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Stock Ideas Investors Daily Edge Wall Street’s Mood Changes With The Weather
Stock Ideas Investors Daily Edge Wall Street’s Mood Changes With The Weather 
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| Wall Street’s Mood Changes With The Weather |
| Monday, 15 September 2008 | ||||||||
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By Rick Pendergraft I remember as a kid, people in Indiana talking about the weather and how if you didn’t like it, there was no need to worry, it would change soon enough. Wall Street seems to be doing the same thing right now. If you don’t like the direction in the first few hours of the day, stick around it will change before the end of the week. Just last week we saw the Dow gain 289 points on Monday, only to drop 280 points on Tuesday. How do you play a market like this? Be quick or be out. In our sister publication Early To Rise, I advised readers to do one of two things: if you are a long-term investor, ignore most of the news unless it affects one of your stocks in particular. Second, if you are a short-term trader, take profits quickly and take losses even quicker. As choppy as the action has been over the last few weeks, you have to be nimble and adapt to the conditions. The weather in the Midwest can only change so much, depending upon which season it is. It isn’t going to snow in July and it isn’t going to be 90 degrees in January either. The same can be said for the market these days. The overall direction is to the downside and it could be this way for some time. So you shouldn’t expect the indices to wipeout all of 2008’s losses in the next few months. If you look at a monthly chart of the S&P 500, there are two things to take note of. First, the S&P failed to close above the March 2000 high and has moved lower since last October. The second item is the crossover of the 10-month and 20-month moving averages and how the long-term trend is clearly to the downside. The last time these two trend lines had a bearish crossover was in early 2001. There were bounces that lasted a month or two during the bearish years of 2001-2002, but the 10-month moving average kept things in check except in March ’02. We have already seen one rally squelched by the 10-month this year (back in May). We are significantly below the 10-month right now, but the 10-month RSI is reaching oversold levels, so we could see another attempted rally in the near future.
 Personally, I am taking a more aggressive approach to closing trades. As an example, I opened a put trade on the Regional Bank HOLDRs Trust Monday morning and turned around and closed it Tuesday morning for a triple digit gain. I could have kept the trade open to see if the RKH went lower, but with the volatility we are seeing (especially in the financials) I felt it was prudent to take my gains and run. By the end of the week, the RKH had bounced back as high as $111 after dropping as low as $102. I will offer the same advice to IDE readers that I offered to ETR readers. If you are a short-term trader, take profits and losses aggressively. If you are a long-term investor, ignore most of the news unless it directly involves a stock in your portfolio. I will offer a third piece of advice to IDE readers. If you are a long-term investor and have not taken action to protect your portfolio from the downside move, you need to act now. Either buy an inverse ETF that gains in value as the market drops, or buy some insurance by purchasing long-term puts on the Spyders or QQQQ. At the time of this writing, you could get a December 2009 123 put on the SPY for $12.50, or $1250 since options are priced in 100s. Should the S&P drop all the way back down to the 800 level as it did in 2003, these options would be worth at least $4,300 each. If you purchase multiple contracts, this could go a long way towards offsetting the losses from the rest of your portfolio. Good luck and good trading, Rick P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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