Market Rallies... but why?

Today, the Dow started up 200 points, and ended the day up nearly 500 points, or a gain of 6.84%.

In the last two weeks, the Dow is up 1149 points or a gain of 17.34%.

How do you even begin contemplating the rationale behind such a huge upward swing, which is so counter to the past 6 months of bearish movements? Over the past 6 months, the Dow is still down 3078 points or a decline of 28.36%.

So what explains this?

I still think we're in a period of rash exuberance, heavily led by day to day government policy decisions. However, I still want to see some good economic data points to back this up.

While housing sales have increased, this has been primarily driven by increased foreclosure sales. Gas prices are still going up, driven by the falling value of the dollar. Unemployment rates continue to rise, heading toward 10%.

I think its possible that the stock market is close to a recovery period. But for the average investor, I would suggest waiting a bit more, to wait until something more substantive than a quick 2-week upswing, that could easily become a dead cat bounce by week's end.

Markets Looking Better

After $500 billion infusion of credit from European banks, markets across the world are starting to do better. Maybe the Santa Claus rally will occur after all.

With the market in so ridiculous flux, it is difficult to suggest any good plays in the near term.

In the long term, the markets will get better, so continue buying up those banks and technology stocks that have suffered greatly in the past weeks. In 2-3 months, the markets be much more stable, and those stocks will be back.

Go Go Fed

The Fed announced a 25bps rate cut today, which is great news, and the market was definitely looking for it. But, interestingly, the market in the 5 minutes after the Fed's announcement tanked. Why?

Hidden in its announcement was the indication that the Fed would most likely not cut rates in the near future, citing concerns with inflation (look at the high price of gas) and the overall stability of the economy.

So what are the plays for the rest of the week? Well, if you got a nice bump today, my suggestion is to sell 50% of your winning positions to lock in your profits, and then maybe wait until Friday to completely unwind. The market tends to take profits after these bumps, and you should do the same.

However, there is one stock I was buying today, CVS. They are announcing earnings tomorrow, and I would have posted this pick earlier, but I had completely forgotten about their earnings release date. But with the consumer goods report today being so good, its a great indication that CVS's earnings will also be amazing.

First Trade

Today was the first day I could trade so I tried something small to test out the platform. As I have often promoted, I bought Cisco today. But rather than the usual stock buying, I purchases two call options for Cisco ending September '07 at a strike price of $32.50 for $0.45 each.

Options contracts are sold usually in multiples of 100, so buying two contracts really means I purchases 200, or $90 worth. A call option purchase makes money if the underlying stock rises above the strike price by the ending, or expiration, date. In between, the price of the contracts can rise as the underlying stock closes in on the strike price. Also, there is inherent time value of money depending on how far away the expiration date is.

I will talk more about this later, but for now, my roommate is wielding my very nice cutlery in her first attempt to make a fruit bowl out of a watermelon, and I need to make sure she doesn't lose a limb.

Market Volatility

When investors don't know which way the market should be going, it is a terrible time for long-term investors due to the enormous risk, but just an amazing time for traders, as volatility = profits.

For me, as I start to do my "investing", my strategy will be one of trading on volatility. Now, I wouldn't recommend this as the only investment strategy for the long-term. I have my own safer long-term investments.

But, since I'm not worried about my financial future, I am investing my excess cash into short-term trading and speculation.

I will be reporting my gains and loses and thoughts here.

More Market Thoughts

Today at work, my boss asked me about my opinion on the stock market. My response? I am as bullish as ever. Looking at the main economic indicators, very little leads me to worry other than rising oil costs. Unemployment rates, corporate spending, and inflation are all at a good places. Oil costs can have a hit to the bottom line throughout the year, but more especially for companies who depend heavily on transportation.

Moving to the stock front, I am still in love with Google (GOOG). As they continue their strategic acquisitions, it ensures that even as a ever enlarging entity, they are still staying on the forefront of 'net technologies. Their large cash base and intellectual capital combine to be a force capable of anything.

Housing still worries me personally, as I see the market starting to bottom out. At the same time, I am torn between buying in now to ride it up, or wait it out and see how low it can go.

Stock Recommendation - CSCO

I was in CSCO (Cisco Systems) last month, and sold a few days after quarterly earnings. They reported quarterly earnings not only a few pennies over estimates, but also upped their year-end forecast. Now, usually a company tends to always be conservative in their earnings forecasts, so that they can get a good rise out of the market whenever they beat their own estimates. However, when a company upps its estimates, you have to consider that internal numbers may even by higher.

With that in mind, consider the negative effects of the Asian Bump of last week, as well as general economic fears such as inflation and the threat of the R-word (recession), which have really hurt this stock. However, I think when more economic data comes out (including yesterday's retail numbers), we will see an uptick of this stock back to $28-$29.

In today's over-connected world, there are two big benefactors: network fiber holders and network value-added services. Cisco is of the latter variety. Their biggest gains are going to be in Asia, but I think in the US, they will stay just as strong.

Disclaimer: Please understand the risk and rewards of stocks before trading. Also, read the disclaimer at the bottom of this page.

Market Forecast

It's weird, I miss one day of posting, and I start feeling guilty.

Anyway, here's are my market thoughts:

1) You've got short-term bond yields increasing, with long-term bond yields decreasing, indicating less confidence in the stock market, and a willingness to pay for essentially riskless investments like bonds.

2) Gold price is inching up slowly, while oil prices are falling slightly. Both seem to contradict the idea that the market believes we are entering a recession. But I think the most likely affect is small investors are still unsure about the market, and want wait and see, rather than liquidate and buy up commodities like gold.

3) With the increased crackdown from US regulators on subprime mortgages and last week's market results, we'll probably see another decline in major bank stocks.

Conclusion: Going to be an up and down day, but at the bell, the market will fall a little bit.

Two Market Themes of the Day

There are rumors of mutual funds who had difficulty selling off their portfolios for stop-loss reasons mixed with whispers of stock bargain-hunters out for undervalued investments in the market today. It's going to be difficult to see who is going to win out (ie. big loss or big gain today), but if the Japanese Nikkei is any indication (falling 500+ points), the stock market isn't out of the clear yet.

I expect a lot of small-time investors to be holding today, while long-term investors, if they haven't already done so, try to liquidate and keep at least some of their previous year's gains. After-markets indicate a rebound in confidence for the tech sector.

OUCH!

Wow, the Chinese Markets tank, consumer goods sales decline, and Greenspan is off making comments about the economy. Mix that in with 8 months of up and up markets, and you get today. 3.5% drops across the board, with some stocks seeing 5-10% drops. Yuck.

IF you had money in bonds or savings accounts, you're feeling really smart right now.

Market Thoughs

Markets will open strong, in the midst of no news on the inflation or debt front and a number of potential big buyout deals going on, but oil continues its rise, potentially dampening the market. Also, Susan Bies of the Federal Reserve will speak today, but its doubtful if any market impacting news will be released to the public.

Going to be a big day for tech

Update: Nothing like being flat wrong, but then again, what I expected for oil to do, it didn't do. Oil went up, killed the tech sector, and made my predictions go to smithereens.

Yesterday's consumer inflation warnings caused a big panic, which will be corrected for today as investors see cheap stocks. Oil prices are down, and Google's big announcement into the world of Business Applications will have a huge impact on the Tech sector.

Expect to see Google go up $6-$10 and Microsoft down probably $0.50-1.00.

Disclaimer: Please understand all the risks of stocks before buying. Also, please understand this blog's disclaimer, printed at the bottom of the page.

How I Pick Stocks

I wanted the chance to inform all readers about how I form opinions about stocks. You will see me more focused on the technology sector, since this is my area of expertise. In general, any reasonable analyst know that the only way to "beat" the market, is to have some sort of advantage. Typically, this advantage is in knowing more about your industry sector than outsiders.

Inside technology stocks, I will most often discuss companies I feel are on the right track with their R&D or acquisition strategies. I will NEVER post about companies based on some arbitrary "technical analysis" numbers, because I think technical analysis is pretty bullshit. (Scroll to the bottom of this post if you want to know more about technical analysis.)

I believe in the efficient market hypothesis (EMH). This is not to say that you can't make any money on the stock market. But it does say, without any advanced (unknown to public) knowledge, you will not make excess returns or money from the stock market.

As such, I my stock analysis rests upon fundamental analysis, or the underlying reasons for a stock's worth. Remember, a stock is a portion, or share, of a company that you own. You are entitled to the company's value in the proportion that you own. Therefore, the equation for a stock's value is:

Company's Total Value / # of shares outstanding = Price per share

Much of the analysis you see rests upon how the company's total value changes. What makes that number hard to calculate is that a company's worth is not just the value of computers, desks, products, etc. that is currently owns, but also the future value of the company, such as the intellectual worth of the employees, inventions being developed, etc.

I will most likely not do a rigorous calculation of company total value most of the time I suggest a stock. This is because a) It is time-consuming and b) There are plenty of analysts that do. What I will add is my own opinion based on my technical and financial background.

Also, just remember that there are NO necessarily bad/good stock picks. You have to consider your portfolio as a whole. Making a bet on one thing is never good. Diversification is always key.

Finally, read my posts for ideas. Don't read my posts as a way to get rich quick.

Technical Analysis
A little more on technical analysis - it is the "science" of reading the historical prices of a stock and figuring how its current momentum. Essentially, you are looking for indications that either the stock is rising very fast, slowing down, falling, etc and you hope to predict future prices from looking at past prices. As a believer of EMH, I believe this type of analysis is inconsistent with EMH. More importantly, since this analysis is so simple that any 5th grader can tell you when a stock seems to be going up or not, I have to assume that there are no excess returns you can gain from using it. After all, if everyone's making money from it, where is that money coming from? Remember, when you make money, someone has to lose it.

Great Week for the Market

With Bernake saying we're in the clear for inflation, oil prices falling, and corporate spending on the rise, it will be another great week for the stock market, especially for tech. If you're looking for something to buy, the sector is the place to go.

Check out: Google (GOOG), Sun Microsystems (SUNW), Yahoo (YHOO), Nortel (NT), Cisco(CSCO)

Disclaimer: Please make sure you understand the risk involved in buying stocks, and weigh your ability to accept loss before considering investing. There are no guarantees in life, and the stock market is no different.