I'll tell you what I told members of The Trend Rider: I had a great week. As you may or may not already know, my wife gave birth to our daughter Maya over the summer, so this was our first holiday season together as a family.
Katie's (my wife's) parents came down to Florida, and so did her sister; my sister was here as well. My baby girl's first time ripping open presents (whether she realized it or not)... I hate to say it, but I was so happy with the whole situation, and it was such a gift to have such a great feeling, that I can barely remember ANY of the material gifts that I got this year. It's a truly indescribable feeling.
Anyway, I'll keep this week's article very short. ("Applause-Applause-Applause")
Before I move further, I'd just like to take a moment of silence to remember a man who passed away 10 days ago. A man who was a great influence on America (especially in the 60s and 70s.) One who probably influenced the lives of hundreds of millions of people around the globe, and a man who brought confidence and strength to America at a time of great uncertainty. One whose leadership came about under extraordinary circumstances at an unprecedented time...
...I'm talking, of course....
about James Brown, "The Godfather of Soul."
Now, the question obviously becomes: how will this impact the stock market and your stock portfolio? Should we buy commodities, futures, stocks or bonds? Should we short rap music? (Yes.) Should we go long the oldies but goodies? (Yes.)
Sorry gang, I couldn't resist. But seriously...
Our indicators are telling us that the market is "over-bought." Duh. With each new market high, we are seeing fewer and fewer new 52-week highs, and we are also seeing a lower number of stocks on bull signals; both of which are classic characteristics of a market top (among many others that we are seeing.) However, I'm not ready to get very bearish yet because I know I'm not here to fight the trend or call the direction of the market. The market will tell us when it is time to get bearish. But you must protect yourself in these waters.
I want to give you the inside scoop on the stockbrokers and money-managers out there because I speak to a lot of them (in a way that they might not speak to you: the client.)
When I ask the typical money manager, nowadays, Wall Streeter to Wall Streeter, what they're shorting, or what they own put options on, the majority say "nothing." (Scary.) There are, of course, the few (who happen to be the smarter ones that I know) who tell me that they are hedging their long positions, and have some bearish positions. Others who are anti-hedge types are at least sitting on a nice amount of cash. But I'm telling you, most of these guys learn the same lessons over and over again.
So, if many of your "Wall Street Pro's" fall under this category, then you may have to grab the reins yourselves and be their partners (as opposed to working against them.) It doesn't mean you should fire them, because if it weren't a common (and understandable) situation, the market wouldn't be over-bought in the first place. It happens.
And I'm not saying you shouldn't make money on the upside. Markets can stay over-bought for a long time, but the bigger they are, the harder they fall. Understanding that we are "over-bought" right now doesn't mean believing that it's time to become bearish. It's understanding that bullish positions come with a higher degree of risk. I like to offset that risk by playing both the bull and the bear side of the market.
We are coming into 2007 in high risk territory for the die hard bulls, so if you want to make money, reduce exposure to risk, and not be part of the herd, then make sure you are not a die-hard bull. I promise you that you'll have a less expensive opportunity out there at some point this year.
That's it. See ya next week.
Chief Investment Officer
Technical Analysis Millionaire