This week, we are giving some of our other editors an opportunity to express their thoughts on the current market conditions. Once again, the contributing editor is Ray Cummins (Combination Plays).
Stocks finished higher on Friday and a late surge gave the Dow Jones industrial average another triple-digit increase. Only six weeks after sliding below 7500, the Dow is now up about 1,275 points for the year and closing in on the July record. Despite fears that gains would be pared on this options expiration Friday, the market moved forward on the backs of financial and technology stocks. Banks and brokerages were among the front-runners with investors growing more confident that lower interest rates will spark the economy with more borrowing and spending. Merrill Lynch, J.P. Morgan, Bankers Trust and Lehman Brothers were the leaders in that group. In Nasdaq trading, online bookseller Amazon continued its amazing climb, rising another $27 after the company declared a 3-for-1 stock split on Thursday. Industry rival Barnes & Noble was down $3 in the wake of the AMZN extravaganza. Yahoo! and American Online ended the day higher and Netscape also climbed on rumors that it is negotiating with AOL for a possible acquisition. Among the big technology winners were some of the semiconductor stocks, which benefited from a positive report showing an increasing demand for chips. Motorola was a surprise leader, moving up $3.
The market also pushed higher in other sectors like drugs and telecommunication services but while most of the blue-chips were firmer, small and mid-cap issues continued to lag the broader market (signs of that infamous pre-January effect?). One of the hardest hit was BEA systems (BEAS), a corporate-software developer that saw its stock price fall 50% after the company guided future earnings forecasts "sharply lower". Wall Street responded with a slew of slashed ratings. Billing Concepts (BILL) and Computer Learning Centers (CLCX) were also punished by analyst downgrades. The Russell 2000 index (a barometer for small-cap performance) edged down slightly to finish at 394.29.
Other Market news...
The $206 billion tobacco deal has won unanimous support from the states, and the industry has indicated it will sign the biggest U.S. civil settlement on Monday. The deal is designed to resolve remaining claims for health costs of sick smokers and calls for tobacco companies to make long-term payments and finance anti- smoking programs in exchange for resolving the remaining state health-care claims.
On Friday, Northwest Airlines Corp. completed its acquisition of a majority voting stake in Continental Airlines, despite an anti- trust lawsuit filed last month by the U.S. Department of Justice. The deal gives Northwest a 14% stake in Continental, and control of over 51% of the voting shares. It's the first step in starting an alliance between the carriers and anti-trust regulators worry that the "virtual merger" could lead to further consolidation of U.S. airlines.
Cendant is selling its consumer software business to French media company Havas for $1 billion to help raise money as the company recovers from a massive accounting fraud. CD owns brand names such as Ramada, Avis and Century 21, but is now shedding businesses to raise cash and boost its stock price.
Japanese stocks rose sharply Friday, fueled by hope that fresh stimulus measures such as a possible sales-tax cut will help put the economy back on track for recovery. The dollar fell against the yen and the Nikkei Stock Average made significant gains. Japan had previously unveiled a giant $196 billion plan to rescue its economy, but many experts still don't think it will work and the Japanese Finance Minister dampened hopes that the government would cut its consumption tax as a part of the revival. Miyazawa said politicians would first discuss the use of sales tax revenue, rather than a tax-rate reduction.
Russia, in the midst of a deep economic crisis and weighed down by billions of dollars of debt, said on Friday it had requested that lenders ease the repayment of the loans of the former Soviet Union. A senior finance ministry official said that it would ask the IMF and the World Bank to lend it more money to repay them. Russia already owes billions to the International Monetary Fund, the World Bank and other international organizations.
European markets were higher; Germany's DAX index was up 2.4%, Britain's FT-SE 100 was up 2%, and France's CAC-40 was up 2.6%. In Germany, Fed Chairman Alan Greenspan said that the success of Europe's single currency, the Euro, depends on the credibility of the new over-seeing central bank; the Bundesbank. He voiced his confidence that the advent of the Euro will be successful.
At the depths of the market downturn in early September, there was a view that the world economy was headed for a deep recession. Those concerns have been lifted by improving overseas markets, (especially Japan and Latin America) and the new optimism is now pushing the markets higher in the United States. The previous economic worries abroad have lessened, taking away a major reason for the late summer correction. This comes as good news for many investors who are still recovering from one of the nastiest market plunges ever. The latest shot of adrenaline by the Fed to save the American economy from the foreign economic threat has rekindled an old Wall Street maxim. Jim spoke about this theory a few weeks ago;
It's well known as a very old and reliable bullish signal that traders call the "Two tumbles and a jump" rule. It states that a major buy signal is given any time the fed reduces one of its three basic policy tools (either the discount rate, stock margin requirements, or the commercial bank demand-deposit requirement) two times, without an intervening increase. The historical effect is quite positive. If you analyze all the signals (post-crash), since 1932, you'll find every event created a major successful long-term buy opportunity. This theory is gaining attention and many bullish analysts now believe that the tremendous recovery in stocks could last for some time. And remember, bull markets are self fulfilling prophecies; the more profits investors make in rising stocks, the more cash they put back in and the higher the markets go. Lets hope that happens this time around...
Strategies..."Back to the basics!"
Surviving the "learning curve" to eventually profit in the market is the most difficult thing that many of us will ever do. Here are some tried and tested elements for successful trading that should help you through the process:
The first fundamental is; "Know thyself!" Think about the outcome that you expect from your trading activities and your portfolio. Are you normally a conservative person or do you feel comfortable traveling at warp speed? How will your type of trading affect you emotionally? Can you handle the volatility of day-trading or are you happier with long-term, conservative plays. Once you determine your risk/reward attitude, you can construct your positions and plays accordingly.
Next, you must understand (completely!) any strategy that you are using and what your specific goals are for that particular trade. You can't make good decisions without knowing the mechanics of a specific technique. Don't use complex or advanced methods simply because they are intriguing. The BEST strategy is the simplest one that accomplishes your goals!
Once you have a candidate in mind, do your homework! Know the company and the calendar (any upcoming events, earnings dates, scheduled announcements etc.). When you have a good knowledge of a stock and its industry, you are way ahead of the investor that buys and sells on rumors or tips. Remember, "Knowledge is power!" and with the tools on the Internet, there's just no excuse for not being well informed about any company or industry group.
When you are ready to trade, use simple proven techniques! One of the oldest phrases is; "Buy on down days, Sell on up days" and it is really not that difficult. Successful traders develop target prices for all potential plays and they know their exits before going in. They take the human factor out of trading by using STOPS and GTC orders. When news or events change the character of the play, they make the necessary adjustments. Learn to trade on YOUR terms, not the markets!
After you take a position in a particular issue, stay informed by monitoring all the news and announcements affecting your play. This is one of the easiest rules to follow with all of the online information now available.
Determining when to exit a play is a matter of personal preference and YOU are the only one who can decide how you will trade. Most professional traders are happy with consistent monthly returns of 5%-10%.
The most painful lesson comes when you close a losing trade. It's very difficult to learn to close out losing plays early but the simple fact is; There is no reason to hang on to a losing position when there are so many other profitable plays that deserve your time and money. Accept your losses, learn from your mistakes (and evaluate each one critically) then move on! Success will come when you create a favorable balance between hard work and patience. Too many traders give up after a few losing plays, long before they have time to learn (and absorb!) the various methods required for profitable trading.
As your portfolio increases, diversify! There is always something to be said for becoming an expert on a few specific issues but don't confuse the basic ideas. By spreading out across industries (and instruments), you can avoid the agony of violent swings in a particular stock or sector and limit losses when the unexpected occurs. Just remember the Titanic...