July 18th

As recently as Tuesday US Equity prices had fallen to two year lows and fear of further failures in the banking group had a lot of people fearful of what even worse times lay just around the next corner. People have been getting checks from the new IndyMac Federal Bank, however banks are not clearing the checks for long periods of time. Last night, however, I was watching the 10pm news on our local CBS affiliate and the newscasters were wondering out loud if the bear market was over, after all how could such a huge move occur if the underlying weakness was still there? It's tempting to write to them, letting them know that eight of the ten largest up days in the market resulted in nothing but losses for those who bought into them since they turned out to be nothing more then bear market rallies.
American equity markets put in solid across the board performance yesterday. The S&P500 and the Nasdsaq Composite both gained 1.2% for the day and the DOW, aided by powerful moves in AXP, BAC and JPM (who's gains made up nearly half of the entire DOW move) closed with a gain of 1.8%. With investor confidence somewhat returning on the heals of oils drop of over $10 per barrel in the last few weeks volume rose on both exchanges, up 14% on the NYSE and 10% on the Nasdsasq. Volume has been running above average now on the NYSE for over a week.
The last two days I have heard with a number of people who are upset with themselves for missing this rally, or not gaining as much from it as they thought they should. Nearly everyone seems to have convinced themselves that they should have been able to stand out and catch swords without getting hurt despite most experience saying otherwise. The worry seems to be that “the bottom” is in and “I missed it”. So what!? If this is truly “the bottom” (which I doubt, but that does not mean I can not be wrong) then there are going to be plenty of stocks that go on to produce stellar gains during the course of the move higher, and not only will there be plenty of stocks moving but you will have setups that present you with a positive reward to risk payoff. Even though looking back it's “easy” to pick out the bottom and say “I should have been in”, doing so in the real world and doing so in hindsight are two different things. Now I'm seeing people who have had bad years running around like headless chickens. It's natural to want to make up the losses by chasing momentum, but sadly your most likely to do by taking this approach is make certain that your equity and self-confidence both suffer greatly. Again, just because something is going up does not mean you should buy it. Certainly you can, but I CAN jump off a tall bridge in the middle of winter if I decided to do that, but the simple fact that I can does not mean I SHOULD. Same thing goes for chasing momentum.
I have been trading since 1996, since I was 21 years old some of the countries smartest and most wealthy individuals have trusted me to manage money for them. I've been trusted with this money because I've shown good judgment (although not good spelling) over time. I follow my rules and do not put capital at risk simply to have a position on, or because I feel bad about a missed move. I treat capital preservation as the single most important objective because I know for sure that I can't make money tomorrow if I blow up today, so during difficult market periods I have problem standing aside and waiting for better opportunities. I may not be the fastest runner on the field, but I won't take a nap in the middle of the race and I always make sure I can finish the race, usually in good time. Now, many people say “Well thats all well and good for you Brandon, your “rich” and can afford to sit in cash, waiting for the market to come to you”. That's a nice way to rationalize a trading addiction or the simple fear of missing a gain, but I can assure you that I would never have gotten the chance to get rich in the first place if I did not have a willingness to get out of the markets at certain times. Over time gains need to be made, and since people pay me well they expect not just gains, but superior ones as well. The most important aspect of doing that is capital preservation and following your rules.
So where does this leave me right now? There is no denying that the gains over the last few days have been spectacular, but the move down before it was also. I will continue to watch the market very carefully for a follow through day. I'll also be watching very closely the price and volume patterns that show themselves when the market has its first pullback from this move higher. If these things line up, then I'll go into the market more aggressively and be looking at leading names such as EZPW, CIR, MMSI, AFAM, MA, JBHT and many others that look like they do. At the same time I'm a bit like Ole Jolly Saint Nick, always making my list and checking it twice. In this case, as the market has rallied I've been paying extra close attention to former leaders like RIMM, AAPL, and GOOG that have not played along with the rally. A lot of leading commodities, both the physical commodity itself and many stocks effected by the prices of them have very weak over the last few days, several of them are in my opinion putting in important intermediate and possibly long term tops.
Any questions or comments feel free to email me brandonfredrickson1@gmail.com