The Stock Surfer

Buying Despair

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Today I wanted to sell everything and go very short. Sure, I regret not buying and holding the Ultrashort Financial ETF (SKF) at 100 (I'd have an 80% gain right now). In hindsight, this all seems quite obvious. But now is the time to look ahead.

In general, I don't recommend buying on the way down. However, sometimes there are opportunities where risk/reward should be considered. These opportunities should be played with money one can afford to lose, or at least take a small hit on.

I am not crazy enough to buy Fannie Mae (FNM) or Lehman Brothers (LEH) here. But I am crazy enough to buy some biotech on this dip. Elan (ELN) is down 4% today, and Celgene (CELG) is down 2.5%. They are in strong uptrends, and this is a dip to buy. I'm also crazy enough to look at a credit card company, like Visa (V). In times like these, people need the plastic. Visa has been finding support around 75. Finally, check out THQ (THQI)--trading up today after hitting near its 52-week low. Of course, I'm hedging these longs with the Ultrashort S&P 500 (SDS).

Look, I'm a bear over the next year, or two, or three. I think we'll see Dow 9,999. I think we'll see bank failures. I also think we'll see bear market rallies and continued volatility. At some point, sellers will be exhausted and value players will step in.

I highly recommend reading this article by Jeff Saut of Raymond James, courtesy of Minyanville. For those that won't, here's his conclusion (and he's been remarkably correct most of the year).

The call for this week: I began this week's report with a quote from the Wall Street Journal: "The nerves mean not panicking or getting swayed by fear, at the bottom, or greed, at the top." Last November, my firm wrote about the Dow Theory "sell signal" when prices were high yet participants wanted to "buy." Now we're writing about the Dow Theory downside non-confirmation; prices are low, yet participants want to let stocks "go" (sell stocks).

Meanwhile, it's session 33 in the "selling stampede"; my firm's proprietary oversold indicator is more oversold than it was at the March 2003 "low" (we were bullish there as well); the spread between Lowry's Buying Power Index (demand) and Lowry's Selling Pressure Index (supply) is the widest in the 75-year history of Lowry's (indicating that stocks are severely oversold); corporate insiders' selling is at rock-bottom lows; and I'm seeing numerous indices not confirming the Dow Jones Industrial's "downside dive."

It's not that I'm turning aggressively bullish, but I think that, unless the markets are in "crash mode," it's time to consider a corrective stock market rally. B.J. Thomas is warming up the song "Raindrops" in the wings.