I don't want to dwell on the rate cuts too much.  I think my opinion on the matter is quite clear (I think it's been a bad move, if you're new to the blog).  However, I spent some time yesterday to see if I could find a silver lining.  I discovered an interesting article where author Chris Ciovacco analyzes the market performance over time after a rate cut.  The conclusion is that generally rate cuts seem to mean good things over the following months.  There are exceptions (of course!).  Here is a good summary:

Since 1970, the S&P 500 has risen by an average of 5.5% in the three months after the Fed’s first rate cut. Only twice in the nine instances (22% of the time) since 1970 did stocks lose ground, including an 18% fall after the first cut in 2001. The average gain after the nine cuts since 1970 over the next six months was 12.3% (Source: Barron’s). If we use these nine rate reduction cycles, the odds of a successful outcome over the next three months is roughly 88%.

Please see the full article here: http://seekingalpha.com/article/47748-market-behavior-following-fed-rate-cuts

I've been building trading systems for a number of years, and of course, this has had a big influence on the design and development of RightEdge.  One of the major goals is to make a RightEdge simulation as close to real life as possible.  One thing that sets us apart from competitors is running simulations bar based and not symbol based.  Let me give you an example.  Let's say you'd like to run a simulation against all 30 components in the Dow Jones 30.  Other packages will run the simulation for component 1, then component 2, then component 3, etc.  Where RightEdge will run for all of the components at the same time.  This is more inline with reality.

Why do I bring this up?  I was reading an article about how the new fundamental indexes aren't performing all that well for 2007, or at least they're not outperforming everything else.  I'm reminded of all of the "backtesting" that was done to prove that this way of indexing is/was superior.  As you might guess, I was skeptical.

I was skeptical because I've built some stellar systems.  I can make a system turn 10K into a million in just a couple of years.  The problem, is that it doesn't work in reality.  With curve fitting, market issues (slippage, partial fills, etc), psychology (can you handle a 70+% drawdown), hand picked symbols, and so on, it's easy to make a system look as good or as bad as you want it to.  I'm not saying that fundamental indexing is not good or bad, I think the jury is still out, however, be skeptical when someone or a company shows you an equity curve from a simulation.  If the ETF or fund goes live, track the error between live trades and the simulated equity curve.

This is why I always stress exercising great caution when transitiong from a simulation to live trading.  It may not be entirely what you expect.

Over the last month, anytime there has been a snapback, financials and homebuilders have been leading the pack.  It seems bizarre that all of this recession or economic slowdown is blamed on the lenders and homebuilders.  The day of the emergency rate cut, they were understandably up in a big way.  I thought this was explainable, but they've kept up all week.  If you're a candlestick kind of guy, XLF formed an interesting pattern on Friday.  The bearish engulfing pattern.  I don't know how much I believe in candlestick patterns.  I do find them worth nothing though, especially in the context of what's going on and also the pure size of bearish stick.  While financials were big leaders last week, I don't think all is roses.  Oh, and if you're not familiar with Bearish Engulfing, it's a two bar pattern where the the stick on the right opens higher (usually substantially higher, i.e. a gap up) than the previous close, but closes lower (usually subsantially lower) than the previous day's low or close.  I've outlined it in the chart below.

A little Sunday funny.

http://www.youtube.com/watch?v=SGkrNJ19DSU

It's Cramer getting busted by Rick Santelli on CNBC.  Rick is telling Jim to get off the high horse since he's been bullish on stocks forever.  Cramer basically said he hasn't, but the editor of the video provides show clips that prove otherwise.  I don't know that I follow this person's editing technique, but the point is crystal clear.  Do not listen to these people.  No matter how much someone screams, they don't know anything over you when it comes to the direction of the market over the short term.  Develop your own techniques, discover your own risk tolerance, create your own trading plan ... don't follow the clowns.

Do it yourself, or buy an index fund.

Looking at the final numbers, it looked like a week of stability for the markets after some tough down weeks.  The DJIA was up 0.8%, S&P was up 0.38% and the Nasdaq was down 0.60%.  These numbers are deceptive.  Volatility is still very much the order of the day.  The VIX is pushing 30, which is definitely on the higher end of things.  Next week should prove very interesting.  Keep in mind, the picks will be sold on Thursday (end of the month).  I'll post the new buys sometime.  Barring some unprecedented surge in stocks, this month will likely be a loser.  We made up some ground last week, but we're still trailing two of three major averages.  Here's the numbers.

Market says ... 75bps, please.

Looks like this morning's little stunt shaved 100 to 200 points off of the loss (the futures market is very thin this time of the morning).  YM was down 500 points this morning, now as I write we're only down between 300 and 400.  So if rate cuts are long term solutions, why are they done as knee jerk reactions to what the futures have done in one day?  I don't know about you, but this further shakes my confidence in the leadership.  I understand that the economy is a complicated engine with many moving parts, but with that said, should we really be knee jerking these massive rate cuts?

I also go back to my original statement of, wasn't it easy money that got us into this mess in the first place?  We're just killing our dollar.  Here's how the EUR/USD responded to this:

In addition to looking at evaluating more long term buys, I'll also be looking for a more stable currency to park my dollars in.  One that doesn't drop nearly a point overnight.

The news of the morning is how far the futures are down this morning.  They've actually steadied and gone up since last night.  At one point we were down over 600 on the Dow Jones futures.

One thing that reminds me of the '87 crash's chain of events is unprecedented down days before the crash.  The Dow dropped over 100 points for the first time days before the big drop.  We seem to be on course for a tremendous drop today.  I'll be watching the VIX and will see if things float up throughout the day.  If that's the case, I don't think we're out of the woods to the downside yet.

The broker I use is obviously preparing itself.  I came in this morning to the following news:

"Due to the exceptional market conditions, xx has temporarily suspended intra day margin reductions. The normal overnight margin rates will remain in place through the regular trading session(s). We strongly encourage clients to examine their portfolios to understand the potential exposure in the high volatility environment."

I couldn't agree with that last sentence any more.  Good luck out there.

Like I mentioned before, the VIX is very telling when we've reached a turning point.  When it reaches historical extremes, there's a good chance that there will be either a good snap in the other direction or even as much as a long term trend change.  I purported that even though that all of the major averages are down big, we're likely not done yet since the sell off has been orderly and without panic.

The big word in 2002 was "capitulation".  While the indexes were selling off and no one knew were the bottom was, the talking heads kept talking of capitulation.  This is a big word and basically means when the VIX spikes.  The experts were saying that the bottom is in when all of the holders have thrown up their hands and begin selling.  This leads into a massive sell off that is panic driven.  Capitulation.

Now today is a holiday, and I don't have a VIX reading, but I'm seeing some real fear without the VIX and I'll share.

(sorry about the scroll)

I don't know what this will translate into tomorrow.  The overseas market were punished overnight, and this may be just reaction to the selling mood.  What I'm hoping for is that this will finally shake out some more of the weak sellers.  Buying after a crash has yielded some nice short term returns for those that can stomach it.

I don't have a single long portfolio or strategy that has been spared.  The one that has held up the best is the Ultimate Buy and Hold strategy (discussed that here, if you missed it).  This one is only down 3.6% year to date.  Normally down 3+% would be a pretty bad month, but all things considered, it seems to be holding up much better than the major averages, and much better than my picks for sure.

Anyway, here's this weeks bloody tally.

Yowza!  This gets back to my original concern about performance during a sustained downtrend.  I guess it's no big surprise, but what's encouraging is that since inception, these holdings have still beat the market.  These are still a tiny part of my overall portfolio, but I anticipate an increase over the next 12 months.

Here's the index numbers.

The egos that fly across the television each night are always so quick to make snap buy and sell decisions for the "benefit" of their viewers.  It floors me because there is one huge piece missing in the whole equation, your individual timeline.  Would I tell someone who's looking to make a down payment on a home or pay next semester's tuition to load up on XLF?  Absolutely not.  However, someone with a 5-10 year or more horizon should be looking to pick up some financials at these bargain prices.  It's probably the same for other beat up sectors, but not always.  Those who are short homebuilders, congratulations, you're making out like a bandit.  But I'm still watching and waiting to add them to my long term holdings.  Prices in real estate and low buyer participation will not persist forever.  When will it end?  I have no clue and it's foolish to speculate.  By the same token, if something like semiconductors or telecom got whacked, I may not be so quick to buy on the way down.  These are commodity items that may or may not come back.  Sure, we'll always need telephone and semiconductors, but bigger and better things come along that are cheaper, which may keep prices depressed for a long time.  Unlike oil and gold, we're not running out of semis anytime soon.

Again, this sort of (mis)information, most of which entire shows are built on the financial channels does a disservice to the viewers.  Anyone blindly following these recommendations will get what they deserve.