Thursday night the US Senate failed to pass a bailout ("loan" they call it) to the auto industry, and futures plunged, looking early on like we'd get limit down and perhaps open 300-400 points lower on the Dow. But contrary to what most people think, especially Senator Harry Reid who quipped Thursday night that he "dreaded" to see the Wall Street reaction the next day (maybe he was short?), the market direction does not depend on the news. News will move the market, but the #1 determinant as to the direction of the move is market sentiment. It's one of the hardest factors to grasp, but insight into human emotional behavior will get you a long way there.
The market is the composite of all its participants, and to personify it as a single entity you'd have to say it's an overly sensitive being with rapid-cycling manic depression, twitchy, mean, narcissistic, as capable of pumping itself up to the point of maximal hubris as falling into a vicious cycle of depression and crying jags that never seem to end. But underneath it all, undeniably human. And the human behavior I witnessed Friday was a kind of numbness. The market no longer cared about bad news; it had heard so much of it lately that it had become numb, just as an ordinary person will reach a point of indifference to pain should a cascade of terrible circumstances fall upon him.
We had early selling, but that was the weak hands (like us) getting out, the ones who had only just gotten in. (The older weak hands were either long gone or had abandoned ship during the October or November lows). The only other holders left were the strongest of the strong hands, who were waiting until zero to part with their shares, and then the most evolved set of market participant, the ones who intuited that the market had had enough and would shrug off the news. Actually, this group most likely started out flat and were the ones responsible for the early buying. When the selling momentum in stock futures stopped around midnight Thursday, that was their cue to jump in. One of the ironic aspects of the bottoming process is that it takes a provocation by the bears to elicit a bullish response, and part of that is due to the fact that the early bulls want to gauge the strength of the bears before they jump in.
As for our holdings, FLR gapped down and we sold for greater than 1R loss. The looser stop in JWN allowed us to hold on; if you followed my guidelines to a T, you'd be out as well but by the official sell-stop, we're still in it. Our other 2 holdings did well after early hiccoughs.
| Current Holdings | ||||||
|---|---|---|---|---|---|---|
| Ticker | Basis | Closing Price |
Perf. | Sell-Stop | Additional Exit Guideline | Chart |
| JWN | 13.06 | 12.66 | -3.1% | 11.25 | Consider selling on a close < 11.99 | Chart |
| MELI | 16.12 | 17.17 | +6.5% | 14.74 | N/A | Chart |
| LIHR | 16.21 | 17.04 | +5.1% | 14.88 | Consider selling on a close < 16.08 | Chart |
After Friday, I feel confident that we can rally for a bit, possibly as long as two weeks. This confidence translates to higher risk per trade and looser sell-stops, because a pullback now has a lower chance of being the start of a downward leg. We might even get a gap-and-run Monday, which I haven't seen in a long time. If instead we get a pullback, that's a potential buying opportunity. It's not part of this system, but on such a pullback, consider buying index calls or adding to the stake in MELI. Always minding your risk as anything can happen, but allowing a bit more to be risked given that circumstances appear to have changed for the better.
| Ticker | Entry | Exit A | Exit C | Chart |
|---|---|---|---|---|
| X (US Steel) | 40.71 | 34.79 | N/A | Chart |
| GLBL (Global Industries) | 3.82 | 3.24 | N/A | Chart |
| UDN (Ultrashort Dollar Fund) | 26.18 | 25.62 | N/A | Chart |
| BIDU (Baidu) | 121.01 | 106.99 | N/A | Chart |
| CHS (Chico's FAS) | 3.72 | 3.04 | N/A | Chart |
Please refer to "How To Trade The Ideas" (right-hand side) to read this table.
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