker names in the market. We have two way action out there so I think both sides are playable, but again wtih caution. I am trading at 15% CAPITAL right now, and may go down to 10% if we do not resolve this range in the next few days. As soon as we do move out of the range I will very quickly get my market exposure up.

Brandon

 

[Brandonf]

When I was in 4th grade my Little League Baseball team went 1-12. In an effort to cheer us up our coach arranged for us to go to the Metrodome in Minneapolis and watch a Twins game to watch the World Champions play. Somehow he also arranged for it that several players would stay after the game to meet us. The Twins lost the game 3 to 4 in the last Inning and I can remember that when we went down to meet them most of the players gave off the impression that they did not want to be there with us. It was rather uncomfortable, and probably would have been a memorably bad experiance except for Kirby Puckett. He came in and lit up the locker and really gave off the impression that he WANTED to be there with us, not that we inconvenianced him and he single handidly made it a great experiance for us. Baseball lost a great Hall of Famer. I know that the last few years have seen Kirby hit hard times, but I will always remember his smile and enthusiasm in hanging out with a bunch of 8 to 10 year olds.

Speaking of sad, how bout the US Equities market! Global equities are, I am afriad, not far behind as it looks like the European Centeral Banks and the BOJ is going to be taking after the Fed and raising rates. I want to be clear about this, if the BOJ starts to raise rates, all bets are off on Japans recovery. Japan's economy depends on the weak Yen, and the gobal carry trade in Yen is measured in the TRILLIONS of dollars. Everyone is leaning in one direction on the Yen. Should the BOJ start to raise rates this carry trade will unwind as it becomes more expensive to barrow yen. This could very well lead to a global crisus a la 1998.

I still don't have a lot to say about direction and picking trades at this point. The market followed through to the downside, so we finally have two days in a row in one direction! Volume also increased, and this of course is on the heels of increased volume on Friday as wel. So, we now have TWO higher volume distribution days in a row. Even more importantly than this is that the right hand side of my notebook is starting to catch up to the left hand side in terms of the number of names. At this point I am still going to tread very light, but I do think that we have found a direction (down) for the short to intermediate term. It will be critical to watch how the market acts when it finally gets some upside. If it rally's up to resistance on light volume that will be the icing on the cake. You will want to be building a list as the market rallies, and that list should include stocks that are clearly seeing downside momentum and do not participate in the markets rally. These are likely to be the best names to play on the short side. Commodity related stocks, Gold and Silver, Oil's etc, led to the downside along with Healthcare, Semi's, Biotechs and Software. These are likely to be nice area's to focus on in your hunt for shortig opportunities. There are still several Small and Mid Cap stocks which are acting extremely well and with the two way trade we are seeing it would not be wise to ignore them. I think you can likely play both sides of the market, however my bias is moving to the short side slowly but surely.

 

[Brandonf]

There is a whole lotta nothin going on as far as the market goes for me. We continue to trade in a sideways manner, from lows to highs, and highs to lows and then back again. For me, this is untradeable. When I do try to aggressively trade it the only thing I accomplish is to lose money. A lot of people get very frustrated when they encounter a market that their system does not work well in. I do not. I realize that a methodology is a bit like a relationship with a person, there are high points and low points, you take the good with the bad. I am a breakout trader, so for me this type of market is the bad. The only appropriate action I can really take is to be on the sidelines with the majority of my funds, and trading light on the setups I do find. There are some pockets out there that are interesting. I think that this range is going to eventually resolve to the downside, so I am focused much more on finding shorts than longs at this point, though you still should be looking for strong stocks as well.

 

[apples10]

There is a whole lotta nothin going on as far as the market goes for me. We continue to trade in a sideways manner, from lows to highs, and highs to lows and then back again. For me, this is untradeable. When I do try to aggressively trade it the only thing I accomplish is to lose money. A lot of people get very frustrated when they encounter a market that their system does not work well in. I do not. I realize that a methodology is a bit like a relationship with a person, there are high points and low points, you take the good with the bad. I am a breakout trader, so for me this type of market is the bad. The only appropriate action I can really take is to be on the sidelines with the majority of my funds, and trading light on the setups I do find. There are some pockets out there that are interesting. I think that this range is going to eventually resolve to the downside, so I am focused much more on finding shorts than longs at this point, though you still should be looking for strong stocks as well.

Brandonf, a simple question. When your markets are range trading (I'm presuming you are trading US equities) why not look for other markets that are experiencing a lot of breaks at the moment, for instance European equities or indices ?

Just wondering? Here in Europe we view the whole World as our 'universe of possibilities'.

Your trading strategy would be cleaning up here at the moment.

rgds

 

[Brandonf]

Brandonf, a simple question. When your markets are range trading (I'm presuming you are trading US equities) why not look for other markets that are experiencing a lot of breaks at the moment, for instance European equities or indices ?

Just wondering? Here in Europe we view the whole World as our 'universe of possibilities'.

Your trading strategy would be cleaning up here at the moment.

rgds

I do trade a tad bit in oversea's market. Over the last year I have been really active in India and Korea as well as a bit in Australia. Last year I traded a few middle eastern stocks when those markets got moving as well. However, for the most part I stick to ADRs when I am trading non US Companies simply because the fundamental data is harder for me to come by on global stocks (even in London, Paris, Tokyo and Frankfurt) than it is for US stocks.

Brandon

 

[Brandonf]

Chuggah Chuggah CHOOO CHOOOO!!! and keep the train moving! What the hell am I talking about? I'm talking about moving on. As you may recall at the start of the year I was extremely bullish on True Relgion Apparel, a maker of high end (ie Overpriced) denim goods that it sells at its own stores and through high end retailers. The company's products are very powerful and the retailers I have talked to said they can not get enough of True Religions products in their stores. This has led to powerful growth in TRLG's earnings and sales as well as some nice appriciation on the stock itself. So, at the beginning of the year I was very hot on this stock and we bought a good number of shares. I thought it had the potential to go up 100% or more over the course of the year, however the price action is suggesting otherwise. In the end, price is king, everything else is secondary at best. Lets look at another stock that I liked a lot, IBM. This is one that I was very hot on shorting due to a nice chart and what I feel is some aggressive accounting which is likely to come back to bite them in the butt. I talked about IBM a number of times and was really looking forward to having a setup so I could put a position on in the beamer, which I antticipated making a lot of money on. In both of these cases I had invested a lot of time and energy into stocks that I really liked, in both cases nothing came of that investment. This can be very disapointing, but it's just part of the game. The longer you trade, the more times its going to happen to you - and each time you must do the same thing. Shrug your shoulders and keep moving. You do not buy stocks with the words "through sickness and health, good times and bad, till death do us part", instead it is a relationship of convenience, nothing more. No stock is worth taking home to mom, and 99% of them are not suitable for life long relationships. They will eventually break your heart unless you are willing to move on quickly if needed.

Moving onto the market. What can I say? I must say that this has been a difficult year thus far. We have been in a rather wide range and the market is holding it pretty well. Unfortunatly for me, I am a breakout trader, so this type of action does not mesh well with what I do. Fortunatly I have taken advantage of the opportunities the market has given me and taken action quickly when things have not worked out. The year started off with a lot of promise, I was up 10% in the two and a half weeks of the year. Since then though the market has gotten rather choppy and difficult to trade, thus I have not been as aggressive. If I had continued to be aggressive and trade as though the world was great and there was nothing to worry about in the world I'd have likely given back all of my gains and worked my way into a loss, but I have not. I have been very bored pretty often, but I am currently up 18% on my client accounts for the quarter during a period when most of my fellow traders and money managers are down or flat. I have only had four days so far this year that I lost money. Why am I bringing this all up? Well cos I like to break my arm patting myself on the back of course! Well actually that and because I want you to know there are still money making opportunities out there, nice ones too. Since I am managing other peoples money I can not tollerate the drawdowns, but there have still been great trades out there that have produced gains. No matter how bad the market is, there are always pockets out there that you can trade.

More on the market then! We continue to be in a range with the S&P500 and the Nasdaq Composite and Nasdaq100. However, the Dow has broken out now to new 5 year highs, while the Russell 2000 (small caps) and the S&P400 (Midcaps) are at new all time highs. Ordinarily this would have me dancing naked in the streets- however right now I just cant get myself real excited about the market. It still feels very rangy to me, but setups are starting to work. There for awhile nothing was working long or short. Now I am finding that things are working on both sides of the market, this is good. My list is my most important indicator. What do I mean by this? Well each night I scan and on the left side of my sheet of paper I write down the stocks that have technical setups to go long, and on the right side shorts. When the market is healthy there are a lot of stocks on the left side of the page and there is a lot of follow up with them. I want to just briefly though draw your attention to a storm cloud on the horizan. That storm cloud is JAPAN. Since the end of World War 2 Japan has been in a giant easing cycle on interest rates, so much so that real rates have been negative in Japan for some time. That means that you essentially are paid to borrow money from Japanese banks. The low rate party though is about to end. We are now in a world wide interest rate tightening cycle, and for the first time in modern economic history the Bank of Japan is being caught up in it too, if you look at a chart of their short term vs long term rates, they are actually on a collision course to invert! Our own bond rates are also rising and are uncomfortably close to breaking a multi year downtrend and going above 5%. If we go above 5% on rates in the US rates will go to 7.5% to 8.5% eventually, there is no doubt about it in my mind. There is also no doubt in my mind that once Japanese rates start to rise it is going to hurt, and there is a chance (Id put the odds at 20%) of it triggering a global crisis such as we saw in 1987 with the crash and then again in 1998 with the Asian Currencies, Russian and Emerging Markets Bonds and that whole bit. This could be AT LEAST that bad. And the big problem is that right now every one is leaning in one direction, and that direction is LONG. Not only are they all long, they have good reason to be long. I think global equities are very much like Oil stocks were right after Hurricane Katrina, which is scary to me. What do I mean by this? After Hurricane Katrina nearly everyone got very bullish on Oil stocks and bought them, and there were many good reason to do it. When oil stocks finally came down it was like the rug got pulled out from underneath of people and the major oil related indexes crashed 10% to 15% in two or three days. Some of the weaker individual names lost 30% to 50% in under one week. This is the kind of risk we currently are exposed too with equities. Right now I don't think there is is a lot of action to take around this because its not something that is currently unfolding, and it might not ever. However, its something to keep a close eye on because if it comes to pass its going to unleash a Hurricane Katrina on the global equities market. The only thing I see currently related to this is the TLT, which I am currently short and will be looking to add additional short exposure to if it breaks down further.

Now lets look at some individual names. For the most part I tend to be a trend following guy. I trade breakouts in the direction of a trend in strong or weak stocks, but there are always places to deviate from this. I occassionally buy bottoms when a stock breaks out of a nice and long low level base. A good relatively recent example of this setup is ARBA. You can see the very long base it was making near the lows at the end of last year. On December 9th it broke out sharply and has not looked back since. This type of bottoming pattern very often leads to some of my best trades, and certainly ARBA, which I still own, has been kind to me. Two stocks I want to watch right now as potential bottoms off these low level bases are LSCC and SATC. Both of these stocks are dirt cheap semi conductor stocks that have been losing money, however both have broken out sharply on heavy volume and have been making quick progress in trimming their losses, which Wall Street is obviously taking note of. Each of them is a little extended right now, so I will not be buying at these levels but I will be watching for a pullback and looking to put on a position then. Silver and Gold stocks are also very strong at this point, silver in fact just made a new 22 year high. The clear leaders there are SSRI and PAAS, both of which are showing great relative strength, but also need to rest a tad before I buy them. Eagle Materials (EXP.B) has a nice gap and go that its building, my main worry with this is that its broken out on light volume. JBL broke out Thursday on heavy volume after earnings, on friday it traded on lighter volume in the top of fridays range, resting and giving us a potential setup. Sears Holdings (SHLD) is another stock that built a nice low level base, has a big gap that is holding and looks higher. Kerzner International, a member of the recently strong gaming group had a thrust 5 days ago and has since rested and looks as though it could go higiher. Other stocks in the gaming sector that I think will offer opportunities later (they need to form new setups) include SHFL, STN, WYNN, and GPIC. I find myself being compelled to buy GM, but I couldnt tell you why. Usually what that means is that I will buy a little bit and will end up wishing I had bought a lot. JDSU seems to have come back to life and over the last few days it has pulled back nicelyy on lighter volume. It now looks poised to resume its march higher. SBUX looks nice, pretty soon each new house will come with its own built in Starbux store. MCHP is another strong uptrending stock that has pulled back on the weekly chart to support. All the names above should give you a pretty good list of names to watch. On the short side the Internet stocks as a group continue to look like the south end of a north bound mule, pretty bad! I had thought the homebuilders would top out and tumble, but they again had the last laugh. Finally Internet Security leader Check Point had a huge move down following a gap on friday. This action brings it to the botom of a rnage which looks unlikely to hold. I will be looking for shorting opportunities in that stock.

Hopefully the half a book I just wrote above will give you a few ideas you can use. If you would like me to look at your portfolio and see how I could help you please email at [email protected]

 

[Brandonf]

Each dot represents a day that there was a change in the account value. I will be busy with a number of things for the next several days so I have essentially gone to cash into the end of the qtr. This is an actual result from an account I manage and shows what I have done this qtr. I will start to post them at the end of each.

 

[Brandonf]

Tuesday was a pretty bad day for the market after the Fed raised rates and indicated that it may not be done. However, as good as Tuesday was, Wednesday was 3 times better. We had new relative highs across the board, Nasdaq, Small Caps, Mid Caps, and Big Caps all had great days. Important sectors also led. We also saw heavy volume AND advancers led decliners by nearly 3 to 1 on the NYSE and 2 to 1 on the Nasdaq. No matter what, 3 to 1 and 2 to 1 A/D numbers are strong. Additionally we are starting to see strong leadership in a number of sectors which shows that we have broad participation right now. Among the best sectors are Oils and Energy, Transports, Biotechs, Fiber Optics, Financials and Consumer Goods.

Something I want you to play close attention to is AAPL and GOOG. Now, GOOG just announced a SECOND secondary in the last 6 months to raise more cash, this is not something that is thrilling share holders. However, both stocks have drawn a line in the sand and that is important because they have been clear leaders of the bull market. With out them it would be difficult for the market to continue higher. AAPL bounced off its 200 day moving average almost to the penny. If I was short AAPL I would want to cover that trade. I will be watching this rally closely and the pullback even closer. A small pullback on light volume and I will be a buyer of AAPL.

This weekend I am going to come out with a special report on Oil and Energy, but the short version is that the SECULAR BULL MARKET in energy stocks has resumed in my opinion after having pulled back for some time. I have been buying stocks that showed clear leadership when the sector pulled back. How do you find clear leaders? When an entire sector has a pullback, we as traders are given a gift by the market. How? Because as the group pulls back we want to identify the stocks that are NOT pulling back, we want to find the stocks that resist the selling pressure and hold strong. Examples include DO, DNR, DRQ, TRGL, PEIX, and WFT. Please note that I have had open long positions in each of these stocks since Tuesday. These are POSITION TRADES, which means that my intent is to hold them for one quarter or longer. In the case of energy I think it is very clear that we are in the middle of a secular bull market, and that Oil is the most likely sector to turn into a bubble. Please note that it has not yet turned into a bubble, I suspect this is a few years out and when it starts to get bubbly we definatly want to have some positions that have been open for some time to take advantage of the speculative excess.

Aside from Energy FIber Optics are in vogue. Some fo the better names include FNSR, AVNX, MRVC and BWNG. This is a strong theme to keep an eye on and profit from, though I think the oil theme is by far THE STRONGEST IN THE MARKET. I think that Japan and the rest of Asia have resumed their upside march. Profits can probably be made with EWJ, JOF, EWS and FXI among others. Gold is another secular bull market that seems to be resuming its march higher. GLD is the the exchange traded fund which represents ownership in gold. I have also been getting myself exposure to the broader market by putting on positions in MDY, IJR and EEM.

An important potential storm on the horizan to continue to be aware of is long term interest rates. A move over 5% breaks a multyear downtrend and could have severe implications for the market. IEF and TLT shorts provide a good way to play the short side of rates.

If you have any questions or comments, or would like my assistance with your own personal portfolio please feel free to email me [email protected]

 

[Brandonf]

We live in a world with so many advancements. People are living longer and healthier lives than ever before which we all seem to take for granted. We take it for granted until we are slapped in the face with sharp reality and realize how fragile we all truly are. Our family has had that slap in the face over the last few days due to Toni's sister in law Ashley who is having a lot of complications with the birth of her first child. She went into the hospital Sunday night with sky high blood pressure, it was decided that it was so bad she needed to stay in the hospital until she had the baby which was due in 5 weeks. Yesterday around noon she all of the sudden just dove off a cliff health wise though and it was decided that they needed to immediately deliver the baby or she was very likely to have a stroke and die. That was the plan until the stress of birth starting rising her blood pressure to the point that it was becoming a near certainty that she was either going to have a stroke or seizures, so they had to start giving her medication to stop her from having the baby. In the mean time the baby is the reason for the problem in the first place and they have broken her water, so it has to and is going to be coming out, but they are in a real catch 22. And if that all was not enough she is at a small community hospital that does not have the personal or technology for high risk births- however she is in such poor condition they don't dare move her. Ashely does have the strength of youth on her side, so we are all hoping that will help her and the baby at this time. Why do I bring this up? We all get so caught up in our own thing in the market and just life in general. We think that the world is ending because of this or because of that. Meanwhile a twenty year old girl is fighting for her and her child's life which really brings things into focus. I try to make it a point in my life to never walk away mad, focus on the positive and tell Toni, my mom, dad, sister and grandmother that I love them every time I talk to them, and I think this is a good thing because you never know what is going to happen and it would be a terrible guilt to carry if you had some petty thing going on the last time you see a person.

Daylight savings time! Uggh..I swear that the guy who came up with this wretched idea is lucky he has been dead for a long time because if he was not I would be tempted to seriously hurt that fellow!

The market! What to make of it. Well..do you want the honest reply or should I make something up? My mom always told me honesty is the best policy so..what do I make of the market? I don't have a clue. Its all over, and even though we have new all time highs in small caps and mid caps and new relative highs in the major indexes to me the way we are trading feels the middle of a range which is my least favorite place to be trading. Its my least favorite because frankly I stink in a range. However, there are some themes out there that have been working very well, and by focusing on them I have been able to do well too. I just got my accounting finished for this quarter and I beat my benchmark small cap index by over 50% after fee's for the quarter, so focusing on themes works! There are three big ones I am honed in on at this point. Asia (specifically Japan, Korea and Singapore), Energy and Interest rates.

Asia has been a big and very profitable theme for me since late summer when the Japanese markets broke out and I put on my position in EWJ at $10.40. I think that Japan has the best reward for the risk, but Korea and Singapore are also compelling. We are right now seeing the entire Asian region wake up to the modern era. The massive modernization of an entire continent has begun and it has proven, and will continue to be, very profitable. This is of course being fueled primarily by China and then to a smaller extent India. Alot of people are taking the approach of investing a lot of capital in these two markets, however I feel that is a higher risk approach. Japan, Korea and Singapore are the most advanced and stable economies in the region. They have the largest companies with a lot of money, manpower and political power. I think that the corporation of these countries are going to benefit massively from the growth in China, India and the rest of Asia by providing the capital and technology to fuel that growth. This is very similar to the current American model for global growth. The corporations of Japan, Korea and Singapore are uniquely positioned both culturally and geographically to profit and they have been doing so. I feel that this is going to be a major theme that will continue playing out over the next the next few years.

Energy is another major theme. A major part of this is being fueled by growth in Asia. I think a compelling case can be made saying that peak oil is upon us (I plan to write an in depth article going over the energy sector with in the next week or two) and that the energy sector is now in a secular bull market that will last for a long time. We have had a deep pullback in the group since late January, this occurred at the same time that Oil futures put in a double top and pulled back. However, pullbacks are normal, they shake out the weak hands . More importantly pullbacks allow you to isolate strength. You do not know who your true friends are until you have a bit of trouble, likewise you do not know what stocks are truly leaders until there is weakness in the group. When this occurs you can find the leaders via relative strength. A few of the better looking energy names using relative strength analysis would be DO, WFT, PEIX, FWLT, SLB, OXY, SOSA, and AHC. In addition to, and just as important as, having strong chart patterns each of these stocks is showing strong growth in earnings quarter over quarter and are efficiently run companies. The lone exception to this is PEIX, but my feeling on this is that ethanol is getting so much hype at this point that if you are willing to watch it closely then there is no reason not to be in it on a setup because that group is explosive at this point.

The final theme is rates, and this is one that we need to pay close attention to because it could be the elephant in the room for the entire economy. Over the last several years we have seen long term rates come down sharply and a nice downtrend is in place on that yield, however we keep pushing against 4.9% now, which I suspect we take out. Once that happens we will have broken a multiyear downtrend, and if that happens I would not be surprised to see rates rally up to their historical average ranges in the 6.5% to 8.25% . These are not actually very high rates, but tell that to a guy who is in debt up to his eyeballs and has a negative ARM Interest Only loan on a house did not earn in the first place but bought anyway.

 

[Brandonf]

You will be happy to know that Amanda Jean came into the world Thursday without too much trouble. A little early, so she will be in the hospital for a few weeks so that her lungs can develop, but for the most part Mom and Baby are well. It was a nerve wracking few days for everyone and I'm glad it's over. So many of you responded and I must thank you all.

Moving on, there is a damn woodpecker attacking my roof! I don't know what his thing is, I have a concrete barrel tile roof, but all the sudden I keep hearing this machine gun otu there above the office. I go look and see a woodpecker wood pecking away at my roof. I scream at him and he flies away to a palm tree and gives me the evil eye. Twenty minutes later the process repeats only this time I swear he is just giving me the finger. Here I thought being a successful trader would get me RESPECT, but at least in the woodpecker world it don't mean a damn thing! Just call me Elmer Fudd.

In the equities market Christmas comes four times a year, it's called earnings season. Earnings season jumps off in full swing next week and this one is looking like it will be a good one. I saw that because we have not had too many companies out there confessing there sins the last few weeks, and that should be a good sign. How I approach earnings season is to watch the reaction of the stocks, that tells you everything you ned to know. That a report appears good or bad to me is not the most meaningful thing, the most meaningful thing is how the market reponds to that report. What I like to see is a stock gap up a lot on the earnings news and then build a nice base. Once that base is built a breakout provides an excellent buying opportunity. Look at a current chart of Jabil Circuts for an example of this setup.

I think that Asia (specifically Thailand (TTF), Japan (EWJ, JOF) and Korea (KF) are going to be major upside themes. I also think that the secular bull market has resumed in oil stocks, though I am a little worried about volume there.

Finally retail stocks. They came out with a bit of bad news yesterday, however as a group they acted relatively well. This is always something worth noting, when the market shrugs off bad news it is very often a sign of good things under the surface. MW is an example of a very nice looking retailer.

Trade well
Brandon

 

[Brandonf]

This will be fast. Right now the market is looking like hell, and everything looks terribe. Breadth is bad, interest rates are above 5%, Iran has nukes, the Congress cant get the tax cut extended, and I stubbed my toe. But, thats how markets often look. A lot of the market is just in a range, and we are now at the bottom of the that range, and until that is no longer the case Im not going to assume there is a trend.

That said last night I spent my time looking to isolate relative strength, which was pretty easy to do given how weak the market has been. A few names I will be focused on include CAT, MOT, CMCO, GEOI, DRQ, CWTR, NFLX, RHAT, VAL, and AVNC.