Sunday, January 24, 2010

Duck and Cover

The market corrected about 5% the last 2 weeks and that's a significant haircut. I don't know if this will be the 10%-20% correction that's been percolating for some time, but the clock is ticking. Resistance levels have been breached and assets may be steamrolled if you are long. I needed this pull back. I've been sweating bullets as the market reached nosebleed valuations the past six months. I may sound cavalier about the losses the Ithaca Experiment portfolio has experienced since July of 2009, but this is real money we are talking about and it is a concern. After all, who likes losing money? But the question has been bandied about as to how long this correction will last. It's anybodies guess, but I'm of the belief that if the market keeps losing ground this week, it will be a domino effect for securities. This is a big week for earnings, so hang onto your hats.

Now what if you are on the long side and think the economy is in a V shaped recovery, that this 5% haircut is merely a bump in the road? Where do you find the casino stocks investors have been bidding up the last 10 months? I would look no further than Investor's Business Daily. William O'Neil has been publishing Investor's Business Daily 5 times a week since the early 1980's and is also the author of How To Make Money In Stocks among other books. He is strictly a momentum player using volume spikes and technical analysis, two techniques I don't utilize, but many do and quite successfully. The main reasons I read Investor's Business Daily is to see what IPOs are on the horizon, to monitor the hot stocks and most importantly, they have the best articles on information and medical technology bar none.

To write in depth about Investor's Business Daily would take a book, so I'll try to do the best I can with a Cliff Notes version here. Firstly, it is a newspaper geared for traders more than investors, but if you take the perspective of a long-term investor, you can find eons of stocks that you may not be aware of trading at discounts. Investor's Business Daily doesn't cover stocks under $10, so you are immediately limiting your downside because stocks under $10 are priced in that range for a reason. The newspaper also devotes a great amount of attention to foreign ADRs that trade on the New York Stock Exchange and NASDAQ. This is important because it enables you to discover securities that are easily traded and are more transparent in hot markets as opposed to going to an overseas exchange. Another nice feature of the paper is its daily listing of the hot and cold sectors in the market. Jim Cramer likes to say that 50% of a stock's movement up or down is based on its sector rotation and with Investor's Business Daily, you can either buy individual stocks in a hot sector or purchase that specific sector's corresponding ETF to take advantage of areas that are running up.

I don't read Investor's Business Daily every day, just the weekend edition because so much of the information they give is geared toward traders and it gets redundant if you are not trading every day. But in the weekend edition, they list the IBD 100, the top 100 movers in the market based on their proprietary ranking system. This ranking system includes an amalgamation of relative price strength, earnings growth, volume and profit margins. You can discover some gems in this list, but beware, most of these stocks are not for your widows and orphan fund. They run up fast and I've seen many can't miss securities get cut in half by being short on an earnings call. If you are a subscriber to Investor's Business Daily, you also have access to their Web site where you can screen for investments. I have never used the Web site, but if you are interested, they offer a two week trial for both the print and Internet version of the paper. Although I am short the market, I still read Investor's Business Daily every weekend to keep my watch lists up-to-date in anticipation of what I may decide to invest in when I jump back into long positions. Used in conjunction with Value Line makes for a very powerful investing resource.