Wednesday, August 13, 2008

To Gamble or Not To Gamble, That is the Question

Top Line: The stock market continues its efforts to defy gravity but we think that will soon end and a significant drop will occur. Patience is the order of the day.

While we wait there are a few orders of business we should take care of. The first is that we plan to be taking the week off next week and may not post anything during the week. We plan to put up a post tomorrow, Thursday but then no post until Sunday evening the 24th.

Then there was a question we received today via email that we wanted to discuss here. That was the question about whether a couple of stocks would be a good buy at this time. The stocks in question have taken quite a tumble over the past year and have a difficult future if you look at fundamentals alone.

What we would say is that if you are planning to buy these stocks or other stocks that have fallen from grace, so to speak, we would recommend you do so in the hope of trading for a mild gain and not expect that these stocks will ever attain the lofty prices from just a year ago. That doesn't mean that you can't "play" them for a good percentage move but that is what you have to do. You can't buy them and put them away.

The way to play stocks that are cheap is different than investing, it's more like gambling. So, you need to trade like you are gambling. Let's say that you put a bet down and win, what do you do? Let it ride and bet again? Or, do you take the money off the table and go home? Well, our suggestion would be to take the money and RUN. Such is the case of the quick gains (and we should say losses) that may be had in these types of stocks.

One of these stocks traded at 6 a week ago and today closed at 4. If you are planning to buy this stock, you should be very happy with a 1 dollar move which would be 25%. That is a great trade and would be a nice smile for a short trade.

Other than that, we don't think it very wise to buy this type of stock. The risk is that it goes to 0 and the reward could be a double or so. What is the purpose of the trade? Gambling is fun and that is what this is but play to win.

There are possibilities that show up at times that truly are good values and we are coming up to one of those times in the next few weeks or a couple of months. There will be chances to double your money over a period of several months to a year and without a lot of risk. There is always risk but if you can actually find some value, then you can simultaneously limit your risk.

We are looking at a couple of value trades that are materializing and the first one is the gold mining stocks which we discussed a few days ago. The GDX has already jumped 10% in those two days from 34 to 37.5. We're not suggesting that you should run out and buy this tomorrow but to watch for another opportunity. We think this is probably in an area that offers some interesting options...never say options to a trader.

There are a couple of other ideas we are entertaining but they can wait for another day. The biggest ones are to come up with appropriate long positions in the stock market when we have a good selloff...yes, we think that will develop over the next month or so.

As for the market action on Wednesday, the financials led the market lower in the early going. JPM continued its decline from yesterday. The banking index declined over 4% and appears headed for a test, at least, of the July lows which are 25% lower from here.

One of our main concerns for the market surrounds the actual traders that are making decisions with other people's money. There are so many highly leveraged (meaning they use borrowed money along with some of their own capital) and they are momentum players (meaning they have computers that let them know what particular stocks are being sought after and they get on board, too. Both of these have the ability to move stock prices fast and furious at a moment's notice so we think the best place to be is in Cash, King least for now.

FSI: 86.71

VXO: 23.93 +0.93 (heading up to 50)

SDS: 65.37 +0.82
QID: 39.62 +0.05

Dow Industrials: 11,532.96 -109.51

1 comment:

Anonymous said...

Do you mind sharing the names of the two stocks in question?

Warren Buffet