Doc's Diamonds

Taking out the trash

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In times like this, with the market nervous and sentiment poor, cash is king. When I say that I do not mean you need to run and hide in cash when the "SKY IS FALLING". What I mean is that, if you have some cash to invest, it is the absolutely best time. So, if you are setting on some cash right now in your investment accounts, be doing your homework and looking over your "wish" or "watch" lists. Look to see if a stock you like is getting cheap enough to buy.

I have been doing that and built up cash from gains in APPL, RIMM, and other high flyers to allow me to make my huge play in retail stocks. I have absolutely no intention of selling them even as they get downgraded every day. You see, I have done my homework and these stocks are priced for drops in yearly income of almost 20% or more. They have dropped like rocks and I will demonstrate in a later post why they have become extemely cheap on a valuation basis even if we assume a drop in income instead of further gains. Further, many have dropped to prices not seen since February of 2005. It took these stocks 2 1/2 years to get to the levels they were in June of 2007 and they have lost all of that in about 3 months.

However, I need more cash to take advantage of the market downturn when things stabilize a bit. Therefore, I will be selling my dogs and plan to redeploy the cash into vastly better stocks. In fact, the irony of this is that I might even rebuild my positions in my winning stocks once the carnage seems over. That is why you need to take profits, as I said in an earlier post, when you have a great run up so that you don't need to ride the whole way back down. If the market gives you an opportunity, you might rebuy great stocks at a lower level. If they do not retreat, then you simply watch your partial position keep making you money. That is always the most fun.

In this case, the market may put these stocks back on sale. We will see.

Be back soon

Doc

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Some signs things may be stabilizing

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I am seeing some soft signs that the current market hammering might be slowing down. Today we had a temporary rally in all indexes (mainly Dow) and then got shot down again. High fliers such as GOOG, APPL, and RIMM have all made exponential drops over several days and are technically oversold. The overseas markets have shown some rises and the Japan market is making a real rally comeback at the end of this day. I believe this indicates some buyers are slowly coming back into the market. Now, this may only result in a short-term technical bounce or could begin yet another end of year rally. Some market mavens are now calling for a further drop of the NAS, the S&P, and the Dow and absolutely no end of year rally. That, in my mind, is a good sign because I always like to take more chances when everyone is getting totally bearish. Even Jim Cramer is now saying "play it safe" and use "bulletproof" stocks. He might be right, but I kind of like it when Jim gets bearish. When he says buy defensive, then that is bearish for him.

I will continue to build some cash by selling losers. I will redeploy soon. Not yet however

There should be, even if we are going into a year end swoon, a technical bounce and all you "defensive" minded folks should have a better price to sell your stocks and go to cash or "safe" stocks.

For myself, I will not be selling into any technical bounce and I will hold with a diversified portfolio and add positions as I see the market stabilizing. Everyone is getting pretty scared. That fear is justified, but I will be buying into the fear and still anticipate that the year end will look better than it does now.

Doc

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A Welcome Market Gift

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Well, maybe not so nice of a gift to Jonathon Coyle, recently quoted in the strategy lab open as saying that he wanted to recoup from his worst performing stock, the QID (Ultra short NASDAQ EFT) which he originally bought in August. He was going to do that by buying another $40,000 of the QID no later than ths Monday. So much for timing, the QID got hammered today only one day after he indicated he would buy it. The position might still turn out fine if we go into another slide, but it doesn't look nearly as good now. My reason for mentioning this is certainly not to dis Mr. Coyle. What he did was like "doubling down" in Vegas when he was down. That is often a good strategy. BUT............. why do you think a better entry point for shorting is after the market has retraced nearly all of it's gains for the year? I have been burned more by this "momentum" method than I care to remember. In other words, beware of market momentum. It can turn on a dime. That is why throwing good money after bad is often futile and lends itself to poor timing. I should know. I have done it several times during this competition and have been burned every time.

As I said a little after midnight last night, the markets had shown some signs of stabilizing and many great momentum stocks were technically oversold. They were due for a bounce. If you had sold when everyone was fearful, you would have missed a golden opportunity to exit positions at a much higher level. Think if you had 300 shares of AAPL and RIMM and 50 shares of Google. You were fearful and sold all of these positions Monday after they had another frightening slide. Even if you are convinced that you need to sell them, that fear cost you thousands of dollars. If you had simply waited for the bounce today, you would have sold with about $9,269 more capital at the end of trading.

I realize that these are just perfect examples and reality is somewhere in between. However, saying that short selling makes the most sense after a rocket move downward is the same as saying that excess exhuberence makes the most sense after a rocket move upward. Neither approach is likely to make you much money. You might guess right and ride the wave (up or down) but with far greater risk. Just my thoughts.

Doc

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Year End Rally Starts Today !! (or does it)

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Here we go again. Another new recent low and another day of terrible sentiment and negativity. The credit crisis and housing crisis is REAL and not going away. The end of day drop to the depths happened again. Investor sentiment is terrible. We may (or may not) already be in a recession or moving toward one at warp speed. Jim Cramer, the permabull, is bearish again and talking all about defensive stocks and how to hide from the terrible market trends. We have competely taken out the market lows of August and there is no bottom in sight. The sky is truely falling and we must sell all now before it is too late.

You know.......... That all might be completely true. Do you know for sure? It sounds plausible. We do have a terrible financial crisis and the housing slump is far from over. It is likely to get worse. The FED seems oblivious to our plight and might not even cut rates at the December meeting. We could be headed for a new bear market and it could be a long one.

Well, if you DO know, please email me immediately so I can avoid financial ruin. However, as I have said time and time again, I DO NOT KNOW and do not pretend to know. I read and listen to financial news voraciously but find no real concensus and no real way to know the "truth".

When I read that first paragraph and see the overbought/oversold ossillators looking dramatically oversold, I THINK IT IS A GREAT TIME TO BUY. I have been saving 1/3 of my money to jump in at the right time. Is this the right time???? I certainly do not know. However, there is a strong argument that the market is terribly oversold and will rally strongly into the end of the year. Now, after that, I do not predict any necessary return to the long bull market. If we do rally, I would be very cautious if we have a long run into early 2008.

I probably was far too early with my retail stock purchases and have a price point too high to recover from effectively. However, I still believe that the retail sector is a great value right now for those willing to wait out the short term rough waves. Unfortunately, it probably will not be soon enough to save me for this game. That being said, I am not selling at this time and will add to some positions (SHLD, JCP, KSS) at this time as I go "all in". I will also add back to tech stocks (APPL, RIMM, CSCO) and add new tech positions in GOOG. I will also add some to other positions that have been hit hard in this recent sell off and look for a strong bounce into year end.

If I am wrong, my portfolio will look like world war III when this game ends. If I am right, I might salvage some level of respectability. However, if you are interested, keep looking at this portfolio after the game ends. I certainly will be. I am quite certain that the longer term view for these stocks is very positive.

Talk with ya soon.

Doc A

PS>>>>> Darn futures are looking awesome with predictions for strong upside at the opening. That just stinks as far as I am concerned because I wanted sentiment to stay terrible through tomorrow morning to let my purchases be at lower prices. However, since I cannot effectively time my purchases for the best price tomorrow, I will simply buy at prices reasonably above today's close. If they do not "hit", I think I will get another chance later in the week.

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Rally was a weak one, but I found one good sign

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I certainly do not think that today's rally gave any indication of which way we are going in this year end market. I might be right and a contrarian rally is beginning (I sure hope so, my portfolio is pretty weak right now.), but there needs to be consistent follow-through for several days before we will know. The doubt about the FED cutting rates in Dec. will probably blunt any rally before then, but only time will tell.

One thing about today's rally that was encouraging was the mid-afternoon drop started again and the market held the rally and extended it to the close. The opposite could have happened and we might have seen a total reversal with the market dropping by the close. That has been the more common pattern during this correction. If we get some follow-through later this week, things might indeed be looking up as we close out the year.

I will be adding ARO (another retailer, boy am I a glutten for punishment) and T for tomorrow's action. I did some personal research on "Black Friday" and found that ARO (Aeropostal) seemed to do very well and the lines were long and consistent. The manager said that she thought they were "up about 15% compared to last year". I also noted that the prices at ARO were much higher than in past years and the discounts really only brought the price back to where they were a year or so ago at full price. This indicates margins might not be trashed like at other retailers. Finally, they did have a pretty good third quarter and the stock has been up ever since. All of these factors make ARO a buy given it's better short-term prospects.

T is simply a great stock that got trashed in this recent pullback. I will be more than happy to buy T at the market and look for it to go up a minimum of 10-15% by year end. Dividend is pretty sweet as well.

Regards,

DocA

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Rally today a bit better. Here is what I would like to see now.

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Hi fellow SLO players,

We were able to see a little "follow-through" today as I had hoped we would see. That is a good sign for the "longs" and not such a good sign for the short sellers in this market. However, as I said when this happened the last time, if you are nervous and lack conviction that this bounce will sustain, then it is a great time to sell out at a higher price than the fear ridden Monday would have been. If you are a strongly convinced bear, than I guess this is a time to short more stocks. For me, I feel that the best approach is to pick good stocks and stay the course. I have made my "bet" and I will stick with it until I find data to support a reason to change. I will continue to add positions to use all available cash and then sell parts of these positions going forward if the rally progresses and I think we might be getting a little ahead of ourselves. Also, a fellow SLO player commented on one of my posts that this is a "bimodal" market and, therefore, as stockpickers market. I agree. I think that any year end rally will not "lift all boats" so we need to pick our stocks wisely.

I picked up more JCP yesterday simply because it was so technically oversold and is a quality company. My position in that is far too large and it is likely to still be a weaker performer in the short term even if a real year end rally is beginning. However, I do not want to sell my entire positon because I believe in the stock long term. Therefore, since it bounced today faster than the overall market because retail in general and JCP in particular was severely oversold, I will use this as an opportunity to sell 1/2 of my position to use with another stock showing better short term potential. I might be selling too early, but I want to use the capital elsewhere.

I plan to add the ARO position soon since I missed my opportunity today. I also want to add DE as an agricultural and "weak dollar" play. I know that it has been a great performer lately, but I think it is still relatively cheap from a valuation perspective. I think stocks such as DE (John Deer) will outperform in any rally because they have remained technically strong even in this recent correction.

Finally, as far as the overall market is concerned, I am hoping for some relative tranquility for the last two days of this week. Personally, I would like to see the market go down a bit and up a bit in the final two days. If volitility drops somewhat, it might be a better base for a continuing year end rally. I think that there is a fairly good chance this will happen and it would be a good sign in my view for us longs.

C Ya,

DocA

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Bets on Fed rate cut are increasing. Rally will be stalled or reversed if no rate cut now.

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Boy, I felt much better when the market was not trying to price in another Fed rate cut. If the market picks up on Bernanke's comments from tonight as leaning toward a rate cut, then there will be an additional solid rally tomorrow. That is both bad and good. As I have said before, I would have liked a few "neutral" days in a row right here. Today was as a expected. The indicies were up but the number of falling stocks on the NYSE exceeded gainers. Kind of a neutral move. Exactly according to the Doc's Diamonds plan.

If we get a large rally tomorrow, it will almost certainly be because the market is interpreting Bernanke's comments as leaning toward a rate cut. Some have speculated 50 basis points. If so, then the market is setting itself up for a fall at the Dec. 11 meeting if it doesn't get what it is expecting. I will be watching my positions closely going up to that meeting, but I will not be trading them or try to "time" this. From a "game" perspective this is probably dumb. However, I want to stay fully invested and simply readjust the positions based on individual stockpicking factors and not trying to time the market further than I already have. I still think my call to go "all in" here was a good one.

I think the evidence is building that I am right and we are moving toward a year end rally. If the Fed disappoints, the rally will be killed. If not, we should see some nice gains going forward. Please don't misinterpret my comments as saying that I believe a rate cut is the best scenerio. As dishwasher says a recession is going to happen, the only question is when. One thing to consider, however, as you contemplate this possibly happening sooner than later is that stocks do not necessarily perform badly during a recession. There is not a direct historical connection between a recession and stock market drops. It might happen but they are not directly connected. Just something to contemplate as you adjust your portfolios.

BTW, because I am hopelessly behind in this competition, I cannot afford to hedge my positions with shorts. I will need to pick stocks well and hope for the best. While fully invested, I will carry about 22 - 25 positions. Staying the course is still the best approach in my opinion.

Have a good day and happy investing,

Doc

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