18 Mar the Daily Stock Report

The stock market took off after the 2:15pm (Eastern time) Federal Reserve announcement that they will invest $1.2 trillion (“T”) and $300 billion would be used to purchase US Treasuries starting in the next few weeks. An additional $850 billion is to be invested in mortgages, the very center of problems that brought investment and money center banks to its knees these past 5 months. This effectively lowers interest rates and mortgage rates and is a much more powerful tool that they had vs. lowering interest rates from .25% to zero.

The stocks that benefited the most were the financial stocks and especially banks, went vertical. Banking stocks that were down 3-4% in the morning closed up 8 to 22% today at the close. What was starting to be a correction that started yesterday morning now got a resurgence that could cause a little more upward movement tomorrow.

If you are disciplined with your stop losses, you should have been stopped out today (or actually yesterday) on that move up. But if you had a small position size relative to your account size and chose to manually control your stops, you are likely still short some of these banks. If that is the case, assuming your position size is small, you could ride it out this surge up against your short position.

This could possibly turn out to be a blow off top in bank stocks that most have doubled in the last 8 trading days. For aggressive traders or those with small positions relative to their total account balance with that account could “ride this out” and wait for lower prices to cover. It is still likely to profits can be made on these small short positions but those who have larger positions relative to the account balance are taking substantial risks that these bank stock short positions continue to move up for several days and erode much of the profits we have made in these the last 4 weeks.

So it is your own personal call how to handle this if you have gotten this much of a percentage loss without a stop loss of some sort activating. My own personal strategy would be to ride it out if it is a small position (less than 15% of your total account balance) and play the odds that banks cool off after this buying frenzy but these bank stocks are likely to go up first before they begin to break down. The type of trading action that is likely to happen with these banks after this type of historic action by the Federal Reserve is likely to be a slow downtrend at first followed by some fairly aggressive selling in a couple weeks of time. In other words, there will be more buoyancy in this sector for some weeks until it breaks down.

The US Government’s actions are best described as a win-win-big loss but we won’t realize the consequences until later. The analogy is that military doctors and nurses are treating war wounds of a soldier and they are trying to stop the worst bleeding first, shock , then moving on to the multiple gunshot wounds, and then blood loss. The Federal Reserve is probably working on the multiple gunshot wounds at the moment.

The insurance sector, PRU and MET were just as strong as the banking stocks today. Their concern is the same with the toxic assets of mortgage backed securities and the looming possibility that more capital reserves will be needed. MET really spiked up today 21% and gives us the best possible trade in this sector. Note the insurance, financial, and banks are in the same sector and are likely to move together and may overweight your positions in financials.

Oil is finally getting the attention now and moving up as it should have. Before the peaking driving comes prices for gasoline will likely go higher and any further reductions in output or inventory supply could move oil up further.

Intermediate Trade Positions: New ideas: SKF, Proshares UltraShort Financials ETF. The price is currently $105 and by buying this ETF, you are actually short the banks and financial stocks. It is very conceivable to see this move to $160~175 a share in the coming weeks. This is an excellent idea and is worth a small position that is purchased in several orders.

Swing Trades: New Ideas: MET, Metropolitan Life was up almost 21% today and is clearly overextended. If you aren’t short the insurance group, this would be a very good idea. Look for a little higher move at the open or let the stock drop a little then see how strong of a pop there is before opening the short position. It is often a good way to gauge the strength of the stock before opening a short.

This would be an excellent stock option play, especially if MET goes higher before opening a short position with stock or long a stock option put. Consider the June 25 puts under $4.00 per contract. Give yourself plenty of time.

Day Traders/Intraday stock ideas: The drop and pop was more like a shallow drop and huge pop occurred. We are going to see very big drop and pop opportunities in insurance and banking stocks the next 2 days. As stocks move down, you should wait longer and longer before buying the bottom for a long scalp. FSLR, HUM, UNH, ICE, BLK, CME, POT, MON, MOS, AMZN, AAPL, FSLR, BIDU, USB, WFC, JPM and any high volume, high volatility stocks. Look for short scalp set-ups in ICE tomorrow.

NOTES: REPEAT: We are entering a cycle where we could be substantially on the sidelines because most of the high probability trade ideas have matured and profits been realized. The odds change as stock ideas mature. Doing nothing in the business of investing or trading is just as valid as making a move going long or short. So it looks like the odds are shifting toward being in more and more cash as we just harvested many long positions. 

REPEAT: Many of you have emailed me with questions about not having the $25,000 to do intraday trading. You can have 3 intraday trades in a 5 business day rolling period. You can have swing trades like we have been having the last 2 weeks and make a smaller amount of money, let’s say $10,000, to build up with swing trades.

Thoughts: Keep steady, calm, decisive, aggressive. Have no fear and no greed. Keep looking at what to be doing next in a calm manner. Don’t focus on the past or beat yourself up what you did or didn’t do or what you should have done. Just keep playing the next shot, which in this business your next shot could be just sitting on the sideline.

I am still expecting some sort of substantial rally in the stock market sometime this year mostly driven by the massive stimulus that has already been poured into the system plus the planned stimulus package being proposed now. Longer term though, in a couple years down the road, no doubt the taxpayer is going to have to pay for such the high debt amounts that the US government (and other countries) have taken on. So tax rates probably will rise in coming years, interest rates will very likely have to rise as inflation surfaces and likely the bear market resumes sometime down the road. But we don’t have to be stuck in a miserable cycle like most investors. With the techniques and approach to the market, we will still thrive.

If you have been uncomfortable shorting stocks, which most people are, try to learn this technique, it will be a useful tool in the coming years.

When I list several stocks from the same sector, like the housing industry for example, don’t short all of them unless you are well diversified and it represents a small percentage of your total stock account (in that same account).

Thoughts: Best odds only, be decisive, aggressive, mentally flexible, stay in position size, don’t overtrade and wait a little longer to buy and wait a little longer to sell. You will find that will make you more money on your trades. Trade what you see, not what you hope for. Intermediate and swing trades are really important to have trailing stop losses set.
Don’t trade unless the setup is there for you, then use the charts to tell you when the odds are heavily in your favor. Don’t force anything to work for you, let the setups develop and then take advantage of that. Be patient. Stay in position sizes without letting any intraday trade represent no more than 10-15% of your total account value. As you build your account, your position size percentage should get smaller and smaller to lower your risk.
Have a great day and I’ll talk to you this weekend.