The recent washout has probably reached a temporary bottom or close to it, I believe.

I was expecting a bottom today on Thursday, but it looks more like the bottom was achieved Wednesday.

The following stocks have touched or reached the lower bands of the long term (upward) trend lines or channels, without totally breaking down:
INP, AAPL, AMZN, FSLR, STP, XLE, OIH, EEM

The following stocks have touched or reached the lower bands of the intermediate term (downward) trend lines or channels, and it’s not clear whether the long term trends are broken:
RIMM, GRMN, QQQQ, GOOG, FXI

All of the above stock selections are the supposedly the stronger names in this bull market. Certainly, most of the other stocks in the weakest financial, mortgage, retails, or homebuilding sectors have totally become trashed.

A bull market ends and a bear market begins when the leaders of the markets crash. Furthermore, the most speculative frothy (solar energy) stocks are the last ones to rise, and the excess must come out too.

Now the most important question right now is whether the energy stocks can continue the long term uptrends, without breaking down into an intermediate downward correction. If they can do that, mid-day yesterday was the BEST buying point. However, I do NOT believe that this correction can end without the WEEKLY (Friday’s closing) charts showing a breakdown in the non-energy/PM stocks. Therefore, I am going to conclude that the selling-into-strength (or buy for short-term trading) opportunity may be here if the stocks do turn up.

Enjoy the ride (up, hopefully) and take this precious chance to lighten up (excluding PM) if you will. This can really be the last chance before falling over the cliff.

Marc Faber, Dr. Doom, is known for his over-bearish views. However, at the recent occasion, I tend to agree with him. Here are some points taken from the the recent interview at financialsense.com.

1. Stock markets are in denial.

On a similar note, I believe housing markets have moved beyond denial phase, and into fear phase. The prevailing attitudes are stocks will do okay, while economy is not so good. This is going to be the typical attitude of clinging onto the rope of hope during the coming slide in the stock market. Denial will gradually transform into fear.

2. There has been a globally synchronized boom, and the bust will be global in nature too.

I agree with him. And therefore, I also agree with him that emerging markets will be hit harder than US stock markets. I agree with him that if given a choice, one should choose US stock markets over emerging markets. I’m not so sure whether the same extension can be applied to energy/commodity markets. However, from yesterday’s stock market behaviors, I guess he is probably right (temporarily).

3. US dollar is actually better than foreign currencies right now.

This is counter-intuitive, as I’ve blogged about this before. However, as stock markets fall, US treasury will be in high demand, and same as the US dollar. US dollar has a tendency to rise, when US stock markets fall, and vice versa. I guess that it may have to do with the international stock/currency arbitrage to produce the least amount of
variation in the values of US stock markets when priced in foreign currencies. That was the main reason that I’ve liquidated my Australian currency holding last week. Therefore, I agree with Faber with the following:

In other words, if you put a gun on my head and said, “Marc, you have to choose one currency today, for the next three months: the euro or the US dollar,” I think I would choose the US dollar. Although, I’m very negative about the US dollar in the very long run. But just for the next three months I think the dollar will hold because the current account deficit is now shrinking, the trade deficit is no longer expanding and so forth and so on; and the dollar is relatively inexpensive vis a vis the euro. Would the question be: put all your money into US dollars cash, or put all of your money in gold? As of today, that would be a very tough question because the gold market in my opinion is now somewhat overbought and could undergo easily a 10 to 20% correction.

4. Given that $US dollar may go up, it goes without saying that gold may have a short-term correction. But since I have been so bullish on gold, my brain didn’t join the two dots together. In any case however, I do think that the current rally in gold is long term in nature, and can possibly extend itself until March to even May before having a 30+% correction. But I may be wrong of course.

Good luck trading. Markets have been very unkind. Stay in cash for safety if you will.

Frugal

Sorry that I have been too busy to write about this. I have already sold all of my holdings in NAT. The coming correction will not be kind to NAT, I believe. This is the only stock that was specifically recommended by either ML or me, which I believe should be sold.

I also sold COP which was recommended by me, but I believe that it could be a mistake in selling it. The correction probably will be shallow on COP. But just in case, I’ve lightened up my energy holdings.

Most of the rest of the stocks you can probably hold. My money manager sold my holding in ADM, and it was definitely a big mistake. My recommendation in ADM still stands, even after it has risen from mid to low 30s to 45 right now.

Agriculural themes seem to be still with us, although it appears to be getting late.

I won’t be posting another message tomorrow. I hope it is still not too late to sell your NAT if you have them. Given the rich dividends in NAT, you can probably still break even.

Regards.

With silver joining on the list of new high on Monday in Asia, I expect this current rally in precious metals to continue.

It almost looks like that HUI will not have any significant pullback until much later.

For those who are not on board yet, I can only say good luck to you. Patience throughout 2006 to 2007 (almost 2 years) is finally paying off big time now. And certainly I have plenty of patience (usually too much of it).

Best luck.

I’ve sold some significant percentage of my energy holding.

I also sold a few deep-in-the-money naked call, since I’m expecting a fall in stock market in the first quarter.

Maybe I’m too scared. Or maybe I’m not scared enough. We shall see.

Holding onto almost all of my precious metal companies however.

I’ve also exchanged my AUD cash back to $US temporarily.

This year will be a roller-coaster ride.

I do intend to eventually increase my energy holdings back into about 50% of my portfolio value.

I think the next level is at 1360/1370 at S&P 500. If that level is broken, we can easily see 1200 again for the S&P500. Be careful out there. This is an extremely dangerous time. 1200 is only 14% away from yesterday’s closing.

By the way, I am recommending sells for ALL sectors except gold/silver/mining. Yes, including energy. You may want to split your sell orders into 2 parts. Sell a bunch now, and if the market does bounce back magically, then sell the rest. There is probably a max of 20% downside for energy sectors I think. If you can tolerate the ride, you could hold on to it.

So far, I have not sold enough. My plan of shorting stocks at a higher level is not panning out. I think most people won’t get the chance to sell. If S&P 500 does rally back, sell at 1450/1460 level.

Let’s see if Bernanke comes to rescue. But I doubt it seriously. He is too confident and too academic.

The one on my buy list is JOYG. I’m very tempted to buy it at 60 to 61 after missing the last big run up. If you don’t believe in gold/silver, at least you can try the gears that dig them out. This is the same reasoning with buying CSCO, while all the dot com booms. The infrastructure & gears will always be needed.

Be back tomorrow from my vacation, but maybe I won’t get the time to write a post.

Regards.

If stock market (S&P500) doesn’t produce a rally of at least 0.6% on Monday, it is highly likely that we will go down by at least 10% or even 20% from here. The right shoulder of the head-and-shoulder pattern is close to be broken. After that, you will hear lots of screaming in the coming roller-coaster ride.

If HUI pulls back somewhat, I believe you should take advantage of it. I’m bullish on gold/silver for pretty much the entire 2008. Besides energy and emerging markets which I am still in the wait-and-see mode (after a correction first), the rest of the market is pretty much junk or toxic.

I hope you all have some. As I have repeatedly asserted that this market is not to be timed, but to be invested. There is probably not a single person on Earth who can tell you that HUI will go up 11% in 2 days right after new year. But signs were there in the gold spot price.

Don’t you hate that you haven’t put enough into this sector?

Markets have spoken. Everything may go down together, but not everything will go up afterwards. Make sure you pick the winning side.

Have you ever wondered why if stocks do have a better long term performance track record than bonds, why do we even bother putting money into bonds? Have you also ever wondered that if small cap stocks have been proven to have a better long term performance, why are we even investing in large caps?

In a simple word, it’s RISK. Actually, Jeremy Siegel may be right. Investing in stocks for the long term may not be more risky because in the long term stocks do out-perform stocks. But there are obviously two problems with “long term”. First, the long term may be longer than your expected retirement horizon. Secondly only if you can ride out the bear markets successfully, you can come out winning.

What is the problem with RISK? RISK is the potential or actual amount of money or capital that you may lose from investing activities. I thought long and hard about Kelly’s criterion for investing, and why it can seldom succeed in the investing world even though it’s mathematically optimal. The answer is indeed risk. Risk must be controllable to a certain extent, or else you get out of your position before fruition.

That leads me to the three elements in investing. The three elements are yourself, the market which represents the collective opinions of everyone’s, and your reactions to the market. The biggest reason that risks do matter even though we know stocks outperform bonds in the long term is that our reactions to the market is an important part of the equation in the long term performance of our own portfolio, even though we know stocks outperform bonds in the long term. The reactions to the market prices cannot be captured from the historical studies of stocks and bonds. Without mastering our own investing emotions, we cannot become a successful investor or trader.

The market will always does it what it does, and it’s short-term efficient. It certainly doesn’t mean that the market has the correct long term opinion. Rather, it simply means that the market has not reached the prices that will be in the future. A successful investor will then try to forecast the future prices, taking advantage of the current market price, and try to control his or her risk, reactions and emotions to the market when the market does not go your way.

I don’t know anyone who can keep a straight face when his or her portfolio goes down by 50%, or even 80%. Theoretically, prices may revert back to historical norm. Practically however, very few people can ride out the necessary roller-coasters due to the emotion involved.

There have been many times that I was emotionally forced out of my positions because I took more risks than I could accept emotionally. The easiest way to control your risk tolerance (and therefore your own emotional reaction) is through a proper sizing of your positions. The more risky it is, the smaller size you should trade. That is the only way to maintain a sane trading mentality.

The second way is obviously using stop-loss order. When you think you may be wrong on a trade, just walk away. The market is about the pricing. If you are wrong, admit it.