Institute for Individual Investors

Member Login
37 votes
Thumbs Up! Thumbs Down!
Thank you for voting!

Why This Market Can Easily CRUSH You

Tuesday, October 14, 2008 | Chris Rowe

[Editor's Note: Teeka Tiwari will answer Tycoon Report readers questions about the current market environment in a special webinar event. This could be the single most important web event that you've ever attended in your investing career. Go here now to register and submit your questions for Teeka.]

This will be a two part article.

 
In Part 1 I'll tell you what the smartest way to profit in this market is, and more importantly, how to avoid making the expensive mistake that 90% of individual investors are about to make.

In Part 2 I'm going to talk about your financial advisor or stock broker or whoever it is that you're working with. In this bear market, a lot of people are realizing exactly how good their advisor really is. Has your financial pro helped you through this market, or is he/she hiding behind the old "Hey, it's the market's fault" routine? The other Tycoon editors will probably be motivated to chime in on the topic this week because, like me, they have danced next to the devil in the past, and we all have the "inside info" on what happens behind the scenes.


PART 1  The smartest way to profit, and avoiding this common, expensive mistake.

After watching the market trade up 11% - 12% (largest 1 day gain ever) you might be all giddy about your bullish positions.  Or maybe, after some more convincing by the media, you'll feel comfortable enough to take NEW bullish positions. Yippee! It's all over!

Think again. 

Perhaps the market saw its absolute bottom on Friday, or perhaps not. And I'm sure the market can, and likely will trade up some more, but this is not the play you want to bet the ranch on. When a market drops significantly like it just did, there is almost always another low that's made at about the same exact level. Sometimes the second "leg" lower is slightly higher. But smart investors won't feel comfortable enough to plug big money in the market until they know that there are new buyers at the lower levels. 

The first bottom is made by short sellers "covering" their shorts. What that means in a nut shell is there are lots of big investors that profit when stocks move lower. The way they do it is they first sell (short) the stock, and then they buy (cover) the short stock at a lower price, profiting form the difference. 

The first bottom is found initially because of the buying pressure that's created when the short sellers buy their stock back (and make enormous profits). Once that happens, more and more new buyers come in because they feel safer.  But they feel safe only because they see the market moving higher. Smarter investors don't feel safer until the last low is tested again.

At some point, the market turns around and comes back down. The question the media and traders will be asking at that point will be: "Will there be another leg lower, or a test of the bottom?"  That's why, you have got to take some bearish positions when the market makes the next intermediate top.  The odds are stacked heavily in your favor!

Please don't make the expensive mistake everyone else is about to make!

You may have read my Tycoon Report article on Sept. 23 titled, "Read This BEFORE the Treasury Bailout Plan is Announced!" where I decided that I would share the market commentary that I sent to members of my trading service, The Trend Rider.

I wrote the commentary on a Sunday after watching the Dow Jones Industrial Average rally about 1,000 points in just two days because it was manipulated higher by the SEC restricting short sales on over 800 stocks, and in anticipation of the, then, $700 billion. bailout package. 

It's easy to get too wrapped up in what we call a "bear trap" as people buy into an advancing market worrying they will miss buying at the bottom. That's why in the commentary following the 1,000 point gain, I told TTR members and then Tycoon Report readers, "it's more likely that the market makes another leg lower than the one we've already seen."

What I'm telling you is we have got to go lower again. Please don't watch the market trade up for a week or two (or three) and start sending me e-mail about how wrong I am. It seems most investors are short sighted. 

The blue arrow shows where I told you not to buy into the exciting rally. As you can see, the market lost 30% after I gave that warning. Of course it would have been cool to buy at the absolute bottom, but is it worth the risk?


I will say that this recent bottom is way more likely to be the absolute bottom. But to own bragging rights, you have to have bought on Friday. 

Didn't do that? Well I'll tell you where your next chance to own the rights will be - It's not going to be on bullish positions over the next few weeks. The rights are found at the next top if you get bearish.  You're better off playing the odds that are in your favor. (At the very least, you may want to lighten up on some bullish positions that you've been holding on to, before the next decline to the recent lows - or lower.)

WHERE IS THE NEXT TOP

After support levels are violated, they become the most likely resistance levels. So in the chart below, I show you where the market will most likely find it's next resistance level. Looks like we will likely find resistance at about 10,400 - 10,500. That's only another 11% of upside. (Only, ha! That's like saying gas is "only" $3.00).



Look folks, I know I'm not a fortune teller here. The goal is to be right MOST of the time. The analysis you're reading now is based on history repeating itself over and over again. And if history is any judge, the odds are very good that we find resistance somewhere neat 10,500, and odds are we get another sharp sell-off. 

I may be wrong, but if you're trading, the name of the game is to go where the odds are in your favor.

Maybe we find another bottom in a month, or maybe a week. But the next bottom will likely be at least near last Friday's low. And if things are bad, and the market plunges through that low, people who own put options are going to hit a home run.  And even if you only have a little bit of bearish exposure, it's gonna feel great, especially if we haven't seen the bottom!


PART 2 - Is it time to fire your advisor? Are you getting what you're paying for?

I will summarize the story in two sentences: We started Tycoon because we used to work on Wall Street as money managers, analysts and brokers, and we saw things that made us sick to our stomachs. With the internet, you now have access to the same info your broker has, and now you can navigate your own way around the market for a fraction of the price!

How much have you paid your pro? Are you up or down this year? Do you know if your pro is even qualified for the job? 

We, in the Tycoon Family have something in common: We all come from humble beginnings. That's why we can't ignore the fact that most financial pros are like the Wizard of OZ - or the "man behind the curtain".

Is your pro in the money management business or the money-raising business? 

If your pro seems to be content with matching the market, he is a money raiser.  That means your relationship is structured where as long as the S&P 500 doesn't do better than your pro, you believe you're getting your moneys' worth. 

That's BULL ... O-ni.

If his goal is to match the S&P 500, then his energy is spent collecting assets, not analyzing and managing them. TRUST ME. If your broker is blaming the market for a bloody account, it's time to fire him.

Do you feel like you get more attention from the free Tycoon Report, or from your pro?

The reason I decided to write this, and I hereby invite all other Tycoon editors to jump on the bandwagon, is I've been visiting with brokers lately on behalf of my family and friends and it's quite disturbing. I've met with many "seasoned veterans" who are making SIMPLE mistakes all over the place. 

Guess what, your "pro" is human too. That means the pro is probably tired in this market like Joe Frazier and Mohammed Ali.  These people are dealing with hundreds of people - angry people. So they often take the easiest route possible. They give you a small fraction of their time and energy. In fact, if you spent time navigating your own portfolio, I'm sure that you would spend 20 times as much time and energy on your own situation, even if it's only a few hours per week. 

I invite you to sign up with The Trend Rider. Before spending one penny, go through a free education series to see if it's for you.  We have some bullish positions that are down, sure. But we have been making lots of nice profits on bearish positions.  On Friday, I closed out a put option on American Express with a 120% gain. Has your pro been hedging you? Did she notice the bear market? Have you been sitting in cash lately? What's her next move?

At Tycoon, we offer trading education and trading alert services. Consider FIRING your PRO and joining Tycoon. If you feel awkward leaving your pro because perhaps he/she is your friend, or family, this is the PERFECT market to do it in with ease.  Believe me, if you see the pro at a picnic in 6 - 12 months it won't be awkward. You will have fired him when bearish sentiment is at a record high - he'll understand. 

Below are a few questions I told students of the Internal Strength System to ask their broker back in April:

There are three things to focus his/her attention on if it's not already there

1. Technical tool/data/indicators (Does he/she know what the BPI is? Does he/she focus on what the sectors are doing in terms of direction, strength and risk? Does he/she follow sentiment readings and if so, how much does that go into the decision making process? Does he/she follow the price/volume action of the NYSE and NASDAQ? Does he/she follow any market momentum indicators like MACD or RSI? Does he/she pay attention to what stocks are performing better - large cap, small cap, mid cap? An even more detailed question is large cap value or growth? Small cap value or growth? Mid cap value or growth? REGARDING ALL OF THESE QUESTIONS: If so, what is he/she seeing?)

2. Application/market posture (Based on the knowledge of the current market environment, how bullish or bearish is the guy/gal? s it black or white (bullish OR bearish) or is he/she 80% bullish 20% bearish etc.?)

3. Money Management (Based on that knowledge, how is he/she positioning your account? What percentage is in cash and why? Where is your risk limited to? Are there stop loss orders? Are you hedged with options? What is the plan if the market starts moving higher? What does he/she need to see to change his/her market posture/stance?)

Your broker is managing your money. YOUR money. If you calculate how many hours you put in, and then divide your annual income by that amount, how much did you make per hour? How long did it take you to make the money that he/she manages? These are tough questions. At any given time, I probably couldn't answer ALL OF THEM if my client had asked me when I was a money manager. So don't be TOO hard on your broker if they don't ace the test. But don't be afraid to ask.

Another Also don't be afraid to ask your broker for three investment book recommendations. This is a true test.

See ya next week, and be sure to open all Tycoon Reports this week to see how other Tycoons can help you understand what you're paying your broker for. 
chris row signature
Chris Rowe
Chief Investment Officer
Technical Analysis Millionaire
37 votes
Thumbs Up! Thumbs Down!
Thank you for voting!

Comments: