New book by Larry Connors - Click here to read more
This
week's commentary was written by Larry Connors with the assistance of
Greg Che and Brice Wightman. THE
MARKET There are two ways to approach trading.
The first is that you can watch television and/or go to financial
websites and listen to a bunch of journalists tell you what the market
is supposed to do. But considering they have four years of journalism
school as their main qualification to predict market direction, this
may not be the smartest path to take. Or, you can do what a small
number of professionals do, and let the market tell you where it is
going to go. This past week there was nothing but
negative news for our financial markets journalist friends to analyze
for us. Anthrax? More people were killed riding their bicycles in the
past three hours than died from anthrax in the past three weeks. (But
that doesn't sell commercials or sell ads). And
let's not forget to focus on lowered
guidance from Microsoft (MSFT)
and Intel (INTC),
more fighting in Afghanistan, rising jobless claims, the Philadelphia
Fed Manufacturing Index drastically falling, and while we're at it,
the Connors Family rescheduling their nine year old daughter's
birthday party at Disneyland, thereby dealing a further death blow to
consumer spending. All this negative news should have made
for a market implosion. So what occurs? A quiet 1.5% drop in
prices. Last year this type of accumulated negative news would have
knocked 5-10% off the averages. This week it was merely a blip on the
screen. And added to this, the Nasdaq futures have now closed six of
the last eight days above their opening. This means that money
managers, traders, and investors are ending their days shrugging off
the intraday news and taking home stocks in spite of the added risk
involved...something they have been less than willing to do for most
of this year. So let's go one step further. Where
will the market be when Bin Laden is captured or killed? And
where will it be if they find that this anthrax scare is not the work
of terrorists, but of some guy working in his basement in New Jersey?
(If you answered lower, you probably have a degree in journalism). Forget about the journalists and their
opinions! Focus on the reaction of the market to the news. And ask
yourself two questions: 1) If the past few weeks overwhelmingly
negative news can't kill the averages, what will? and 2) if there are
no crazy surprises, and business begins to show the slightest pickup
in activity, where is the market headed? I do not know (nor anyone else knows)
where prices will be three, six, or twelve months from now, but it
sure looks to me like this market has very much factored in the
negative and is looking for any reason to pounce on the positive. And
when the Russell 2000 outperforms the S&P, Nasdaq and Dow averages
in this market environment, and the Nasdaq closes strongly almost on a
daily basis, the storm we have seen is very likely behind us. NAMES If you want to see some solid charts,
go to our Uptrending
Pullback List in the indicators section. Look at the moves the top
names have had since September (how come the press doesn't talk about these
stocks?) Many of them are in first-pullback stages...a stage that
is a favorite to focus on as they begin moving into their next upward
leg. And they come from many diverse industries, including software,
management services, publishing, and biotechnology. The same goes for
our Proprietary
Momentum List. More solid names, more solid up-moves. The average weekly closing levels of
the VIX for this year is 28.6. On Friday, it went out at 35.8...more
than 20% above average. This is significant and further evidence that
fear is abundant and negative expectations are priced into the market.
A move back to its mean of 28.6 will be accompanied by a strong rally
in the S&Ps. Most TM members are stock traders, but
opportunities lie in other markets. The other markets that are most
significant to us at this time are the coffee and cotton markets. As
you know, commodities are controlled by supply and demand...and
sometimes by boom and bust. And from bust comes some great
opportunities. Both coffee and cotton (especially cotton) are in bust
stages. Both are at 20+ year lows and are priced below production
costs. This means farmers, producers, and processors are closing down.
And where will this eventually lead? To lack of supply...which
ultimately leads to higher prices. How do you take advantage of such
an opportunity? Not by blindly buying the market because it's low. The
safer way to trade these markets is to enter them just after they take
out the previous months' high. Explosive moves come from this
setup, as the majority of managed money in the futures industry is
trend-following money. And nearly every trend-following money
manager is short these markets. And when these markets begin
reversing, the trend followers start aggressively covering their
shorts, pushing prices even higher. The safest way to enter both the
cotton and coffee markets after they take out the previous months'
high from these low levels is to simply buy calls. When you are right,
not only will call prices move in your favor, the volatility of these
calls will also likely rise--a natural tendency for commodity call
options--giving the value of your options an even further boost. If you need help with this strategy,
call
ON THE VIX FRONT
OTHER MARKETS
COMING THIS WEEK
We're adding a new feature this Thursday: "Charts Ready To Explode." These are stocks in extremely low-volatility setups that are likely to explode in the very near future. We will show them to you every Monday and Thursday.
Good luck this week, and best of luck with your trading.
Larry Connors and Greg Che
