The markets were down in the first hour with over 100 points on the Dow30 but after some favorable “economic reports suggesting that the economy may be approaching a bottom,” the Dow reversed by 250 points in the following 2 hours. We are also in a new quarter for the calendar year and mutual fund managers typically buy more aggressively the first few days of the quarter to make their performance figures look better. We are getting more and more positive economic news not that the economy is recovering but that the expected numbers are not as the worst case scenario.
We also have the emergency G-20 summit that is likely to announce some sort of stimulus agreement between countries and this positive spin is likely to help the market move up the next few days.
What the trading action does tell us the last two days is the market has some enthusiasm and buying power on the sidelines ready to react to any favorable news. This is a change in sentiment compared to earlier periods these past 5 months where the market was looking for any bad news or any excuse to push the sell button.
This is what I’ve been explaining recently that we should be looking to see how stocks act in comparison with the positions we’ve taken or with the assumptions we have made about what the stock market should be doing.
The market is getting enthusiastic or “bouncy” and could keep moving up. The purpose of the short positions with the banks and 2 life insurance companies was for a short period of time, maybe 1-2 weeks but if the market keeps moving up, your hard and mental stop losses might be kicking in.
Depending upon your own risk tolerance and style of investing or trading, that is what determines how much loss (or give back profit made) you are willing to take. A good general rule for swing trades can be 4-7% stop loss and your potential profit would usually be about 3 times that. So a 3 to 1 profit vs. loss if stopped out, would be the minimum ratio you should be using. The ideal scenario is you have a defined limit of losing $1 but have the potential to make $4.
So it is looking like these short positions are going to have to be reduced or covered if they continue to climb, especially the stronger ones like JPM, JP Morgan and USB, US Bancorp. The Asian markets are up sharply tonight with Hong Kong up over 5% and Japan over 4% as of this writing.
More evidence that we could be starting the rally sooner than expected is the “wish list” of stocks below have really moved up the last two days, many of them moving up to higher highs with hardly a recognizable pullback.
My impression is that tomorrow’s rise in the US markets could put us uncomfortably over our threshold of limited losses. It could be that Monday gave us the lows in these financials after the two down days of last Friday and Monday. The challenge is always going to be with swing or intermediate trades that lasts from days to weeks is to allow a stock to move one way or another which to give it time and space to confirm it is or is not doing what is expected. And you will have to decide for yourself what comfort level or risk tolerance you have to absorb a stock going against you.
I’ve suggested 4-7% stop losses but depends upon what your style, personality, financial situation and strategy for that stock. I personally have higher risk tolerance and like to give a stock a chance to do what I forecast so it usually involves a larger loss if I am wrong than what many people can take for themselves. Yet at the same time, I am right about a lot of stocks that give a lot of profits, as you can see from the trades on these banks going long, short, long and now short.
What we have had for months is an underlying potential for stocks to really move up sharply and the talking heads on the financial websites and TV networks have come out of the woodwork saying how many trillions are under peoples’ mattresses available to invest.
So the sentiment and the talk that is increasing in frequency actually can help build a momentum of buying. That hasn’t happened yet but for months I have had on the bottom of this newsletter that
I am expecting some sort of substantial rally that could be caused by the stimulus spending and the initial spark could just be an oversold condition and in the current environment, good news is starting to be rewarded.
The actual news may not have any substance to it and the overall economic outlook may be bad for another year but the stock market could go into rally mode even with that overhanging dark cloud. My hunch (only an educated guess) is that we could start getting into rally mode but it is really hard to tell right now.
Oil had no change today and will likely follow the market as it has been for the last 6 months.
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