Option Investor

Four Weeks of Selling

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2005 started of with a bang. Unfortunately the bang was our Q4 bull rally being shot in the head and turned into hamburger. After three months of positive gains from the October lows January 2005 has been a serious disappointment. The expected near record fund flows were stopped at the spigot and we are leaving January with outflows for the month. Since 1990 the average January inflows have been over $20 billion with recent years over $40 billion. To say we went from feast to famine with a switch to outflows would be an understatement.

We beefed up the portfolio the first week of January in anticipation of that cash and the liquidity wave it would produce. When the cash did not appear the market entered into four weeks of selling as funds scrambled to cover the liquidity crisis. Having the Iraq elections, inauguration, Fed meeting and several high profile stock disasters has completely soured investor sentiment for 2005. It is entirely possible we could see the market turn around after next weeks events have passed but I am beginning to doubt it.

We had three stops hit this week and I am dropping Marathon Oil after it failed to participate in last weeks rally. This brings us back down to our minimum play level while we wait out the coming week. The market is still very over sold but could easily become more oversold if Dow 10400 breaks convincingly. We appear to be in a holding pattern at current support levels but I hesitate to initiate any new longs.

On years where January is down substantially it is common to see the trend continue but with numerous head fakes to the upside as bargain hunters try to buy each successive dip. Instead of trying to pick a direction this week and adding new plays accordingly I believe it is time to stand aside and let the market confirm its next direction.

The LEAPS Trader strategy is to reduce risk as much as possible while in positions and in uncertain times refrain from entering new positions. This market is a crapshoot. Good stocks are being slaughtered on any negative news and buyers are not rushing to pick up the bargains. EBAY last week is a perfect example. EBAY has been bullet proof for over a year and the public crucified them for allocating more money for expansion. The -$20 dip to $85 was not bought and we were stopped at $80 again this week. No buyers appeared despite the potential bargain. On the flip side our DGX play rocketed +$7 higher when they announced a +21% increase in earnings and raised guidance for the year.

Until the market outlook clears I would rather keep our exposure to a minimum. Once a direction appears we will be more aggressive but for this week cash is a position too. Four weeks of selling has produced a lot of red ink but I don't think we are alone.

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