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Daily Stock Picks Newsletter from October 6th, 2008

The Dow was down over 800 points at one point today with steady selling in all sectors for the first three hours of the market.  It looks like all indicators described a classic "capitulation" where the market hit an extreme low and started a 500 point reversal on the Dow at the close.  Here is a term to remember that is appropriate for what we are going through today and tomorrow.  Remember this term and how I use it.  We saw a pretty decent example of this today.  This is from The Wizard Training Course Workbook that I wrote.

Capitulation ­- the point at which a stock (or market) reaches maximum negative or positive sentiment and with unusually high trading volume, the stock reverses in direction.  The maximum point of enthusiasm would be associated with the peak price in a stock and the maximum point of "despair" would mark a significant bottom in a stock price or market.  Ideally, both points would be reached with parabolic curves in price and volume leading up to the peak or to the bottom.

When a good bottom in stock prices is reached and the subsequent sharp rise of stock prices out of that bottom, this typically forms the shape of a "V," hence the term a V bottom.

We did not see outright panic or a disorderly selling process but the stock market does not have to experience outright panic in order to put a good bottom in.  The talking heads on CNBC imply that this is required for a good bottom but I disagree.  As traders or short term investors, we can make substantial profit percentages on the bottom that occurred today.  Sure, it would be ideal if the market closed down maybe 500 points and then followed through tomorrow with another 400-600 points, with huge trading volume.

Either way, today was likely a bottom that can be the lowest price levels in stocks for months to come.  My guess is that today was the bottom that forms a "V" bottom that is typical for a big selloff followed by a vertical rebound for some days.  Look back on July 15th bottom, March 17th, and January 17th, (all 2008) and you can see there was substantial gains made in stocks.

Indicators that we saw today: 

1.      CNBC reported that today was the all time highest VIX reading ever in history of 58.24 but I see a reading on October 13, 1998 at 60.63.

2.      Over half of all the NYSE hit its 52 week low.

3.      The lowest percentage of stocks above its 40 day moving aver at 3.22% today.

If you did not buy any of the stocks that I mentioned on last night's newsletter, you still have time tomorrow.  I mentioned several weeks ago that it is possible that the Federal Reserve may do an emergency lowering of interest rates.  Now that the bailout package is voted in AND the Dow has free-fallen to 9,525 it is very likely to see an emergency rate cut tomorrow in the US market and possibly a coordinated one throughout different countries.  If this occurs, usually the best strategy is to buy stocks at the open and not worry too much about whether the price you get.  I know that is hard emotionally for a short term investor, especially since the market has rewarded the trader, not the investor.

What matters most is that you get long in what will likely be a substantial run up in stock prices these coming weeks.

I did not anticipate that the market would get this negative but it isn't surprising since investors, mutual fund managers, foreign investors, banks, brokerage firms and traders are all watching and wondering how bad this could get.  When you see continued selling that starts accelerating and causing a big drop in stocks for such an extended number of days in a row is redemptions at mutual funds start to be substantial.

When investors call in or order online that their stocks be sold into cash, the manager must sell stocks to raise the cash.  Also, those individual stock investors (like us) who may have margin calls in their account (not like us), they also have to sell stocks to meet the margin call.  And then the foreign investors see our market and they start selling and that perpetuates itself.  We also had the added influence that the European markets and banking system is under the same pressure that ours are.  All of this continues to drive stocks down into a spiral which explains why we can easily have a huge drop like the 800 points today.

Try to remember at major tops and bottoms in the stock market or in any financial market, prices move the fastest and have the widest range of stock prices in that day.  The Dow Jones Industrial Average or the S&P 500 (Standard & Poors), what most people might consider the market when using that term, had big swings today and will have less of a swing.

I am going to stick my neck out and say that today was the bottom and we probably go up from here but tomorrow will still give us an excellent buying opportunity when looking over a 2 month time period.  We probably won't get the same low prices though.

Here are the stocks that I talked about last night.  What is show here is the low price of the day and the percentage move off the bottom.  Even though you see the coals performed the best after rising 18-21% off the bottom, there is still a huge profit potential left in them.  I'd say many of these stocks have a chance of rising 60-100% from here in the next months (but don't hold me to that big of a number).  Just remember that stocks move really quickly and have tremendous gains off an event like we saw setting up all these past 2 weeks. 

The following table is the stock picks I posted last night and today's low, closing price and the percentage gain from today's low.

Monday, October 6, 2008 Stock Picks Results 

AGU               Agrium                       Ag-Chemical                        32.65              39.39              20.6%

MOS               Mosaic                       Ag-Chemical                        31.43              37.16              18.2%

MON               Monsanto                  Ag-Chemical                        69.20              75.48              16.3%

POT                Potash                       Ag-Chemical                        76.80              86.91              15.2%

NBL                Noble Energy           Energy                       38.99              42.76              9.6%

EOG               EOG Resources       Energy                       67.19              75.50              12.3%

COG               Cabot Oil Gas           Energy                       24.07              28.16              16.9%

HLX                Helix Energy             Energy                       16.82              18.65              10.9%

FCL                Foundation Coal      Coal                            20.50              24.23              18.2%

ACI                 Arch Coal                  Coal                            21.65              26.23              21.2%

CNX               Consol Energy         Coal                            29.86              36.37              21.8%

MEE               Massee Energy        Coal                            21.92              26.54              21.2%

PCX                Patriot Coal               Coal                            14.87              18.05              21.4%

TCK                Teck Cominco          Metals & Mining       16.52              19.60              18.6%

FCX                Freeport McMoran   Metals & Mining       37.34              43.71              17.0%

SCHN                        Schnitzer Steel         Steel                           26.88              30.70              14.2%

X                     US Steel                    Steel                           52.06              59.62              14.5%

AKS                AK Steel                    Steel                           15.74              18.04              14.6%

CLF                Cleveland Cliff         Steel                           32.03              36.43              13.7%

CMC               Commercial              Steel                           10.30              10.90              5.8%

MT                   Arcelor Mittal             Steel                           35.87              41.10              14.6%

HIG                 Hartford Group         Insurance                  29.05              30.90              6.3%

PRU               Prudential                 Insurance                  48.21              52.20              8.3%

AAPL              Apple Computer       Computer                  87.51              98.14              12.1%

UYM               Basic Materials         Long ETF                  26.01              31.00              19.1%

Count:  25

After reviewing the stock picks from last night's report, the following 3 stock picks look weak and don't appear to be making as much profits.  Delete HIG, PRU and CMC.

It looks like the bias for the opening might be a little positive on the talk that the G8 nations are having an emergency meeting.  They may possibly be organizing a coordinated interest rate cut in conjunction with the US Federal Reserve.  This is only my conjecture.  If it does occur and the market opens up, I'll probably buy a little more of these stocks, and look for a slight pullback before adding more to the stock positions.

Have a great day and I'll talk to you tomorrow.

Mitch King

www.TradeStocksAmerica.com

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Mitch King is the founder of TradeStocksAmerica.com.  All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Mitch King. Investment recommendations may change without notice and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Mitch King and/or the staff at TradeStocksAmerica.com may or may not have investments in any stocks cited above before or after this newsletter is prepared. Opinions expressed in these reports may change without prior notice.

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