Blackstone IPO Causes Pain and Regret

Jun 26, 2007: 9:51 AM CST

I had to point the Blackstone IPO (BX) chart out to readers, simply for its major irony to me. I watched a television report where it showed a montage of news sources that were literally giddy with excitement discussing the Blackstone Financial Group IPO and how it will make investors so much money and how traders were so excited to invest in the successful fund, and how wonderful it was, and how the Chinese government did so, and how nothing could go wrong.

As you may suspect, something went wrong (in the short term, that is – I’m not speaking of long-term price appreciation here, which I believe will happen).

This story is one of the many instances of ‘retail traders’ or new traders being lured by the Siren song and then dashed among the rocks.

View the chart:

bx-june-26.png

Giddy traders rushed out, possibly cashing out positions in long term mutual funds and the like to speculate on this ‘sure thing,’ and probably bought in the $37.oo to $38.oo range. Today, we hit a new low at $30.50.  The IPO was initially set at $31.oo.  The good news is that volume is clearly drying up, but please note that over 100 million shares were traded on Friday. Yesterday – 50 million.

There are literally hundreds of thousands (possibly millions) of disappointed traders/investors (in the short-term), and many have bailed out of their positions at a possible 30% loss in three days. Those holding tight are experiencing pain, but it should be temporary. Patience is key, here, as well as allowing the crowd to get ‘rinsed’ before entering (which appears to be happening).

Trading is hard, and what is popular doesn’t always make money.  In fact, how many people could have known that the way to make money with Blackstone’s IPO was to short it?!  And how many people could have shorted it (psychologically) when literally everyone everywhere was bullish?

That is exactly why it would have worked.

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Link: Trading by Regimes

Jun 25, 2007: 11:30 PM CST

Dr. Steenbarger recently posted on the topic of “Trading Regimes,” which are ‘relationships which exist between one or more variables and prospective price changes in a trading instrument.’ The relationships tend to be temporary, and one must discover various relationships and be open to the possibility of variance in analysis. Rather, regimes should be analyzed as ‘recent history relationships.’

Regimes are assumed to persist unless the following occurs:

1) There are fundamental, market-breaking news items or economic reports moving markets sharply;
2) Volume and volatility today are meaningfully different from the recent past;
3) Interest rates, currencies, oil, etc. are behaving abnormally relative to their recent past.

Analyzing the market this way provides clues to what may happen, and gives you trading ideas to execute and evaluate.

I particularly enjoyed the final quote:

“Markets play by rules. The rules change. The key is figuring out when fundamental shifts in markets are creating rule changes and when regimes will persist at least one more day. “

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Weekend Strongest Industry and Index Overview

Jun 24, 2007: 8:09 PM CST

Here are some daily and weekly views of some of the major indexes for your study:

Daily Charts of the Dow and Russell 2000:

dow-june-24.png

russ-june-24.png

Weekly Charts of the Russell and S&P 500:

russ-weekly-june24.png

spx-june24-weekly.png

As an added bonus, consider pulling trade ideas from these strongest industries (via Prophet.net) over the last three months:

industry-june24.jpg

Notice the major jump in flow in the “Specialty Chemicals” group.  With 45 stocks, this is a major move not to be taken lightly.

We see resounding strength (from 92 stocks) in the Independent Oil & Gas industry as well.

Use this to supplement your analysis to build your watchlist for the week.

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Link: TraderFeed – Lessons from a Life Crisis

Jun 23, 2007: 6:06 PM CST

Dr. Steenbarger recently shared his personal story with readers regarding a recent life-threatening medical emergency he encountered.  We are so glad he is doing better and that he has shared his experience with us, including lessons learned.

Not only do the three lessons relate back to trading, but to life in general. 

Dr. Brett’s three lessons are as follows (without explanation – see his site for elaboration):

  1. A Little Knowledge Can be Dangerous
  2. Advocate for Yourself
  3. Networking Can be Your Best Survival Tool

There is so much more to life than trading, and sometimes we get so caught up in trying to increase returns, or some of us could be classified as “addicted to the market,” but the reality is that trading and investing should be only part of our lives – perhaps (for those who are successful) it’s the means to enhance the quality of life, but trading is not life.

Experiences like this slam us back to reality and force us to step back and reassess what’s important in our lives.  Trading can provide so many wonders but it can also rob us of so much if we are not careful.  Either way, trading success must be pursued as a means to and end (happiness, financial security, mental accomplishment, etc) and not the end (ultimate goal) itself. 

Study the market diligently, learn from your mistakes, but at the end of the day, walk away and spend time with those most important to you and do the things that bring happiness to your life and to the lives of others.

Thank you, Dr. Brett, for sharing this harrowing experience with your readers.

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Brief Overview of Sector Rotation Theory

Jun 22, 2007: 2:00 PM CST

“If you are in the right sector at the right time, you can make a lot of money very fast” –Peter Lynch

Sector Rotation Theory can help you invest (or trade) in the key sectors that are outperforming the market right now. There are always stocks in certain sectors that are “on fire” or “out of favor” and you can build a simple hedged portfolio (or trade structure) that takes advantage of understanding the following concepts.

Your goal is to understand broad patterns that reoccur and try to find connections between ideas and occurrences in the market and the broad economy. The stock market can at times lead the general economy and provide high-probability trade ideas for longer term positions (or tell us when to be in bonds and away from most equities).

The following explanation is adapted by me from Peter Navarro’s brief work “When the Market Moves, Will You Be Ready?“($13.57 at Amazon.com)

Recall that the “stock market cycle” often leads the business cycle by three to six months. At the top of the cycle (late expansion), the business cycle is in full expansion and inflation pressures are increasing. The Federal Reserve must raise rates which hinders the ability of businesses to borrow money, and often this leads them to cut back, especially if they foresee consumers less willing to spend on big-ticket items. Often the Fed raises rates too quickly and brings things to a halt because it can take months for the economy to feel the effect of a rate hike.

Assume that the businesses cut back and consumers are crunched and are not spending as freely. Assume that the economy is just ahead of a recession (negative GDP growth). Production falls, employers cut back on labor, factory inventory builds up, prices decine, laid-off workers spend money only on the basics; as such, they cannot purchase big ticket items (new homes, new cars) , and the Federal Reserve begins to step in to correct the situation by lowering interest rates to stimulate growth. Defensive sectors (consumer staples) will outperform when it seems everything is falling (realize they may fall too, just not as much).

Jumping ahead through the recession, interest rates will eventually fall to an attractive rate as the economy ‘spirals downward’ and then businesses will begin to expand again and take on more loans and hire new workers and invigorate production. Automobiles and housing stocks may be among the first to recover as consumers have been saving up their money and find interest rates attractive (they were among the first to fall at the market top, also). This also bolsters financial companies and banks who make loans to these consumers at this time – the broader economy is picking up.

As the economy recovers, transportation and technology stocks rise with a brighter future on the horizon and businesses must invest in new equipment/repairs with increasing capital and demand. Sectors such as capital goods, industrial machinery, basic electronics, etc begin to outperform as businesses rely more heavily on them and consumers perk up with demand.

Inflationary pressures are rising, but not to any level of concern as the market and economy rise together. However, increased demand pushes up energy prices (excess production and transportation) and the Federal Reserve has been raising interest rates to keep inflation in check and eventually consumers will again be pinched by rising prices and high interest rates (as will businesses) and the cycle will reach the peak and begin afresh.

While no two cycles are equivalent, the underlying theory – which is explained in much more detail and clarity by Dr. Navarro – remains valid and sufficient to build trading ideas and positions for underlying profit regardless of your strategy. Examine this concept in more detail if possible and realize it has great potential to make sense of some of ‘technical analysis’ and underlying fundamental currents that drive price.

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