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CREDIT CRISIS CONTINUES
I was traveling the day the Dow plunged 777 points, and was shocked when I heard about it even though I've had in mind for a while that a stock market crash is a real possibility. That was a glimpse of what could happen to the stock market if the credit markets don't stabilize. If most people are like me, there is a general lack of public understanding as to why the credit market is so important.
Simply put, many businesses rely on credit for common activities. Retail companies, for example, need to buy a lot of inventory in September and October to stock the shelves for the increased demand of the holiday season. They often use credit to do that, knowing they'll be able to pay back the loan after they sell the products. That's one example. Another would be a business that wants to expand operations to another part of the country or even overseas. Typically, they would borrow money to do so and plan to pay the loan back after their new opportunities pay off. When credit markets freeze up or become cost prohibitive, businesses suffer. Some businesses may even struggle to stay afloat. Credit is that important.
I could go into more detail, but this is a stock blog and not the Wall Street Journal. So what does this mean for stocks? The market is trying to price in whether or not the credit crisis gets solved. On Monday, the reaction to no government plan was a 777 point drop. Yesterday, the reaction to renewed hope for a plan was a 500 point pop. We're not looking at constructive buying and selling at this point, we're looking at emotion (emotion is always in the market, but more so now than usual). Volatility as measured by the VIX is now firmly above 40 and staying there. The market is oversold by most measures, but that doesn't mean we can't go down even more. Also, one could argue that even after a government plan is enacted, it may not work and it may not prevent a recession.
It's an extremely difficult investing environment because if you have any discipline in cutting losses, you are probably getting stopped out after a day or so. For this reason, I've tried to minimize risk by cutting all positions except those that I have confidence in longer term. Most of these are video game names that continue to sell off, despite solid fundamentals. I could be wrong, but I still like the prospects for companies like Activision (ATVI), Nintendo (NTDOY), and Take Two (TTWO). I'm not recommending those to anyone, but I will say this: if you are losing sleep over the stocks you're holding, you still have too much risk on the table.
GAMESTOP AND A FAT PITCH
Last week on my personal blog I mentioned that Gamestop (GME) is looking very cheap. I'm usually not one to buy extreme weakness, but I think the drop in GME is overdone and I bought a partial investment position today. I plan to lay out a more detailed case soon, but for now let me just say it's a value play.
Last week I also mentioned my Fat Pitch Account in which I'm testing out my day trading skills. A friend of mine said it should be the 3-1 Account since I'm looking for consistent base hits rather than home runs, and he has a point there but not a catchy name, so I'm sticking with Fat Pitch. Today, GME was my stock of choice, and here are the results.
DAYTRADE JOURNAL
Stock: Gamestop (GME)
Buy Details: Bought GME at 34.96. The overall market was down, but GME was up--a "green bean in a red sea", as Todd Harrison likes to say. That's a sign of demand for the stock. I had found it curious that during yesterday's big rally GME was not up. I also found it curious that GME was up despite acquiring a French video game retailer today (usually stocks are down when acquisitions are announced). All of that, including GME's ability to make an acquisition in this environment, struck me as bullish for today.
Sell Details: Sold all my GME at 35.55. There were ups and downs, but GME remained strong. I resisted the urge to get greedy and took the gain.
Profit/Loss on trade: +1.46%
Profit/Loss on account: +1.02%
Overall Profit/Loss on account (all trades): +1.53%
Note: Profit/Loss is calculated to include commissions. Since I don't always trade the entire account at once, the account P/L is different from the trade P/L. Also, there may be rounding issues.
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