Wednesday, 9 January 2008

Welcome to the Bear Market?

The last 7 trading days were definitely interesting to observe. We saw a very healthy selloff sequence. Speculators are becoming increasingly nervious and sell massively at any hint of negative news. I bought shares of Wells Fargo & Co. (WFC) and D.R. Horton Inc. (DHI) on Friday and Monday, respectively. Anticipated a rebound this week because both stocks were oversold and their market sectors (banking and construction services) have been hit hard recently. But a lousy article on CFC (somebody must have paid to somebody to publish it), "worse than expected" numbers on existing home sales (well, da-a-a-h), a couple of analyst downgrades, the "softness ahead" estimate from AT&T's executive, something else, and here we go - the markets continued their journey down.

However, given the evidence of some pretty strong cherry-picking buying on Wednesday afternoon, we still can see a rebound over the next several days - enough for me to make short profits and close the positions, which was my original idea afterall. On the other hand, if that does not happen and we move yet lower, I will not be disappointed either - I bought two good dividend-growth stocks with nice yields, pretty good management, and positive long-term prospects. Wells Fargo is one of the top largest American banks that is not overly deep into the subprime mess. Not quite clean, but also is not like Citicorp, Washington Mutual, or UBS AG. D.R. Horton is one of the better U.S. home construction companies with decent management, which went down very well up to date and will probably not go lower than $6-8 per share in the worst case-scenario. Both stocks got hammered recently by sector weakness and general market selling pressures. I do not mind keeping them long-term if the things get ugly and the prices will not rebound above my target profit levels over the next couple of weeks.

Speaking of falling prices: Yesterday, the closing values of DJIA and S&P500 finally broke down through the neckline of the so called head-and-shoulders (HAS) chart pattern. At last, welcome to the Bear market! When the indexes permanently settle below the neckline support level, we can officially say that the Bear phase has started. Now, there are two short-term possibilities in this situation: The first is the one that I originally anticipated - a short-term bounce for several days, which is enough to make quick 10-15% gains and get out promptly. The second one is the accelerating panic selloff which continues for several more days until the markets temporarily pull back up to or even above the already broken HAS neckline.

The markets rebounded somewhat today, but there is a strong possiblity that the selloff continues for at least several mmore days. If we do not hear any significant negative news and if in his speech on Thursday Bernanke promises a 50 bps cut on the Dec 31 meeting, then there is a good chance of a rebound mini-rally. Otherwise, down we will go.

I will still stick to my long-term dividend-growth strategy, but will also swing-trade an allocated portion of my portfolio funds, as I mentioned in my earlier post. The catch is that I will trade only above-par dividend stocks, the ones which I do not mind holding in my portfolio in the long run - this allows me not to worry about stop-loss positions. I will describe my trading strategy in more detail in the foreseeable future.

The usual disclaimer: I am not an investment advisor, and my rants about the markets and individual stocks do not represent investment advice.

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