Category: MarketClub Techniques, Tips & Talk

Is subprime the tip of the iceberg that sinks the market?

The market has known for months about the sub-prime problem and just like an ostrich it has buried its head in the sand. Traders have been blindly pointing to the positives earnings and global growth while ignoring the storm clouds ahead.

Here's what concerns me the most ...

The growth of hedge fund has been nothing short of phenomenal. Look at this chart, did the rich people get it wrong?

Did all the smart people from Harvard climb on the bandwagon a little too late, while at the same time chasing too few deals that made sense?

Has Harvard who has 18% of its money in hedge funds become addicted to double digit returns?

According to the Wall Street Journal (8/1/07) edition, one hedge fund manager who graduated from Harvard lost 350 million dollars this past month for the Harvard Endowment Fund! Ouch, I guess tuition will be going up next year for Harvard.

All this leads me back to the subprime mess. Here we have a bunch of bright guys coming out of Harvard and Stanford and all the top business colleges coming up with exotic ways to create securities on bundled mortgages. On paper this idea looked great and worked out perfectly, but that is not how the real world of trading works. Theory and reality often collide in the marketplace. What looks good on paper can actually turn into a disaster in the market.

That bring us back to the Hedge Funds ... just how many esoteric and exotic deals have these guys cooked up that we don't know about ... yet??

The Fed has no clue on tracking what the hedge funds are doing. Why should they. If government can't keep track of 1.1 billion dollars paid to dead farmers how on earth are is the Fed going to track a hedge fund gunslinger.

My guess, and I'll use my friend Dennis Gartmans who writes the Gartman Letter, cockroach theory to illustrate this point: "if you see one cockroach you know there are more of them around".

In the coming weeks and months I expect we will see a lot more stuff hit the fan.

Is it time to run for the hills?

Read on and then decide on a course of action that works for you.

In the last twenty years we have had two major bear markets that have moved over 20% from peak to valley.

The first was in 1987 when the DOW dropped 36.1% in 40 days!

The next came in 2000 with the dotcom peak when the market dropped 23.9% in 436 days. The latter was more of a classic bear market.

There's really very little difference between a hedge fund manager and a regular investor. Both are driven by fear and greed. As human are genetical programed with these traits.

Now I think it is safe to say that hedge funds managers along with mutual fund managers are going to look after there own self interest in the markets. Which means they will be bolting thru the same barn door before the next guy. That is just how the market works.

Here's an amazing fact that just took place in June 14th, 2007. I still am in shock on this one. The SEC decided to repeal a rule that has been in place since 1938 that allows you to short a stock without having an uptick in the stock. What this means to me is that you can have a stock literally pummeled by massive amount of selling both from shorts and investors just wanting to get out thru the same barn door.

The question I have for the SEC is why now, and for what reason. What are these guy thinking?????

This one rule change alone from the SEC completes the scenario for a perfect storm in my opinion.

I did not talk about crude oil/ inflation/ interest rates you can see that here and in other parts of our blog using the search tool above.

Stay vigilant, listen and believe what the market it telling you. Remember, actions speak louder than words, and they slide faster than they glide.

Stay safe,

Adam Hewison

P.S. Last poll gave the bears a slight edge over the bulls after 180 votes cast.

Leave your comments here.

Dear Members & Guests,

This past year has been great for MarketClub traders that have been following Amazon. Our Trade the Triangles have been very accurate, putting a pretty penny in your pocket! The big gain this week was nothing new, and if you were following the triangles you would have been in to make the move.

Wishing You The Best of Luck,

PS- Check out below... not new news for members, but big news for guests

How would we have done?

There are going to be skeptics everywhere. They will try to say that we manipulated results, showed only time frames of the charts that were in our favor, changed the techniques to fit the trend. Well, today I was reading the Wall Street Journal and I came across an article on Amazon (NASDAQ:AMZN). I pulled up our Trade Triangles on Amazon and noticed that our monthly/weekly filtering technique for our Trade Triangles was amazing for this year. However, how have we done since we began tracking Amazon.

Ok skeptics, here goes... I am not factoring in stops. I am using our suggesting filtering technique (monthly for trending [possible initial entry] and weekly for timing). When I say out point (this is not getting stopped out, this is saying that we are getting out because either a monthly or weekly trend has changed).

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Record high volume yesterday on a down day in the Dow. Ouch.

Is it time to fade the rallies or should we be buying dips. That's the argument that is going on right now in the market place.

I am not going to comment on what you should be doing right now in this blog posting but what I will say is this.

IT DOESN'T MATTER.

Let me say that again. IT DOESN'T MATTER.

Why would I say something like that on the biggest volume day ever at the NYSE.

Here's a cruel reality of the marketplace.

It doesn't matter where the markets are headed. What matters most is you get the direction and timing right.

The reality is, all markets are trading markets. They are all driven by market sentiment and perception.

What matters most is that you get the direction of the market right. You can only determine the trend by using pure market action. The easiest way to do this is by using technical analysis and a program that tells you in plain english what the market is doing.

Here's a look at what our indicators are showing before the market opening on July 25th.

Has the first negative signal already occurred. Look at what we alerted short term MarketClub traders to 7/18. The red triangle indicates to get out not to go short. The key level for the DOW is 13,400. A move below this level alert intermediate term traders to exit the market.

Lastly what would totally turn the DOW into a true bear market according to out "Trade Triangle" formula is a move below the 13,000 level.

Right now the major trend remains positive for the DOW, but I still have this uneasy feeling this morning that sentiment and perception is changing.

Cheers,