Alcoa Tells Us To Continue Hedging The Market
The Dynamic Wealth Report
January 14, 2009
What We're Learning From The Last 48 Hours
I don’t know about you, but I’m confused. Totally, thoroughly, utterly
confused. Strangely enough, I’m not confused about my investment
strategy. I’m not even confused about the market. What confuses me is
the “market sentiment.” That’s a fancy word investing professionals use
to describe investors' expectations and reactions.
I’m really confused over what investors and traders are thinking.
I’m really wondering if anybody is looking at market information. Investor expectations are clearly disjointed from reality. What do I
mean by that? Let me give you two perfect examples… then I’ll tell you
what to do to protect yourself from this craziness.
The first example is Alcoa (AA).
Regular readers of the Dynamic Wealth Report will remember Monday I
wrote about Alcoa’s impact on the market (“What Earnings Season Means
For Your Portfolio”). Alcoa is the
first major firm to announce earnings. They’re also a member of Dow
Jones Industrial Average. Because of their position, they are often the
bellwether to the rest of earnings season.
Often if their earnings are bad… the rest of earnings season is bad. If
they have a positive announcement… well, you get the idea.
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Less than 10 days ago, Alcoa effectively preannounced earnings.
Management came out and said they were working to conserve cash. They
were cutting production, cutting employees, cutting expenditures. I
don’t know about you but all that cutting told me to cut my
expectations.
I was prepared for the worst.
Apparently I was the only one. Just look at the market reaction after
their official earnings announcement.
Of course the major indices didn’t like the news either. The Dow and the
S&P 500 both fell after the announcement.
Now today we’re down again. And this brings me to my second example of
market insanity.
Why are we down today? Because retail sales were bad in December. Today
the Commerce Department announced retail sales were down 2.7% in
December. So the natural market reaction is to fall… as I write this
we’re down almost 300 points.
Apparently nobody (but me) was expecting a horrible holiday shopping
season.
Really I don’t get it.
For more than 5 months we’ve been talking about how bad the holiday
sales season was going to be. As a matter of fact, we made some really
profitable trades based on these thoughts. In the Elite Option Trader,
we suggested put options on a few retailers, including JC Penny. These
puts had a peak gain of 676%.
Clearly the bad news was good for us!
Nobody likes a surprise.
I guess what it comes down to is the market was surprised. Surprises
like Alcoa’s poor earnings and the December sales numbers were shocking. Overall it tells me something important. Expectations were lowered, but
not enough.
That means more bad news will continue pushing the market lower.
So what do we do with our investment dollars today?
We need to realize the market will be range bound for quite a while.
Continue hedging your portfolio, and don’t venture out from your core
holdings. Watch the market closely… we may be starting another trend
lower.
•
Lumber ($161 per 1,000 board feet)
Lumber peaked in mid-2007 at over $300 per 1,000 board feet. Now it’s
trading at close to half of its original value. Clearly the fall in
housing and construction numbers are impacting the commodity directly. I
don’t see this moving higher until we see growth in housing numbers
again.
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