Trading Track - Winning the mental tug of war.

Jim Cramer said it best "....Did you really think that after a week like this, that we would rally into the weekend with every potential for bad news available and at the ready?".

Still taking massive amounts of pain, but Im winning the mental tug of war to cash it all in and go to bonds. Portfolio is off 5% at this point, and I have no reason to believe that Monday will bring new positive catalysts. In fact the ONLY catalyst out there is the fact that people might just get tired of selling eventually. I'm not swayed, and my hands remain strong. I'm a bull at heart and I continue to look at pullbacks like this as working off the outstanding year we had last year. Although I must admit that this selloff is stinging a lot worse than the last two. Our economy is working like gangbusters and we are emerging from a tough recession. The action this week seems to assume that we are going back to 2002. No way....Didn't work last year, wont work now.

Individual Stock - Let go of the last bit of Echostar for a loss. I couldn't in all good faith carry it any longer with the bets I've made on CMCSA and CHTR. Plus I don't need the extra drag right now. CHTR is getting hit, but I'm only a buyer under 4. If we get to 3.5, Ill take down another 500 shares. Took down another hundo IR today about 2% under my cost basis. PD and AA continue to get hit but are showing bottoming support (no consolation here since we are off big numbers right now), so I feel like we are getting stable with raw materials. FOLKS!! THERE ARE MORE GROWING NATIONS WHO NEED METALS THAN CHINA!! These stocks have become sources of huge amounts of pain.

Bonds - Liq'd nice chunk of cash representing my total realized gain for the year out of the stock PF and Im starting to look at a muni to replace it with. I'm not going to pull the trigger until I can get a +- 10 year muni in the high 4s. Want to buy the 10 year at 5 as well if it can get there. Saving floater income for that. CMO paper seems stable for now and are paying down nicely. Had some big paydowns last month for some and my principal came in quite a bit. Resisting the urge to do any more right now and saving it for the Muni or the T-Bill.

Index - My Q long that was so close to 2080 is now also producing pain. We really didn't see this slide coming so everywhere I look on the indexes are lost opportunities. May consider doubling down the Q stake soon if we get any more oversold. If the market gets too ridiculous, Ill get back into index moves, however right now I'm not going to do anything that produces anymore pain potential.

Meme Watch - Pain

Okay. Those of you who have been reading me for a bit know that I called for a second decline, similar to what we are now experiencing. The selling, the dirge of selling, is scary, and the fearful rule on the street this evening. The averages are down big at this point, we were oversold days ago and now we are worse.

One might think this is it. This is the big flush.... It is all downhill from here.

Thats why tonight's Meme Watch is Pain. The state of pain that the news, your broker, your portfolio, and pretty much anyone who is following the market wants you to reflect. Down here is where pain is produced. We need pain to ensure that stock changes hands and builds a base to move higher. We had no pain at all up until a day ago. Now we have real pain and those who are weak will capitulate. This is why this is NOT the big flush, but the forced rush downward in order to coil the spring.

The reason I want to highlight this very prevalent meme should be obvious. You buy when there is blood in the streets and you sell when euphoria is highest. I believe that the markets are beginning to pay their final penance for the stellar year they printed last year. Yes, I believe that when the pain is this intense, you force yourself to buy.

Here are my catalysts, one by one:

China - Everyone thinks that the government there is going to slam the brakes on the growth, forcing Asia into a recession. Just like all the other one day wonders that the news produces, this theme is being over reacted to. We now have PD and AA selling down huge (talk about pain), and all for what? A promise from a previously inept government to reign in the overwhelming forces of capitalism? No way. I'm sticking with my raw materials focus which at this point is a large part of my PF.

The 10 Year - 4.52 makes me smile. Id like to see it move higher but I really want the sell off in bonds to take a breather for a minute. In the grand scheme of things, we are going to 5 on the 10 year by year end, but I would like to see the bond market sell off more orderly. I'm still on the sidelines here. This erratic move higher is also spooking the markets something fierce.

Earnings - I really don't know what to make of this. By all accounts, earnings were out of the park outrageously great. Yet we have this continued selloff. This brutal, unrelenting selloff. My confusion is not why this is happening ("sell the news"), but how to price these great quarters and guidance into a market that cant keep a bottom. I believe that this is going to ultimately be a catalyst higher if we can mount an upward move any time soon. Let me tell ya though, the economy is back big.

Trading Track - Range Bound starting to move to upside

The PFs are pretty stable in here. I have a raw material, advertising, cable/entertainment, tech, mix going on and the current action keeps it pretty steady in the middle. I'm looking for an upside break past earnings on economic news that further supports what we are seeing in earnings. I feel like everyone is looking at the run we had in the beginning of 2004 and saying that we priced great earnings in. They seem to forget the slow painful Naz selloff, but that's okay.

- Index - Still holding the Q long trying to get out at the 2080 level. No Diamonds or IShares positions.
- Individual Stock Highlights - Not much trading action. Waiting for my big PD bet to start moving higher on realization of the shortage in copper. My HAL position is finally rocketing higher. People need to realize that HAL earns their money the hard way and is a great American institution. Can't figure out the DD position. 25% increase in earnings and they sell it off. Not like they ran it up to high to begin with.
- Bonds - Unwinding the inverse floaters....Moving some of the principal into the 10 year above 4.50 (still waiting). Sniffing around for good Muni yields.

Meme Watch - Inflation

I like to watch "memes" work their way through the media. A "meme" is a fairly recent phenomenon. As far as I can tell, a "meme" is a general ideal or theme prevalent in the current news cycle. Ya know how sometimes it just seems like all the media is talking about the same thing? That's a meme. Some of them impact that markets, and some of them don't.

One current meme I'm tracking is the Inflation meme. This is the story that takes a look at isolated numbers and attempts to show that Inflation is in danger of getting out of control. This is a very new meme for our economy since only months ago the Fed regarded Inflation risks as equal to Deflation risks. However this meme has found it's way into the psyche of the stock trader's head and the talking head alike. Why would we be getting the best earnings reports in years, yet have the stock market seem downright uninterested? The Inflation meme.

Now I've been on what seems to have been a never ending search for inflation for the last two years and I feel very comfortable in reporting that there IS core inflation going on (raw materials, hard goods, et al). However the real measure of inflation, the cost of money, is still quite low and likely to move slowly up the inflation scale. Imagine a big jumbo airliner taking off at super slow motion. So the truth is that inflation is coming, but it is coming at us slowly giving us enough time to reposition and prepare.

The moral of this meme? Get ready to get ready, and be forewarned, but don't jump off a cliff.

Trading Track - Current Market Strategy

Trading Track is going to be a new ethi-Letter feature. It is a quick, memo-style analysis of current trading strategies I'm employing broken up by Index, Individual Stock, and Bond plays. Kind of like a quick temperature of my trading activity.

1. Index - Long QQQ Looking to bail on some at 2080 Naz
2. Individual Stock - Picked up a bunch of PD at 68...Halved my cost basis. Caught a 1.75 updraft the next day. Went deeper on CHTR, waiting for convertible refunding to wash out the shorts and go higher. FRX is disappointing after a similar low end double and lost almost 3 points, not sure I want in anymore. Holding over 2000 IACI on a breakout yesterday on the Amazon numbers, looking for big upside here.
3. Bonds - Shut down and not doing anything. Waiting to see where interest rates shake out over the near term (Oct). Have a large stake of Inverse Floaters (CMOs) that I want to let unwind for a while. Not too worried about Rates getting out of control since we have no reason to believe that things wont be as orderly on the way up as they were on the way down. This says my floaters can unwind fully just in time to turn over some refunding next year and go straight into 10 year Munis.

Taking a victory lap...

Yesterday the Dow, Naz, and S&P blew the doors off. Huge gains across the board...2, 3 percent in some cases. This is the moment when buying at the bleakest possible moment pays off and you watch your hard work pay off. I sometimes think of this exercise as the "price" I pay to actively trade the market. The act of overcoming fear and doubling up your position on a stock that is already down 10 points (Phelps Dodge for me, Alcoa for others yesterday). Having enough courage and conviction to hold everything all the way through a down turn. Wondering, "Does the market have a bottom close to where I've made this huge bet?".

But then a day like yesterday happens. You feel the palpable turning of the tide and realize that you just paid your price and now you can take your profits.

Looking for a big follow through today to put us on a path up. Interest rates seem to have worked their way through the news "meme" cycle and we are now left with a slew of outstanding earnings reports to propel the market for a bit. I'm hoping for a couple days of upside before we try to work anything off. I still think we have one more big down turn to go before we go for Dow 11,000.

FUD - Fear, Uncertainty, and Doubt

When I hear someone say "FUD", cash registers ring in my head. Never has there been a better motivator to separate you from your cash. If you are going to trade the market, you have to resist FUD. Youhave to reject it completely. If your trading thesis has been established, and over the course of the day the market takes you into never-never land, you resist FUD impulses. If every economic indicator points to recovery, but the jobs number wont budge, you resist FUD impulses and buy......and when the Fed Gov starts talking and the weak hands start wringing.....you go on vacation...completely rejecting FUD.

Right now is the time to be looking at this market for the earnings growth, the snappy balance sheets, and most importantly the "buzz". Will the Fed raise rates sooner than later? I say Yes. Will the markets hate this idea...absolutely. Will the weak hands sell off, creating an opportunitiy? As sure as the sun will shine. I say "Step up and participate in the market here. You are buying the begining of a recovery and historically that has been a great time to either buy and hold OR trade."

Living with the weak and feeble.

Man, never is it more evident that weakness and fear rules the markets than when Mr. Greenspan speaks. Today was a doozy. The guy just hints at the fact that interest rates could go up without much pain and the markets sell off in a panic. The logic here is that higher interest rates are bad for stocks.

What all the weak-willed, moral relativists are forgetting is that we are currently sitting at historically low interest rate levels! The Fed could raise the Fed Funds rate almost two whole points (they tend to do things in quarters or half points) and only be at even when it comes to historic rate levels. So why the sell off if the boys move the FF rate a half point in June? Why? Fear, and weak hands.

Now is the time to be buying.....we have a long way to go once everyone wakes up and realizes that we are merely at the beginning of a glorious US expansion. So go ahead sucker...sell that stock....Im waiting over here to buy it cheap and sell it back to you 20% higher when you get over your lack of rationality.

Home on the range.

I hate range bound markets. I don't like the risk/reward of trying to time a range, and when you are wrong, you wind up giving back any profits you made from calling the range correctly.

Today I decided to hang out a bit before I posted to see if anything different or significant would happen. Not a thing. Pretty much all day we bashed around the range. You know...The range between Naz 1980 and 2080? I'm a bit hard pressed to do anything until we get a confirmation of an upward or downward bias. So far I don't know anyone who has been able to call this correctly.

Which leads me to interest rates. Some would say that the reason we have a range bound market is because no one is sure what the impact of higher interest rates will have on the market. This is the key reason why I'm buying dips and special situations right now. Everyone knows the answer is that rate movement under 3 points on the Fed Number only gets us back to normal rates! This is a fact historically, and we have no reason to believe that this will not occur now.

Therefore we need to be buying. Once everyone wakes up and realizes that we can own stocks as the Fed tightens we will go higher. Lower would be an insult to anyone's sense of historical relevance or accuracy.

On Vacation

Hello Readers!

Im on vacation this week and consequently will not be posting about the market. Please return here next Monday for more continued market commentary.

Still short..But for how long?

I'm still hanging on to my QQQ short into earnings. We had a nasty downturn last night post market. Alcoa, the first of the Dow components to report, reported a good quarter but said that they would not see the big jump in earnings (due to hyper-increased demand for aluminum) until Q2. This got the grumpy traders upset and they sold it off in the aftermarket. That will most definitely overhang the market today and we will probably go lower.

Good! I need to cram more dollars in, but it is important to note what is going on here. WHEN IS THE LAST TIME ANYONE WAS THIS CONCERNED WITH ALCOA!!?? I remember a time when Cisco would garner earnings attention, or perhaps Intel, but Alcoa? I think some folks want Alcoa to start swinging like a high beta tech name, and that just aint gonna happen folks. A 64 cent move in Alcoa is a big move for that stock. But what do I know? I own it a point and a half higher......

I believe earnings will ultimately post a great quarter. There will be more winners than losers, but make no mistake, you have to not only pick the winners, but do it at the right time due to the range bound nature of the market here. Right now I'm liking EMC for earnings. Guys like me have been buying this stock for weeks now and taking huge amounts of pain with no upside reward. If they post a great number, then I feel like the vacuum that has been created by the downside pressure will fill and we will go higher. I'm going to try to buy more under 13.

The Media is Frequently Wrong...

Hey I think it is important to note that as someone who follows markets closely, I see huge errors occurring in the media outlets who report business news. More on that in a moment......

Those of you who got last night's dispatch know that I nailed this downward turn on the nose. That, by the way, was luck with a little bit of "feel". Either way, we aren't done going down. I think we will see pressure well into earnings season. Where the market will drift lower, and begin the stair step that I really want to see to be a buyer of more positions higher. Since my trading discipline wont allow me to buy too far above my cost basis, chasing prices is not something I do lightly.

That said.....I feel like many of you who email me after listening to the news need to consider that the news HAS to write about something. When you listen to the radio "post market" and you hear an announcer saying things like "The Dow went lower as traders feared terrorism, and signs that the economy isn't as strong as they may have considered.". It is a subjective opinion. There is no official government or exchange office that universally tells us why the market did what it did.

What REALLY cracks me up is watching people like Tom Brokaw tell me about what happened in the market. It really helps me see throughout he hype that the major media outlets pump our way. He (or any other talking head) stands there and tells me that the economy is worse than traders thought. He does this in a very "matter of fact" way and almost assumes the posture that he seems to know something that we don't know. It kind of puts things in perspective for me when it comes to other news items. Its an act....He is trying to be Walter Cronkite even if he has to insert things that will intentionally scare you into listening. Folks we have a con-artist come into our living rooms every night and that is the evening news anchor.

Man, I hate the way the media dumb things down for Americans. They give us not credit and assume we just lap it up. I say revolt!! Make your own decisions and don't forget to put your money where you mouth is in the markets.....It is a real and legitimate way to capitalize on those who actually believe that BS the media feed them.

Gettin' on tha good foot....

Okay...That's enough. I think the market is topping here for a bit and needs a rest. We just jetted out of the mire that was a couple of weeks ago and we need to start that stair step action that got us up the number all last year. Our tell, the ten year is playing out correctly for us, but I think that this is where I get off watching the 10 year as a tell to the overall market. Feels like the fear trade has unwound enough to create momentum and it is no longer needed. Look for the 10 year to keep going though. We are hopefully, gleefully on our way to 5.

I took a short on the QQQ this afternoon and will continue doing this until we get a small correction. I anticipate that we will see some shake-outs near term and starting to build a short position here doesn't look too dangerous. For maybe 2.5 to 3 percent. Also bailed out of BP today after getting a 10% gain in a week on it. I actually bought it for the dividend, but given that, how can you ignore 10%? I feel a bit bad about it.....Mostly since I feel unfulfilled when I don't work a position to it's limits. But you gotta stay true to your own trading rules.

Jobs Number Confirms Thesis

308,000 new jobs.....Ill bet Bush has collapsed with joy. Not to mention the fact that he is now NOT going to create 0 net jobs during his term....

What a huge number this is. It tells me that our preserverance and attention to our vision has paid off and we are indeed on the track I outlined in earlier posts. This big of a number also implies that the last two horrible, stink-o numbers were indeed wrong. We even have 100,000 plus revisions of those numbers as well. Needless to say this drastically changes the bear thesis, dramatically hurts the Democrats chances of winning the election, and rewards those of us who had to sit and take the ridicule that we were dreaming about the growth going on in the economy.

10 Year to 4.5 by Year End....5 by mid 2005
Fed Raise of 3/4 point to a full point by year Year End
Stair step pattern in the Dow to 11,000 by year end.

Even a bad jobs number isn't going to shake this level of growth next month. Onward and Upward from here folks! Look at the markets today, they are not even over-reacting to the number. Nice and orderly, but moving higher. Watch for a huge short squeeze on the open. So much of a squeeze that Ill bet we squeeze all the way up to higher triggers and then go even higher!

Keepin' it real.

Ya know...I used to feel like that phrase "Keep it Real" was just a phrase that the MTV crowd was sporting this week. However I'm finding that more and more I am applying it to my trading stance.

"All the numbers are good but the job number!"
Keep it real. The evidence adds up!

"Inflation is going to consume any opportunities in the market"
Keep it real. Nothing is that absolute.

"Iraq is a quagmire and we will never recover!"
Keep it real. A US footprint in the Middle East while we are in the middle of a war on terror is appropriate and expected for security.

Every time you turn on the news and listen to the news...Keep it real and ask yourself one question. Tomorrow, will the story I'm listening to right now affect my life in any way, to any appreciable degree. Usually the answer is no. It is just the networks filling the news cycle. The markets are impacted by emotion but driven by speculation and analysis. Panic creates buying opportunities and nothing else.

So tomorrow. When everyone is over-reacting to the jobs number (up or down) remember to keep it real as to how it impacts your investments.

Is the jobs number really that bad or important when we have an evolving economy, and one of the best employment levels overall? Keep it real!