– Stock Market Companion – Current Holdings –

(Please scroll down to the end of the report to see your favorite benchmarks – Dollar, Oil, Gold … closing prices and daily direction.)

– Market Trends –

*Summary of terms from Trader Vic II-Principles of Professional Speculation (pg. 140-141)
*_________* Represents a change in trend rating.

– Market Perspectives –

For your added perspective, we’ve included this chart of the broader market (Successful stock investors develop and start with a minds-eye view of the broader market and keep it clear) –

SMC SP-500 ETF Daily Chart (Please click on the chart to see a bigger, easy to read chart on a separate browser tab window).

– Today’s Highlights –

For a brief moment this morning, the broader market was POSITIVE.   This positive tone, just as on previous days, didn’t last.   As we have mentioned before, Bear Market Behavior often involves buyers stepping up and purchasing shares at perceived discount prices (real discount prices relative to recent past higher prices) in the morning, and then – when no follow-through buying occurs in the afternoon, and instead – existing shareholders begin unloading more shares at slightly better prices than the previous afternoon,  the early morning buyers sell their shares in disgust – pushing prices further lower as selling volume increases.

Bull market behavior on the other hand is like this –

In the morning hours of trading, shareholders sell on multi-day strength in share price, pressuring share prices down.  Buyers – eager to buy on pull-backs in price – step up in the late afternoon hours and purchase shares at lower prices than recently available, driving shares higher in price into the close.

Yesterday, we came to this final decision about today’s Facebook, Inc. (FB $38.23) initial public offering (IPO) – “It is a bullish EVENT – which MAY act as a catalyst to halt selling and cause a strong SPIKE HIGHER in the markets”.   Here’s why (we’ll cover the details below in our S.I.M.P.L.E. Stock Investing Method) –

• The IPO was “over-subscribed”, meaning – there was more demand for the shares than shares available.
• Because of the strong DEMAND, the pricing for the IPO was at the high end of and already upwardly revised price range for the shares.
• The markets were ready for a reprieve of selling, after pulling back over 30% of the total rally appreciation from the October 4th lows, over the last 1.5 months.
• The markets are falling for several reasons, one of which is the FEAR of an event (restructuring of the euro and uncertain consequences of that event) that may or may not finally happen.
• Individual stocks like Alcoa and Ford are at multi-month lows, and at strong multi-month support levels.
• Sometimes, just a spark of buying is enough to throw strong fear into short sellers and cause a short-covering bounce of strong proportions, with quick-footed buyers pressing the short-sellers by hitting the “ask” price with large orders.  Short-sellers are investors who have borrowed shares and sold them high, with the intentions of purchasing them back at lower prices – for a strong profit.

So, what was the result?  The FB IPO was an EVENT for sure, and shares of individual stocks DID move HIGHER in the mid-morning in anticipation of it.  For instance, Apple, Inc. (AAPL $530) shares DID move up in price by over $14/share = 2.7 %!  But shares again met strong selling pressure as it became quickly evident that Facebook shares were not going to advance in price today and act as a catalyst for the overall market.  In fact, Facebook shares were sold hard all day, dropping  15% from its spike highs of $45/share at its opening.  The FB shares closed at approx. $38/share.

Today’s weakness is caused by the usual suspects –

• Fear of the uncharted waters surrounding the POSSIBLE disassembly of a major, modern currency (euro).
• Fear of the recession that has engulfed Europe spreading around the globe.
• Forward looking financial indicators in the US (major US corporation CEO’s declaring weakness and economic uncertainty ahead; Philadelphia Federal Reserve economic survey results yesterday were unexpectedly weak) turning negative.  Earnings at US corporations are going to be negatively impacted.

Please note that volume today on the S&P 500 ETF (SPY) spiked to highs not seen since last November.  FEAR is entering the market now.

– S.I.M.P.L.E. Stock Investing Method tm –

– (Where each investment begins with a Story and ends with Earnings) –

S.I.M.P.L.E. Stock Investing is built upon these core concepts –

S = Story (What is / are the key catalyst(s) behind the company of interest?)

I = Institutional Investor Interest (Is the stock chart showing investor interest = buying or share accumulation?)

M = Market (Is the background market favorable for investing at this time?  Don’t Fight the Market! We know the vast majority of stocks move in the direction of the overall market).

P = Person or Product (Is there a particular person or product that makes the story work for this investment?)

L = Leader (Is the company a leader in its industry group or is its product a leader in its market?)

E = Earnings (Are current quarterly earnings and annual earnings growing?)

This morning, an investor was telling me briefly that she wanted to buy shares of Facebook (FB $38) TODAY.  I could tell that when I mentioned that FB was probably NOT a buy today that the caller was surprised.  I went on to quickly explain that initial public offerings (IPO’s) are to be handled with EXTREME CAUTION.  Here’s why –

• IPO underwriters have become very skilled at determining the maximum price that the market is prepared to pay for shares of a company being “floated” onto the market.  Based on current earnings, the shares are often “priced to perfection” – which maximizes the amount of money the company is able to raise for ownership rights AND maximizes the fees that the underwriter is able to earn.  Any perceived failure in the newly listed company’s ability to deliver on earnings is met with intense selling.  A good example of this is the Groupon IPO from November 2011.  The shares spiked to over $31/share on the day of the IPO and over the last six months have sold down to $10/share.
• On “hot sector” companies like Facebook (Sector = Internet social media), the privileged few who had the opportunity to purchase the IPO at listing prices have ample opportunity to make a lot of money on the day of the IPO by selling their shares to the hungry public buyers.   Buying shares of an IPO on the day of the IPO is often like arriving late to a party and seeing more people leaving than arriving.
• If the U.S. or global economy is entering a recession, almost all stocks will be negatively impacted in price.
• For the “possibly privileged” (“possibly” because not every IPO is oversubscribed and hot.  Some drop like a rock at the open and NEVER return to the subscription price that the solicited investor paid for the shares BEFORE the IPO) investor, if the IPO is strong on the first day the decision at hand is best summarized as ” a bird in the hand vs. 2 in the bush… ”  When given that opportunity, it’s proven best to take your profits on the IPO day.  You can always buy the shares back at another time if the shares prove able to support the IPO pricing structure.
• As mentioned, some IPO shares drop at the open and over a short period achieve a fraction of the value that they were given at the listed price.   So, if you are ever solicited by a brokerage company about the opportunity to buy pre-IPO shares, BEWARE.  A good example of this is the company DEX-One (DEXO $0.75).  The shares launched at $30/share on the IPO day and within the first 6 months had sunk to $5/share.  The shares are now valued at less than a buck.

We’ll talk more about Facebook (FB $38) in the weeks ahead!  Maybe an opportunity will emerge from which we can gauge our risk more accurately and move forward with an investment.  Not today, however.

– Benchmarks “At a Glance” –

–Data Source : Financial Visualizations Inc.