Tuesday, January 20, 2009

December low violated on Inauguration Day

In the 1970's Forbes columnist and former Wall Street trader Lucien Hooper came up with "The December low" indicator as a statistic now commonly watched in the Stock Trader's Almanac. Hooper believed that "the January indicator" was not enough in predicting how the markets would trend in the coming year.

Hooper discovered that if the Dow Jones Industrial Average closed below the lowest December close at any point in the first quarter of the following year, the Dow would continue to decline on average another 10% from the point the Dow breaks the December low. Hooper's statistic has worked in every instance except two (1996 and 2006) since 1952.

With the December closing low of the Dow at 8149.09 and the S&P 500 at 816.21 on Dec 1, today's 5% declines on inauguration day of all days puts both averages (DJIA 7946.22 and SPX 816.21) in danger. While in 13 of the 27 cases, the averages would rebound to finish positive for the year, it feels like there needs to be more pain before the markets can begin the healing process, notwithstanding the United Kingdom's request for a second bailout for banks and rumors that the entire banking system of the UK is insolvent.

YTD +.4%

Monday, January 12, 2009

Last week's sectors in the news

Educational stocks such as APOL and STRA were winners last week when APOL reported earnings ten cents above street estimates.

Losers were Retailers when only WMT reported a same stores gain in December (+1.2% year over year) while everyone else reported declines.

Insurance companies are taking a hit today as AET has lowered earnings guidance going forward.

LEN was in the news last Fri when a rumor floated on the blogs that they might be an indirect Ponzi scheme given their financial condition is considered the weakest of the homebuilders.

Sunday, January 11, 2009

One week into 2009, the averages go from green to red

The January effect of low priced stocks rising from Dec 30 through Jan 5 was in full swing as the averages climbed nearly 5% over four days through January 5 before ADP announced before the bell on January 7 that payroll numbers decreased 693k from the previous month. When the Department of Labor came out with their own number of -520k on Friday, Jan 9th, pretty much everyone who bought in the last four days unloaded everything turning the new year's 5% gain in the QQQQ to just over 1.2%. All the other indexes are now red for the year with the financials once again the worst sector down 7.6% just nine days into 2009.

While the big winners to start the year were coal (JOYG, PCX), casinos (BYD, LVS) and energy stocks; they all have retraced almost all of those gains in the past three days.


We're up only .4% ytd because we missed most of the gains but fortunately missed most of the losses as we've made two small trades with very small share sizes.

When you're in markets that are not trending as well as Oct 2008, trading smaller sizes allows you to still be in the game and forces you to watch the markets daily. We're in an environment were saying you are going to make 13% for the year is simply ludicrous. If you pay attention daily, you could make 5% or you could make 25% by the time 12/31/09 arrives. Risk management on every trade will allow you to maximize each trade so that any losses do not materially hurt your account balance. Because once your account hits zero, its game over.

When my nephew or niece gets to be around 21, if they start showing aptitude for it, I would probably want them to be aware of the index futures markets, specifically the ES (S&P 500), the YM (Russell 2000), and NQ (Nasdaq). For example, at the close on Jan 9, the cash market for the SPX at 890.35. Recently, I've been paying attention to how my streamer automatically calculates resistance and support levels or R1, R2, S1, S2. These are updated daily and approximate how a program trader would do at one of the market makers. The point is to scale out of part of a position if it is going in your favor to 1) lock in a guaranteed profit if the position reverses and 2) to allow the remaining position to ride a potential new trend.

Now its important to think of both scenarios so that you make an objective decision. We know the T2108 indicator on tradestation is still at a high 78% so from that perspective the lean is towards a move towards S1 just below 880. It probably could try to hold there before dropping to the 860 level which is S2.

On the opposite scenario, we could gap up to 899 or R1, pullback to 880 or S1, then go back up near the high from Jan 6 or around 925.

Confusing isn't it. When in doubt, stay in cash. But should something show up on an intraday scan, be confident in your analysis before the potential profitable trade disappears when everyone else starts to see what you're seeing (the self-fulfilling prophecy).

Results for 2008, Why the Barrons Roundtable is no longer valid, and Who's Managing Your Money

So the markets were in a tight range from Dec 1 - Dec 29 in the indexes, until a 5% gain on the last two days of 2008 (Dec 30-31) cut the closing losses for the indexes to 1933 levels.
The best of the indexes was the Russell 2000 down only 35%. The S&P 500 was down 38%, the Nasdaq down 42%, and the worst sector was the financials down 56%.

Fortunately we were up 7.1% but that isn't the point. The point is you should not let anyone except YOU manage your money. There are millions of Americans who watched years of wealth disappear in the span of six months and it was all avoidable. The most any of them should have lost was 17%. If the market was not a wakeup call for people to manage their own money, I'm not sure what it will take in the markets to convince them that they do not need the so-called experts telling them where to invest their money. Even in the best case scenario, a 35% loss will take almost ten years to recover from and that's assuming the investor has nine consecutive years of decent single digit percentage gains.

Fred Hickey from the Barron's Roundtable is now the only one I "read" and I would still take it with a dose of skepticism since if investing were easy, we would all by retired. It's pretty astonishing that the panel of "investment experts" had the following performance in 2008:

Fred Hickey +22% (shorted GOOG and RIMM at highs)
Oscar Schafer -13%
Felix Zulauf -18% (right about Gold, up 5%, but other picks fell)
Abby Joseph Cohen -18% (always been wrong for eight straight years)
Bill Gross -33% (the so-called bond guru wanted investors to buy Ford and GM corporate bonds, guess he was too busy selling them to realize they might be worth zero).
Meryl Witmer -33% (her one London pick FKI was up 56% but the other picks doomed)
Mario Gabelli -36% (he has always loved media but this has to hurt one's credibility)
Marc Faber -38% (the irony, he was short China but picked the wrong vehicles to implement his idea, his short FXI, and long FXP imploded on him because the instruments didn't trend in the intended direction)
Archie McAlister -62% (and why is he here, probably because they couldn't convince Peter Lynch to come back)
Art Samberg -63% (there is such a thing as being out of touch, and in this instance, this wins the last place towel)

Mental note, leveraged ETFs by ProShares and Direxion are great trading vehicles, but do not think for a second that you can hold these positions for a full year because the leverage will eat up any profits and potentially shift you into a loss situation.

Now if the above table does not convince you that YOU should be the only one to manage your money then you might as well not read any more of these posts.

Making money means planning for income taxes

We'll talk about the markets in our next post. When you either have your first job or income producing business, you must plan for income taxes. In a business setting, most states require payment of estimated taxes on sales on a monthly basis. The money is due between the 16th and 20th of the month and they don't accept excuses for late filings.

When you get your first job, if your employer asks you to fill out a W-4 withholding form, you usually want to claim "2 exemptions" on the federal form AND "2 exemptions" on the state form if you reside in one of the 43 states that has a state income tax. The reason for "2 exemptions" because you are likely single when you have your first job and you want to make sure that you withhold just enough to comply with the laws but no so much that you get a refund. When you hear about your friends getting big four figure refund checks every year they are giving the government an interest free loan on their money.

By filing "2 exemptions" on both federal and state, the most common scenario is that you will owe a small amount of money both the federal and state governments every April 15th. If you don't have any capital gains from stock transactions, you want to make sure that your withholding payments equal 90% of your estimated total taxes.

If this all sounds confusing, it's actually very easy. When you get your first paycheck, if you work a standard 40 hour week you can take the amounts listed on each line and multiply by the number of pay periods you are paid by this company. Then you can pull up the income tax tables on the irs.gov or the local state department of revenue and do a quick calc on whether you might pay too much or too little in taxes.

If this all sounds confusing, you can always give me a call, but there is TurboTax and I'm sure by the time you are reading this, the calc is probably available as freeware over the internet.

Because I had a big capital gain in 2007, I was probably subject to estimated tax in 2008, so I had to make estimated payments on 4/15/08, 6/15/08, 9/15/08, and 1/15/09. Because my income fluctuates depending on how I do in the markets, I made very small payments for the first three dates otherwise I would have ended up overpaying in taxes. However, the past three months have been pretty good, so I have to up the final payment a little to make sure that 1) all my withholding payments from my job plus 2) the four estimated tax payments on 4/15, 6/15, 9/15, and 1/15 total 90% of the tax calculated for the entire calendar year. The other wrinkle is that the state I reside in, the remaining amount owed must be less than $200. So even if I pay 90% of the estimated tax liability since I won't know the final numbers until all my sources mail their 1099 forms on January 31 and it arrives around the first week of February, the amount owed on 4/15 must be less than $200 for the state I reside in; otherwise the state will charge an underpayment penalty. The federal form is more conservative as all they care is 90% paid regardless of the final 10% is over $200.

Estimated taxes only occur when you owe more than $1000 on 4/15 or if you expect that your withholdings are less than 90% of the final bill. The first year it happens, you usually get a free pass, but the government expects you to start paying estimated taxes. So let's say you owe at least $1000 in 2007 and the amount is due 4/15/08. Well you also have may have to send two additional checks to the state and federal government on 4/15, 6/15, 9/15, and 1/15/09 because that is the way the law is written.

Tax law is not as complicated as your friends want to make it. If you are as responsible with your money as your parents, you have the ability to manage your money as wisely as them. All you have to learn is adding a few extra payments to the government when you are making money.