Rightfully yours

The stock market can be a tricky place. Recession compressed the market to the lowest point since March 1997.  Recovery is now in session.  Charles Dow said the market was a predictor of the economy.  Let’s see if he was right. 

Right now: Europe in a debt mess, oil spreading in the gulf, jobs are not coming back fast enough—depressing times.  But the US economy is gaining recovery traction.

The Bull and the Bear are always fighting.  Sometimes the Bull is stronger, and sometimes the Bear.  But overall, the Bull is stronger.  Look at any stock, year by year over the last 10-20 years.  The ones that are in business today under their original names have flourished and are valued many times higher than at the starting point. 

What does this tell us?  Hold and wait it out.  This is a storm—wait for clear skies—they will come.  And if ever there was a lesson of not to invest with the mortgage money, or money that will be soon needed, this is it.  

Recap of overall market performance: the Dow reached its historic high of 14,015 on October 11, 2007.  It reached the bottom of 6,547 on March 9, 2009, losing more than 50% of its inflated value over 17 months. 

The Dow’s rise to 10,000 was reached on November 5, 2009, a brief 8 months after the bottom.   It took another 5 months to reach 11,000 on April 12, 2010.  That stretch-out should have given us a clue.  One way of looking at the rise to 11,000 is that the market is 85 percent of its former self, and only needs another 3,000 points to pay us back.  This is the attitude that causes us to lose money. 

The Dow’s peak of 11,258 reached on April 26, 2010 started the slide to 9,757 reached on June 8, 2010 that may have been the bottom.  This was a drop of around 13 percent after the former rise of 85 percent for a net increase of around 72 percent.   

On a shorter scale, the Dow bottomed at 9,904 on February 8, 2010 before rising in 11 weeks to its peak on April 26.

The first drop in 2007 had valid reasons behind it.  The mortgage bubble exploded, and the country was heading into a serious recession.  There was a 17-month period to get off the downslide.  This current drop has taken only six weeks and the U.S. economy is recovering.  It is the European economies that are dragging the market down, and as the drop increases and people talk to each other, purposeful selling becomes the norm. 

We can only hope this market recovery will be as time-relative to the drop as the first one was.  With this dip, many investors have held their stocks, and strong stocks held through this drop should recover soon.

There is talk of a head and shoulders formation in the Dow, starting May 27, 2010 with the formation of the left shoulder and head.  If fully formed, the Dow will retrench below the June 8 level before recovering.  However, a similar formation occurred starting July 30, 2009 at 9,154 and the head formed the base of a 2,000 point (23%) rise to 11,284 on April 23, 2010.

Continue to believe that the Bull is stronger than the Bear.

When the market improves …

I will be picking stocks set, in my opinion, for improvement in the near future.  Readers are welcome to read along and see how I do.

I set a price in the morning to buy or sell a stock.  There will be some buys and some misses.  I do not set the quantity, but will report percentage increase or decrease.  The round-trip commission is generally $20.

The Buy price is “at most” and the Sell price is “at least.”  Advantages are if a stock opens lower than my Buy price, I get the stock at the lower price, and if the stock opens higher than my Sell price, I get the higher price (overshoot).  If the daily range is higher than my “buy” price, I reconsider.

There are times when my price misses the stock, setting Buy price too low, or Sell price too high.  There are also times when the stock will suddenly drop, which is why I almost always have a following ‘Stop’ price in the range of 3% which sells the dropping stock immediately. 

Sometimes the market will take a step back on its journey forward.  Everything needs a rest as long as the direction is forward.  If I feel the market is consolidating, all stocks are down, and my stocks are still good investments, I increase the following Stop price to 5-7%.  I am looking to ride the consolidation while being protected from a company disaster.  I also try to keep my “missed buy” stocks out there with adjusted prices, in case they drop. 

When the market is still jittery, and huge down days are still possible, I tend to be very conservative, taking a 1% profit or break-even if I feel the stock picture has changed and will not rise in the near future.  I only have to clear the $20 round-trip commission. 

If a stock has a down day, even on the day I bought it, I put in a Sell a little above or at the close price.  It is easier to recover a $0.20 loss than a $2.00 loss.   The $20 round-trip commission is small, compared to our stock investment.

Some of my gains are tiny.  The easy thought is to hold out for more.  Remember, we cannot tell the market what to do; we observe and pull the trigger when we see opportunity.

It pays to look at the stock futures (foreign market results) around 9am and adjust the sell prices before market opening.

Trading note:  When the market seems to be moving against us, we can look to options for a community prediction how the stock will move.  And we can use options to recover our capital.

Example:  In early June 2009, HRB was a Buy at $15.69, but dropped to $15.00 (June 23).  Call options expiring July 17 showed a lot of interest from $15.00 to $20.00 meaning buyers of these options were optimistic it would rise into that range.  Selling a Call at $15.00 would net me $72 per hundred shares and I would be covering my loss.  If it rose, my stock could be called away and I would be about even.  If it dropped I would lose anything less than $15.69 – $0.72 per share. 

Put options expiring July 17 show the most interest at $20.00 meaning buyers of these options were protected up to $20.00 less the Put cost ($3.90), putting the protection at $16.10 per share.

The option market traders are a lot smarter than me, so I went with them and kept the stock.  The outcome was that HRB soared to a High of $17.44 on excellent earnings June 30, when I sold HRB at a great profit.   

Be patient.  You are the hunter.