11/14 Kelly Letter Topics
Weekly market review
The bottom holds
Big bounce volume
Recession projections
The magic midpoint
LevMark Timer holds
Crocs is dying
Hope for Goldman
Importance of retest
My predictions last weekend about the market entering a down phase were on target. We hit my stop order to sell 25% of my original Maxtor position at $5.80, and to sell all of my Sun Microsystems position at $4.41.
The gain on Sun was 5%. That's from a $4.20 buy price on Feb. 17 to a $4.41 sell price on Mar. 9.
The gain on Maxtor is a little tougher to figure. I originally bought a large position on Oct. 21 at $3.25. I then sold half on Feb. 11 for $5.30. Last Monday, Mar. 7, I sold half of my remaining position (one-quarter of my original position) at $5.80. That leaves me with an average sale price of $5.47 so far, representing a 68% gain. The performance will change when I sell the final quarter of my original position.
Both of these sales are shown along with all of my trades and investments on my strategies page.
While it's good to see us exiting gradually from what has been a profitable winter, I'm a little disappointed that I haven't grabbed more profits from the semiconductor sector. Ultra Semi dropped 4% on Friday, and that brings us down to just 2.5% above our Nov. 11 buy price. It beats a loss, but isn't much to crow about after four months. Still, I'll take small gains over losses any day. Also, we'll see what happens from here. We might get a little more out of it before selling. I know the semiconductor sector is going to explode from its doldrums someday and I want to be onboard for that, but I can't seem to get a handle on the timing. I thought it would have happened by now.
For example, Intel reported on Friday that its March quarter revenues would be in the $9.2 to $9.4 billion range. They had earlier said it would fall in the $8.80 to $9.4 billion range, and Wall Street's average forecast was for $9.14 billion. That sounded good. Higher is better, right? "Yes, but..." say the analysts. From Briefing.com's Friday morning update:
The semiconductor analyst at Morgan Stanley is commenting this morning that the strength in revenue may not be sustainable. The analyst at Merrill Lynch is saying that Intel has beaten low expectations for this quarter, but will have trouble with the full year, and doesn't find the stock attractive from a risk/reward standpoint.
Where goes Intel, so goes the semiconductor index. I'm not eager to ride that volatile index at Ultra Semi's double impact through the slow summer months. Stay tuned.
Even old Disney and Pfizer had a rough week. Disney closed at $27.59, which is still a respectable 84% gain from our buy price, but two bucks lower than it fetched a couple of weeks ago. Pfizer, the ugly duckling medicine company that got even uglier after we bought, closed at $26.36, 6% below our buy price of $28. These two don't worry me a bit, though. Disney is as solid as a company comes and one of these days I'm going to get that 100% gain I've been aiming for. As for Pfizer, well, is there anybody left out there who doesn't hate the company? I didn't think so, and that generally signals a rough bottom in the stock price.
Speaking of seeking price bottoms, how about that UTStarcom? We sold on Feb. 11 for $15.10, a 9% loss. We all hate selling at a loss, but one way to smile about it is to watch the stock drop far beyond our exit price. That's just what's been happening. UTStarcom closed the week at $12.70, a full 16% lower than our exit price. So in an attempt to feel good in this sinking market, let's call that a 16% gain with no need to pay taxes.
Finally, the Dow portfolios. After poking their heads into positive territory last week, they've ducked back under. Double The Dow doesn't do well in such a narrow range, sawtoothed pattern, so it's down 0.1% while the Dow itself is up 0.3%. Neither is worth saying much about at this point, so I'll stop there.
What's ahead for the market? Probably lower prices. If memory serves -- and keep in mind that it very often does NOT when it comes to the stock market -- these conditions spell a short-term drop, followed by a lukewarm recovery in late spring, then a significant drop over summer, to be followed by a solid recovery into year-end. Can't say for sure, as you must know by now, which is why the best approach remains to watch for value and grab it when it appears.
I would like to mention that the famous Warren Buffett recently released his annual letter to shareholders. Buffett is the most successful investor of our lifetime and known for his preference to hold forever. That's quite a time frame, and serious Buffett-watchers have always looked at that point with a narrowed eye. After all, what's the point of investing if one never sells? To give Uncle Sam a lot of money upon one's death? No thanks.
Sure enough, the Oracle of Omaha, Mr. Buffett, doesn't really believe so strongly in the forever term. He wrote that he wishes he'd sold stocks in the late-1990s bubble. He regrets sitting on so much cash last year and promises to put it to good use in the near future. Best of all, in explaining why most investors suffer disappointing returns, he underscored the market-timer's golden rule of going contrary to the crowd:
[They take] a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
It is this approach to trading that leads me to end up buying in late summer and fall when the news is grimmest, and selling right about now when people are excited about the improving economy.
The economy is doing pretty well, it seems, but I expect oil to continue its rise and the dollar to continue its fall. That headline has a way of surfacing just about the time temperatures rise and -- voila! -- another sinking summer.
