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Saturday, June 11, 2005

This Still Is Year 5 of the Decade

The latest McClellan Market Report (available on 21st Century Alert site) reminds that it is still a year ending with 5. I think most of you have have read that years ending in 5 are always up years. Almost every market analyst wrote at least once about this topic in the beginning of 2005. But now, no one is talking about it anymore. As all major indices are below January 2005 values, it may be a reasonable idea to play on this "historical martkets law".

This Still Is Year 5 of the Decade
The McClellan Market Report

Prepared After the Market Close, June 9, 2005
Still, it is hard to argue with a string of anything that has been working 100% of the time since 1885, and which also shows signs of relevance in European stock market data going as far back as the late 1700s, according to Larry Williams.

As contrarians, we are somewhat heartened to know that others have lost track or lost faith in this phenomenon; so much the better for us.

Most people have forgotten about the “year 5 phenomenon”, which is good news for those of us who still remember that the year 5 in every decade tends to be an up year. That means a DJIA close above 10783 this December, or better, and some good times along the way as prices work their way up to fulfill their year 5 destiny.
Read further:
21st Century Alert: The McClellan Market Report: This Still Is Year 5 of the Decade (in PDF format, paid subscription required)

Stop Loss Q&A

There is a Stop Loss Q&A article on Hard Right Edge site. They point out some common mistakes a lot of traders do when they set stops.

Trading Tactics
Stop Loss Q&A
Hard Right Edge

Over time, carefully chosen exits are more important than great entries. You don't believe me? Just ask all those folks who bought tech stocks in the late 1990s.

If a stock is set to gap through your stop loss when it opens, do you sell it immediately or wait for a bounce? There's really no right answer. I usually pull my stop and watch the first few minutes of trading. If the market reverses, I try to close out on the bounce to a common retracement level.

Some midday panic situations are global, while others are sudden. Most times, my preferred fire drill is to exit first and ask questions later. Sometimes I'll see the futures go crazy and not know why. They may not affect my individual positions at the time, but I'll often exit everything until I can find out what happened. I still remember the futures going crazy on Sept. 11, 2001. There was only a few minutes to jump ship before the market was shut down for days.

But the nature of price mechanics suggests that after an initial rally, a stock will pull back to test the original breakout level. Train yourself to avoid breakout entries and instead trade pullback entries.

Q: Should I lift my stop-loss when I know the stock will gap against my position when it opens?
A: When there's news that could affect the stock, I pull the stop loss and keep the position through the open. Then I try to hold for the first 10 to 15 minutes to see if it reverses or runs. If the stock starts to run or breaks a large support-resistance level, I get out immediately. The strategy can lead to a larger loss, but it's a tradeoff, because the gap prints the high or low for the day more than 70% of the time.

Get more aggressive as the stock approaches your reward target. Shift your strategy after the price passes 75% of the distance between your entry and intended exit. At that point, there's no sense risking a bundle in order to make a few pennies. Move the stop in close so any small reversal takes you out of the trade.

Stop-running or stop-gunning (both terms are used) occurs when a price is pushed through support or resistance in order to trigger the stops that are hiding there. After the stop supply is exhausted, the market bounces back in the other direction, usually winding up where it was before the exercise began.

I never use a stop limit on anything. It's too easy for the stock to go right through your price, not get filled, and trigger a deeper loss. When you want out, you want out.
Read further:
Hard Right Edge: Trading Tactics: Stop Loss Q&A

Friday, June 10, 2005

Weekly Wrap

Weekly Wrap
Briefing.com
Friday, June 10, 2005 17:55 ET
It was a mixed week. The Dow and S&P rose fractionally while the Nasdaq fell 0.4%.

The biggest events of the week were two speeches by Federal Reserve Chairman Greenspan and mid-quarter updates from Texas Instruments and Intel. Although all of these were bullish, they provided little boost to the overall market.

The other good news this week came from upbeat mid-quarter reports from semiconductor companies Texas Instruments and Intel.

There are also some big economic reports scheduled next week as well. PPI is due on Tuesday, and CPI on Wednesday. The core rate on each will be closely watched for inflation trends.
Read further:
Briefing: After-Hours Report Archive (paid subscription required)

Interview: Jim Rogers, co-founder of Quantum Fund

TradingMarkets has publish an interview with Jim Rogers. He became a Wall Street legend when he and George Soros founded the Quantum Fund. Nowadays, he is trading commodities.

The Big Saturday Interview
By Jim Rogers
TradingMarkets.com
January 21, 2005 5:00 PM ET
The following is an interview done by Dave Goodboy in conjunction with RealWorldTrading.com.

Jim started with humble beginnings and became one of the top money managers of all time.

Jim started in the markets in 1968 with just $600.00. In 1973, he was fortunate enough to meet George Soros with whom he started the Quantum Fund. Jim was the analyst at the fund with George being the trader. This partnership proved to be a super success with gains approaching 4000% while the SP 500 gained a measly 50%
His passion for investing has led to the creation of “The Rogers International Commodities Index” and matching fund. This fund has had the best performance record of any fund, regardless of class, over the last several years with returns approaching 170 %.

Jim: If I am correct, we are in one of many periodic bull markets in commodities and it is going to last another ten to twenty years and people should be aware of it.

Dave: How much capital do you have in your fund right now?
Jim: Several hundred million dollars.

Jim: We are up about 170% since 1998. It has outperformed everything in the world, every index in any asset class.

Jim: I would abolish the income tax. We don’t need the IRS and we don’t need an income tax. We should have a consumption tax. This would save billions of dollars on bureaucrats, tax lawyers, accountants.

Read further:
TradingMarkets: The Big Saturday Interview

Update 2: Live Action: Internet Initiative Japan Inc (IIJI) calls

IIJI just made new day highs! I could get about 20% profit at the moment.

What went wrong? Maybe I was too tight with my stop (exactly on the resistance), I think I should have left some cents for "turn around area". I still have a lot to learn about stops. I'll do some research during weekend and you'll see some posts about setting stop levels. OK, I think there is nothing more to write about IIJI today. Sometimes things just don't go as I would like to.

See also:
Update: Live Action: Internet Initiative Japan Inc (IIJI) calls
Live Action: Internet Initiative Japan Inc (IIJI) calls

Update: Live Action: Internet Initiative Japan Inc (IIJI) calls

IIJI fell below $11.28, which was my stop level at the moment and I sold my calls with $1.60. I had bought them with the same price, so no profit from this trade. One thing, I don't like about options, is wide spread (IIJI June $10 options have about 8-15% spread).

I am not too happy that the stop was executed, because I had a great possibility to sell these options with at least $1.80 or even $1.90 a little earlier. I was too greedy again. Actually, I still think, IIJI has a great change moving back towards day highs ($11.59), but I am not going to buy these calls back with $1.80 (the ask price currently), it just wouldn't leave much space for possible profit.

See also:
Live Action: Internet Initiative Japan Inc (IIJI) calls

Live Action: Internet Initiative Japan Inc (IIJI) calls

I bought Internet Initiative Japan Inc (IIJI) June $10 calls with $1.60 as IIJI breaks technical resistance today.

Note that this is not a recommendation, but just an entry of my trading diary!

Big Mover: Streicher Mobile Fueling Inc (FUEL)

Streicher Mobile Fueling Inc (FUEL) has been one of the biggest movers on the market during the last 2 days. I think we won't see such a high jumps anymore (at least for a few following days). We'll rather see it struggling between $3 and $2.50, with a higher change to break down. But anyway, it's a classical pump and dump share, so at the moment it's too risky for me to take a position.

FUEL is currently trading at $2.91 (+21.25%).

Stock Chart: Streicher Mobile Fueling (FUEL)

Update: Google (GOOG)

Trader Daily has publish an interesting post about Google (GOOG). There's a brief summary on Trader Mike's blog. The original article was posted on June 6, but it's still pretty relevant, because Google has been struggling between $300 and $280 since.

I personally consider shorting Google (or buying put options) if it hits $300 (and doesn't breake it quickly) or falls below $280 support area.

Stock Chart: Google (GOOG)
Stock courtesy of StockCharts.com.

Panics, Bubbles and Google!
June 10, 2005
Pete and I have noticed unusual (read: MASSIVE!) out-of-the-money options trading in Google, contributing to an explosive move in the underlying stock. Why is that? Because short sellers are taking major heat from shares already sold at lower prices. And a good many of those short sellers remain convinced that GOOG will see a correction, so they are not buying in their shorts. Instead, they are buying call options above the present price to limit further losses, should the search engine keep chugging higher.
Read further:
Trader Mike: Panics, Bubbles and Google!

See also:
Google (GOOG)

Brokers' stock research revisited

Brokers' stock research revisited
Seeking Alpha
June 9, 2005
The Wall Street Journal quoted an Investars.com ranking of brokerage research. Its conclusion? "Brokerage firms' own advice on when to buy and sell stocks is becoming more reliable". That's the good news. Here's the bad news:

In the Investars ranking, six out of 23 brokerage firms research recommendations trailed the S&P 500 over the past year. Just think – that means that in aggregate those research departments destroyed value in addition to their cost.
Read further:
Seeking Alpha: Brokers' stock research revisited

Thursday, June 09, 2005

Update: Live Action: Long Select Comfort Corp (SCSS)

I added a link to a conference webcast (Select Comfort Corporation at Piper Jaffray Consumer Conference 2005) which was held on June 8, 2005, 8:30 AM ET. This helps to get better fundamental understanding about SCSS. I think the future is very promising for Select Comfort.

This is mid- or long-term investment, not a day or swing trade. Anyway, I may consider closing the position sooner, if the shares should surge, but I would probably buy them back lower levels if possible.

SCSS chart:
Stock Chart: Select Comfort Corp (SCSS)

See also:
Live Action: Long Select Comfort Corp (SCSS)
Select Comfort Corporation at Piper Jaffray Consumer Conference 2005

Live Action: Long Select Comfort Corp (SCSS)

I would go long with Select Comfort Corp (SCSS) at $21.65 as it is cheap by fundamentally and also broke intraday technical resistance.

This trade is not with real money, I am just checking my trading strategy.

Update: Live Action: CDWC calls

I sold CDWC call options with $1.00, the total profit from this trade was +25% in half an hour.

See also:
Live Action: CDWC calls

Live Action: CDWC calls

I just bought CDWC June $55 calls with $0.80, expect some bounce. CDWC released May sales, which were a little disappointing. I don't see a reason why CDWC should trade so low (more than -8%).

Note that this is not a recommendation, but just an entry of my trading diary!

Update: Live Action: Long Intuit Inc (INTU)

Intuit Inc (INTU), the competitor of H&R Block (HRB) should also get positive impact on HRB good earnings.

HRB is trading at $54.12 (+6.85%) in pre-market.

Big Season for H&R Block
TheStreet.com

By TSC Staff
6/8/2005 4:52 PM EDT

For 2006, H&R Block expects to earn $4.25 to $4.65 a share, compared with the Wall Street consensus estimate of $3.99 a share.

Shares rose $3.66, or 7.2%, to $54.31 after hours.

Read further:
TheStreet: Big Season for H&R Block

See also:
Live Action: Long Intuit Inc (INTU)

Wednesday, June 08, 2005

Live Action: Long Intuit Inc (INTU)

I would buy Intuit Inc (INTU) shares at $44.39 (ask price on after hours trading at the moment). H&R Block Inc (HRB) issues earnings realese and beats analysts estimates, gives upside guidance.

This trade is not with real money, I am just checking my trading strategy.

Google (GOOG)

Google (GOOG) initiated with a Buy at Smith Barney, they raised the target to $360 (Briefing 08-Jun-05 16:09).

What's next? Google $1000?

Bankruptcy: An option for GM?

General Motors (GM) – a car maker or rather a financial institution? As its vehicles production is declining, the financial unit may also get into troubles.

Bankruptcy: An option for GM?
CNN Money
By Chris Isidore, CNN/Money senior writer
June 8, 2005: 2:57 PM EDT

NEW YORK (CNN/Money) - General Motors Corp. might be one of the richest troubled companies in history.

Its finance unit, GMAC, made $729 million in the first quarter.

The problem is that the company's key product -- its sport/utility vehicles -- are seeing declining demand that has forced the company to step up the cash-back offers needed to maintain sales, said Walter McManus, director of the Office for the Study of Automotive Transportation.

Morici said the best alternative could be to file for bankruptcy protection, and try to have a judge force health care savings and other cutbacks on the UAW. Another alternative is that only the auto operations file for bankruptcy, thus preserving the corporation's finance unit and other assets, like its horde of cash.

"The rating agencies and stock market are sending a clear message that the company will lose money for the foreseeable future and eventually go bankrupt," said Morici. "Bankruptcy is a serious option either strategically or as an eventuality."

Read further:
CNN Money: Bankruptcy: An option for GM?

Update 3: Live Action: Long Target Corp (TGT)

As Target Corp (TGT) shares fell below $53.85, the stop order was executed today at $53.84. The loss from this position was -0.54%.

See also:
Update 2: Live Action: Long Target Corp (TGT)
Live Action: Long Target Corp (TGT)

Update 2: Live Action: Biogen Idec (BIIB) puts

There was a very interesting situation with BIIB after I sold my options. Biogen is trading around $34 and it is still possible to sell these June $35 puts with $1.90 (maybe even with $1.95). Implied volatility has surged today, but usually it goes up when the shares are falling. Today, it's just the opposite way, it started to raise on intraday uptrend. I find it very strange.

See also:
Update: Live Action: Biogen Idec (BIIB) puts
Live Action: Biogen Idec (BIIB) puts

2004 Top Earning Traders

The current issue of Trader Monthly magazine contains their 2004 list of highest earning traders. They're revealing the list on their site this week.

Read further:
Trader Mike: 2004 Top Earning Traders
Trader Monthly magazine

Update: Live Action: Biogen Idec (BIIB) puts

I just sold my Biogen Idec (BIIB) puts with $1.90. I got +15.15% profit from this trade in 1 hour.

See also:
Live Action: Biogen Idec (BIIB) puts

American Capital Strategies Ltd (ACAS) intraday sell-off

American Capital Strategies Ltd (ACAS) intraday sell-off on very high volume without news taking place at the moment. This may be a trading possibility.

Live Action: Biogen Idec (BIIB) puts

I bought Biogen Idec (BIIB) June 2005 $35 puts with $1.65 as BIIB gapped down and broke 52-week low from late March at $33.85.

Note that this is not a recommendation, but just an entry of my trading diary!

Tuesday, June 07, 2005

Update: Live Action: Short Martek Biosciences Corp (MATK)

I would close the Martek Biosciences Corp (MATK) position at $36.50 in after hours trading as "MATK prelim $0.11 vs $0.11 Reuters consensus; revs $55.8 mln vs $54.85 mln Reuters consensus". The total loss of this position is -3.02%

See also:
Live Action: Short Martek Biosciences Corp (MATK)

Live Action: Short Martek Biosciences Corp (MATK)

I would short Martek Biosciences Corp (MATK) before its today's earnings release. MATK warned some weeks ago and plunged from $60 to $32.50.

Currently, MATK is trading at $35.43, this would be the price of the short position.

Anyway, I'll be ready to close the position in after hours trading in the case of positive earnings release. This is very speculative trade, but I think if MATK continues to make such a low profit of its business, it should dip to lower levels.
Another possibility would be buying June $35 puts with $2.05, but I would not do it at the moment because it would be too risky.

Stock Chart: Martek Biosciences Corp (MATK)

This trade is not with real money, I am just checking my trading strategy.

Update: Live Action: Long Integra Bank (IBNK)

I would close Integra Bank (IBNK) long position with $21.42 (current bid price on the market). Total profit from this trade +0.56%. Seems that there is not going to be that kind of jump I expected. The shares actually topped $21.82, but I did not sell at this point as I expected it to go up to $21.95.

See also:
Live Action: Long Integra Bank (IBNK)

Update 2: Live Action: Long Target Corp (TGT)

I raised my hard (market) stop for Target Corp (TGT) to $53.85.

The shares of Target Corp are currently trading at $54.71 (+1.43%). The profit from this trade is currently +1.07%. TGT shares made new highs today, so I'll still wait with closing the position.

See also:
Update 2: Live Action: Long Target Corp (TGT)
Live Action: Long Target Corp (TGT)

Live Action: Long Integra Bank (IBNK)

I would go long with Integra Bank (IBNK) at $21.30 as it dropped with high volume without news, I expect some recovery. I would set the hard stop at $20.50. I will close the position before market close today.

Briefing:
"Integra Bank: Spoke to representative of IBNK who says they are not aware of anything material that would lead to sudden price decline"
This trade is not with real money, I am just checking my trading strategy.

Analysis: Buy signals for stocks

Buy signals for stocks
CNN Money
June 7, 2005: 6:08 AM EDT

NEW YORK (CNN/Money) - Stocks could get a lift at Tuesday's open from Federal Reserve Chairman Alan Greenspan saying he expects long-term interest rates to stay ow as well as from a decline in oil prices.

U.S. stock futures were up in early trading, indicating a higher opening for stocks.

Greenspan said that low long-term interest rates are not easy to explain, but not ikely to change in the immediate future. He also said the narrowing spread between ong-term and short-term rates does not necessarily signal an economic slowdown.
Read further:
CNN Money: Buy signals for stocks

Monday, June 06, 2005

Being Right vs. Making Money

Trader Mike writes in his blog how important is to place hard stops right after opening a position. He illustrates it with his recent trade and makes it very clear what could have happed if he did not set the stop on the market. I could not agree more with him.

As no trader is able to make 100% right decisions, setting stops ensure that you'll get out of the position before the loss really hurts you.

The Big Picture points out another good point – you should set the stop level before actually doing the transaction, because then you are more objective.

Being Right vs. Making Money
Trader Mike

June 04, 2005
Thankfully with that ABLE trade I got stopped out before I even knew what happened and, more important, before my loss became large. (I was short ABLE and gave back about 2% in the first couple of minutes of the day. The stock rallied about 20% in the first 45 minutes of the day.)

I'm never happy about taking losses but small losses are much easier to deal with than large ones. If I didn't take my predetermined stop just after the open yesterday I could have easily seen that trade ruining my day and probably even ruining my week.

I'm sure the average person would feel better trading a system that had a 90% win rate instead of a system that had a 40% win rate since they could be right 90% of the time. But depending on the relative size of the winning and losing trades the 40% system could be more profitable. In fact, you could be right 90% of the time and still lose money overall!

Apprenticed Investor: The Zen of Trading
The Big Picture
Original source:
The Zen of Trading
Barry Ritholtz, Apprenticed Investor
The Street.com

6/1/2005 11:37 AM EDT
Predetermine Stops Before Opening Any Position: Sign a "prenuptial agreement" with every stock you participate in: When it hits some point you have determined before you purchased it, that's it, you're out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.

The prenup means you are making the exit decision before you are in a trade – while you are still neutral and objective.
Read further:
Trader Mike: Being Right vs. Making Money
The Big Picture: Apprenticed Investor: The Zen of Trading

Update: Live Action: Eyetech Pharmaceuticals (EYET) puts

I just sold Eyetech Pharmaceuticals (EYET) puts with an average price of $1.15. The total profit from this trade 76.92% just in 1 hour.

On my real account, I hold the options over the weekend, but as I said, I purchased these with $0.65.

See also:
Live Action: Eyetech Pharmaceuticals (EYET) puts

Live Action: Eyetech Pharmaceuticals (EYET) puts

It is possible to buy EYET June $12.5 puts with $0.65. I purchased the same options with the same price some days ago. Although I had the puts, I list this trade here as a new paper trade, starting from today, because I hadn't mentioned my position before.

This trade is not with real money, I am just checking my trading strategy.

See also:
Technical Analysis: Eyetech Pharmaceuticals (EYET)

Update 4: Live Action: Google (GOOG) puts

I sold Google (GOOG) puts with an average price of $0.55. The total loss from this trade was -31.25%.

See also:
Update 3: Live Action: Google (GOOG) puts
Live Action: Google (GOOG) puts

Update 3: Live Action: Google (GOOG) puts

RBS raises Google (GOOG) target to $330 (previous was $280). They also initiated 2007 EPS estimate of $9 per share, saying "profitability of GOOG is driving the share price, not the multiple, which remains quite reasonable".

I would not say $9 per share earnings estimate for 2007 and $330 target gives a "quite reasonable" P/E.

Currently, GOOG is trading at $283 (+0.98%) on pre-market. I'll probably have to close my GOOG puts with some loss today. There is no meaning to fight against the market. I won't do the trade in the first minutes on the regular trading hours, but wait for a bit to see, which direction the shares are heading to.

See also:
Update 2: Live Action: Google (GOOG) puts
Live Action: Google (GOOG) puts