The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

08 June 2007

Dazed and Confused

From Investment Land comes astonishment, investors suddenly dazed and confused, and their astonishment begets yelps of shock, and finally the shock begets screams of agony.

"What is happening to the bull market in the Dow, the Trannies (Transports), the Utes (Utilities), the S&P, the golds, the uraniums, the...?!" (Insert here your favorite leader that now tumbles off a cliff's edge.)

This recent market action could be summed in few words (terrible!), but even better with one picture...

[click on chart to enlarge]

The chart above, as I annotate, is an updated (and daily bar) version of the same chart from this post. You can see for yourself the destruction that now occurs in the credit markets, and why, in turn, equities suddenly act sickly. Diligent readers of this site were prepared for what has transpired... And remains yet to occur.

"Both the European Central Bank and New Zealand hiked their benchmark interest rates a quarter-point, to 4.0% and 8.0%, respectively. The Bank of England paused at 5.5%. Fed fund futures now show traders only expect an 18% chance of an FOMC rate cut to 5.0% in '07, compared to 40% last week and 98% a month ago. Benchmark rates are at multi-year highs across the globe. A Glasgow-based bond fund manager said the hike by New Zealand "frightened" investors, adding that "Global growth is too strong, yields have to rise. The trend is bearish." Yields on U.S. 10-year Treasury bonds are currently above 5%, their highest level in 10 months. The VIX has increased 16% to 14.87, since the start of June. The Fed next meets June 28; it has kept its overnight lending rate at 5.25% for the past seven meetings." (From Seeking Alpha)

"Moreover, when Bill Gross's comments about turning into a bond bear hit the wires today, there was a fair amount of ambiguity as to what he actually meant. It turns out his comments were part of a larger interview posted to the Pimco website. Here are some quotes from the interview: "... Over the next three to five years, our secular outlook suggests that global inflation, and certainly U.S. inflation, will accelerate mildly for a number of reasons... That combination, I suppose, is not necessarily bond-friendly, especially in light of some of the changes that may take place in terms of financial flows—the recirculation of reserves from foreign central banks, etc. As a result, we've raised our forecast range for global interest rates, moving the range for 10-year U.S. Treasuries to 4.0-6.5% versus last year's forecast range of 4.0-5.5%... First of all, in terms of durations and maturity positions, the secular environment implies that portfolio durations would probably be less than market indices as opposed to greater than market indices. That is one of the biggest shifts that I would anticipate for the next three to five years. And after 25 years of being a bull market manager to all of a sudden become a bear market manager—although mildly so in terms of higher interest rates over the next three to five years—is sort of a major shift. But I think it is a well-deserved shift, at least based upon the forecast that we're suggesting..." (From

Investors must always differentiate between the stocks they own and general market action, just as they must differentiate between a company and its stock. If you do neither, then now would be a good time to begin. Corrections in the general market create our opportunity to purchase favorite investments at better, if not fair, prices.

"What do you see as the upside potential of this stock, J Crew/JCG? Are we looking for a sort of traditional run of 15-20% above the breakout point or is it the kind of long-term buy and hold that dreams are made of?"
Attempt not to confuse your time frame with the market's periodicity; each accords value to time, but stocks merely oscillate whereas we, being human, suffer a tendency to vacillate (oscillate, but with an emotional component). The current charts for the market say one thing -- clearly, to me -- and the chart for JCG says another. Too, I never invest seeking only a percentage gain (99% or less); I invest only for multiple gains (100% or more). Thus, a direct answer: I believe quite strongly that JCG has a destiny that includes a much higher share price. But does the achievement of that objective fall within your time frame...?

Which leads to all manner of possible predictions; the core three being price, time, and trajectory. (The x, y, and z axes on a chart.) When aligning my time frame with the market's periodicity, my objective is to capture the trajectory within the time frame that speaks directly to me.

Having mentioned briefly a winner, I will discuss, equally briefly, a loser - Isis Pharmaceuticals/ISIS. Corporate life continues positively, no worries there, but the stock has proved unable to gain upside traction -- notably not able to break above resistance at ~$10. In fact, it has been turned away a number of times, which argues the importance of this line of declining tops. I recognize the potential -- and possibility -- to re-test crucial support at $8.5 to 8/share. Having breached beneath its 200 day sma today, the picture changes from intermediate term price momentum to possible long term accumulation. I choose not to linger (hold) because I have no idea at this moment how low the shares might decline before turning up convincingly. So I sell, and keep my eyes on that hardened line of declining tops (resistance).

No use crying over spilled milk, I reason. Yes, I retain ISIS on my monitor, watching for another, future setup to purchase. The objective, as always, is not to be right (emotional need) but to make money. The fundamentals for the company, as of this writing, remain bullish; the sole change is a breach of rising support on the chart.

Which brings to mind the objective correlative when investing: while aligning your time frame with the market's periodicity, never lose sight of the market's leaders. Leaders lead. If you choose to pare back your holdings -- and I do not argue you do so; each investor has different objectives and tolerance for risk -- sell first your non-core, non-investment holdings. Keep your leaders; they signal general market direction weeks and months from now. (Leaders are not those stocks with up trends obvious to even the untrained eye. Obvious = near exhaustion.) One leader would be Google/GOOG -- having just broken above an 18 month high level consolidation, its long and intermediate term trends are now in sync; the only doubt for traders are the short term oscillations.

I do not mean to seem dismissive of short term oscillations, but they provide insufficient reason for you becoming dazed and confused. Or losing track of your primary objective: to make money, consistently and successfully.

Full Disclosure: Long the shares of Google/GOOG and J Crew/JCG; no short positions.
-- David M Gordon / The Deipnosophist

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