July 21, 2008, Monday Evening

It's going to be a tough day for the bulls tomorrow.  Stocks will open down in most sectors tomorrow morning.  The top news is that although AAPL, Apple Computer announced their earnings increased 31% but their cautious forecast is what investors were focusing on.  The stock was down about 20 points after the regular market hours closed.  This is also going to bring down other NASDAQ stocks like GOOG and BIDU which are high priced stocks.

The cautious mood and negative sentiment that prevails over the market now is going to punish any stock that doesn't issue much better than expected earnings in this earnings season that is in full throttle this week.

The financials have started correcting, as expected.  JPM started correcting first a few days ago on Friday followed by a second down day.  That was because it went up the most and it is usually a good clue when you see a leading stock in a sector change directions that the others might follow.  So your attention should be on the others and how they are acting.  We should see the others start heading down tomorrow with substantial corrections coming this week.

BAC, WFC, WB, C and JPM are the best stocks for a short position in the financial sector.  This position may last from a few days to a couple of weeks.  They are going to open down in the morning, which we call a gap down.  That means the opening price the next morning is lower than the close.

The volatility will return in the financials with potentially some scary down days again.  It is the same 10 year old girl syndrome that the market often acts like emotionally which means, the market tends to over-react.  When you understand the psychology of investors and the market sentiment, you can really make a lot of money by anticipating that and positioning yourself to profit.  But you still have to trade what you see, not what you expect.  You just look for signs to confirm (or not) your forecasts are correct or not and react accordingly.

The logic and language that I often have goes something like "usually in this situation, the stock should act like ........."  This is with the understanding that I am always looking for new information or conditions that will influence the current course of a stock.

If the financials tank again (term that means go down hard), guess what......we can make money again.  We made money on the long side, now on the short side, and if they go down similar to what we saw before, we are going to have a tradable move up again.

When you follow a stock in 2 directions, the account balances tend to go up quickly.

We won't see 64% moves again on BAC like we saw this last week but I suspect we will see some good signals.... [subscribe to read the full story]