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I just read an interesting article that follows along with my view that retirement accounts are really not that great.

Check it out and see for yourself that there are downsides to them.

http://www.onlineinvestingai.com/blog/2009/03/14/myth-retirement-accounts-are-designed-to-help-your-retire-early/

The prospect of tax free gains or investing with tax free money, offered by retirement accounts, seems like an amazing deal.
If you’re earning $50,000 per year, you’re probably losing at least 20% to taxes (varies by where you live) and I bet you would love to get some of that 20% back.

What could be better than that government offering you a 20% return on your money even before you put it into the markets?

But don’t be fooled!
There is always a catch!

I have been a strong advocate of RRSPs and TFSA, until now, because I understood, theoretically, that they allowed for you to make and keep more money than a regular trading account.
I know that an RRSP is beneficial if you’re making more money now than you will be living off of in your retirement and a TFSA is great if you’re in the opposite situation, but they both have the very very limiting restriction.
They both require that you become a permanent bull.

You see, retirement accounts will not allow you to short stocks, they won’t let you buy/sell on margin and they certainly won’t let you trade in put options.
Those poor bastards with retirement accounts have had their hands tied behind their backs as this recession looms on and the markets wipe out all gains since 1997!

It is probably a sentiment of bullishness and hopes of an unchallenged US/Canadian economy that made regulators impose that restriction on retirement accounts.
It must have been a happier time when those accounts were created.

The government needs to remove that restriction on retirement accounts and let the people decide which they would rather be – bulls or bears.

It is challenging enough to make money in this bear market, but being forced to be a bull, watching your savings go to hell and not being able to do anything about has to be the worst.

I don’t really know what to say to those of you with retirement accounts except to make wise decisions from now on.

But for the rest of us, stay away from bull-only accounts and be free to trade the markets as you see fit.

ANDS is a high flying stock that’s been in a nice uptrend since January 8th.

It sky-rocketed that day because it received Fast Track designation from the FDA for its drug approval, which is a great fundamental reason for it to go up, but consider that this company has had 0 revenue since 2008 to balance that out.
I agree that if this bio-tech company gains approval of its drug, it might start to see some significant revenue come in and that will be a good reason to go bullish on this stock.

I think that drug will pass the FDA approval process, but until it does this company will continue to eat through its cash.

Lets look at the technicals for a shorter term perspective.

This stock hasn’t seen many down days since the announcement of its FDA status, despite the market’s volatility.

A quick glance at a daily chart (http://stockcharts.com/h-sc/ui?s=ANDS) shows that this stock has an RSI @ 90, which is incredibly high and signals an overbought stock, and declining volume, which signals decreasing interest in the trend. Both of these are signs that a correction is coming.

As of Jan 30, many of the shorts had covered leading me to think that at least part of this rally had been a short squeeze.

I think that we should wait for a reversal to show itself before shorting this stock, and with rumors of a partnership in the works and an earnings release on the 26th, we can expect lots of volatility over the next little while so be wary of a false trend.

I have no doubt in my mind that there is to be a correction in the price of the stock. It might be after the earnings or it might be tomorrow.

Keep your eyes open. I most certianly will be.

I made a few stock predictions yesterday and I would like to go back over them to see if any of them came true yet. Lets take a look:

Stock: FBP
Prediction: up day tomorrow but a down-trending stock, declared dividend is still on, RSI too low
Actual: This stock went down a little today, short interest went up, and volume was high, MA cross over too, but RSI is too low, this stock won’t change direction till some good news comes out

Stock: TNB
Prediction: up trending stock, might need one more day to clear oversold levels, good earnings
Actual: This stock just wants to follow the stock market and is probably levered to stimulus package, the stock went down and the short interest went down too, i think this stock will go up soon enough

Stock: MTL
Prediction: watch tomorrow, if it opens up it’ll stay up
Actual: The stock was down on lower than average volume and the short interest is low now, the stock will probably turn up soon

Stock: DTPI
Prediction: short interest is almost fully covered, it’s oversold, time to buy
Actual: Looks like it went through accumulation today and closed up, should be starting an uptrend

Stock: MF
Prediction: short interest is high and going higher but the stock doesn’t seem like it’s stopping, watch for a small sell off with low volume tomorrow then continuation up
Actual: The volume was lower and the stock was down for most of the day, the short interest went up, probably because RSI hit 70, it’s gotta get off this oversold level before it continues up

Stock: ABK
Prediction: going down after today’s rally, down trend
Actual: This stock has really high volume for small cap, it’s really hard to predict, but it was down a little at the end of the day today

Stock: ARNA
Prediction: can’t stop won’t stop, look for the short squeeze
Actual: Wow I hate this stock, it had a correction today that will probably continue, but I can’t predict this stock

Stock: BZH
Prediction: wicked down trend stock, wait for it to spike up a couple of days then short!
Actual: BZH moved a little bit lower today on lower volume and a bunch of shorts covered, if the past repeats itself for this stock then it’ll jump up and come back down

Stock: TISI
Prediction: very oversold, almost all shorts covered, wait for it to start the up trend
Actual: The uptrend might’ve started already, 3x average volume on an up day.. got this one right..

Stock: CBL 
Prediction: HOLY SHIT HIGH short %, needs to go down for a bit, let it fall below $4
Actual: It did go down below $4 and a few shorts covered today, it might test the $4, but it will probably keep going down

Stock: NARA 
Prediction: watch this stock to turn up and then buy as it runs up
Actual: This stock started its uptrend today, yesterday was very high volume probably for all the shorts to cover, it should keep going up

Stock: PDS
Prediction: all shorts covered, watch for this to turn up
Actual: This one didn’t turn, it went lower and more shorts covered, I would like to see this one start going up soon

Stock: CLFC
Prediction: same as above
Actual: There are VERY FEW shorts left in this stock and it’s started going up a little, I’m guessing people are accumulating, but I can’t be certain, maybe the company really sucks, it is a financial after all

Stock: CRAY 
Prediction: continue up till it hits 70 RSI, very few shorts but building
Actual: It’s almost at 70! and shorts went up a little, it should slow down then reverse, wait for it

So, in review, 9 of my predictions were correct in the very short term, 3 were incorrect and 2 were meh, by which I mean I didn’t really predict anything so I wasn’t right or wrong.

That’s pretty good if you ask me.

Here are a few stocks on my watch list and my thoughts on them.
I won’t be trading all of these, but I will be watching each of them to see if my predictions start to come true.

If they do start to come true then and only then will I dip my feet in.

FBP – up day tomorrow but a downtrending stock, declared dividend is still on, rsi too low
TNB – up trending stock, might need one more day to clear oversold levels, good earnings
MTL – watch tomorrow, if it opens up it’ll stay up
DTPI – short interest is almost fully covered, it’s oversold, time to buy
MF – short interest is high and going higher but the stock doesn’t seem like it’s stopping, watch for a small sell off with low volume tomorrow then continuation up
ABK – going down after today’s rally, down trend
ARNA – can’t stop won’t stop, look for the short squeeze
BZH – wicked down trend stock, wait for it to spike up for a couple of days then short!
TISI – very oversold, almost all shorts covered, wait for it to start the up trend
CBL – HOLY SHIT HIGH short %, needs to go down for a bit, let it fall below $4
NARA – watch this stock to turn up and then buy as it runs up
PDS – all shorts covered, watch for this to turn up
CLFC – same as above
CRAY – continue up till it hits 70 rsi, very few shorts but building

Lets take a look at the weekly chart of EBS, Emergent BioSolutions.
I spotted this chart a while ago because its beautiful and predictable uptrend but now I am starting to think that this might be a good short trade.

Take a look at the chart here: http://stockcharts.com/h-sc/ui?s=EBS&p=W&b=5&g=0&id=p88491272954

This is a weekly chart of EBS with Bollinger Bands, 50/200 day moving averages, RSI on top and MACD on the bottom.
If you look at the recent trend in the stock it has been mostly up, staying above the middle line of the Bollinger bands and continuously pushing the upper limit of the Bollinger Bands higher. This is a very bullish trend in the stock and can usually be traded by buying at a reasonable projection of the middle of the Bollinger bands and selling at the top, but has the stock run up too much?

The recent volume in the stock is up drastically and the price seems to be waning, perhaps indicating some profit taking. The RSI is above 70 and has hit its own resistance level signaling an overbought situation.

The stock has been also been hitting a price resistance at the $26 level and I think that it will be a level that is not going to break.

The trade here is to short at the $26 level with a tight protective stop at $27 which is a 3.8% loss and a potential for the stock to go down to around $15 if the trend turns.

The Dogwood Report posted a sample mechanical trading system:

Go long if price is above the MA(50) and RSI(2) is less than 5

Exit when RSI(2) is above 70 or an 8 percent stop loss is hit

Go short if price is below the MA(50) and RSI(2) is greater than 95

Cover when RSI(2) is less than 30 or an 8 percent stop loss is hit

The results of this system were quite impressive.

Take a look at their results here:http://1.bp.blogspot.com/_-YWCgDK_Px4/SWQvNwoLXvI/AAAAAAAAC7U/DxV3aq5DZ2A/s1600-h/RSI(2)+Long+%26+Short.png

The one negative of this system is the number of trades this system creates is high. With a fixed cost broker like most people have, those can really cut into your profits.
I believe that this system is impressive and follows the philosophy that simpler is better.
It could probably be further refined to reduce the number of trades that it makes.

Play around with it yourself and see if you like it.
The original post is at:http://thedogwoodreport.blogspot.com/2009/01/wealth-lab-developer-51-experiment.html

Tradesignal: Strategy and Optimization screen displayed

I have started looking into developing a mechanical trading system and as with all things I try, I am going at it with a passion akin to that of Al Pacino in Scarface.
The task seems slightly in-surmountable because I have tried and failed to develop something successful in the past. In retrospect, I feel that I may have taken the wrong approach.

During my previous attempts, I was unaware of software such as Tradesignal. Tools such as this one allow anyone to develop custom trading algorithms with ease.
My approach was more of a do-it-yourself methodology and I was trying to re-invent the wheel.
I had once programed Bolliginer bands and moving averages into excel files using end of day data that I downloaded from  Yahoo Finance, only to realize that my plan of programing individual indicators then searching for trends then coming up with profitable combinations of them is a task with no end.
I tried to re-invent the wheel but my wheel turned out square.

This time, I will be successful. I am not going to waste time programming the math behind indicators. I will however, learn their use and research how others have succeed in using them in the past.
A program like Tradestation does the hard work for you. The indicators are pre-programmed, the back-testing algorithms are pre-programmed, the graphs look good, the interface is nice, etc etc etc. All in all, it is really a good program.

Your role in developing your mechanical trading system is simply to pick the indicators you want, use the Tradestation optimizer to select appropriate parameters for those indicators and test it.

Now that I have made it sound as easy as taking candy from a baby, here is the honest truth, it is hard. How hard? Very hard. Ok, maybe not that hard – but it’s not easy.
There are hundreds of indicators to choose from, millions of combinations to create and if you don’t really know what you’re doing, you may as well go back to programming indicators in excel.

Here is the approach that I am taking:

1. Learn a few common technical indicators and how they work
2. Backtest the use of those indicators
3. Learn a few complex indicators
4. Think up logical combinations of the indicators I know and test them in Tradesignal
5. Read about others who have had success in mechanical trading
6. Repeat 3 – 5

I am currently at step 2 and I am hoping to be ready to test some of my “strategies” in the next few months.
I will post my results on this blog so stay tuned.

Leave a comment if you have dabbled in mechincal trading and have any tips.

We have all heard the self help advice telling us to be proactive in our lives instead of reacting to our lives.
Proactive people are generally ahead of the curve and are more likely to be “lucky” because they are better prepared for any opportunities that arise.

The same can be said of investors. Many of them tend to take a reactive approach to investing.
They buy stocks after analysts upgrade them, they hear news on the TV to form trading ideas and they always miss the big moves.

Does this sound like you?
Here are 7 easy to do things that will get you ahead of the curve and turn you into a proactive investor.

1. Know the trend

This many sound very simple, but it is dreadfully important to keep the market trend in mind at all times, otherwise you may fall victim to a bad trade.
In today’s deflationary markets, the primary trend is down. Even if a stock does rally during this market, the gains are short-lived.
For example, take a look at HP, (symbol HPQ). Here is a company that has an amazing balance sheet, some of the best management, a steady dividend but can’t seem to get off the ground with any of its rallies.
Over the past few months, it has experienced many short term corrections, but in this environment  – it could not keep it up for long.
If you took a long position in HP after it was given a $111 million contract with the US government, or after it expanded its notebook lineup or any of its other good news, you’re probably sitting in the red.

2. Know the big players

Who else is buying / selling your stocks?
Is the institutional ownership of the stock high and are the hedge funds still liquidating? If so, maybe now is not the best time to go long.
What are Buffet, Soros, Templeton  or any of your other favorite big players buying? Can you invest along side of them?
Are the insiders buying up the stock? They may know that the prices are too good to pass up.
This may be a great indicator to help you keep ahead of the markets.

3. Watch the government

Even back in the day when the governments weren’t acting as a giant hedge fund, it still paid to watch what the government was doing.
Under George Bush, defense spending was high and that led to many defense suppliers having amazing years of growth.
When congress enacts a new tax, you can bet retailers will feel the hit as disposable income is reduced.
So stay aware of government actions such as the development of Obama’s infrastructure plan and the growing debt of municipalities to be proactive.

4. Keep track of the rates

Which rates am I talking about? All of them.
You should know the Fed funds rate, LIBOR, prime lending rates in your area, the yield on T-bills and 10 year bonds, tax rates, etc off the top of your head.
You don’t have to be an expert on the many ways each of those effect the current environment but even knowing that the current yield on T-bills is less than your local FDIC / CDIC insured savings account can save you money.

5. Keep an eye on commodities

There is a direct relationship between commodities and currencies and stocks. If you keep up to date with the prices of various commodities, you may be able to get the jump on stock markets.
For example, as crude prices go up, so does the stock of many energy companies. That can damper the prices of airlines and solar companies. Sometimes the damper on solar companies overseas is not as quick to occur as it is in the US. That can make for a profitable arbitrage trade.
If you see the price of gold edging upwards as it is these days, that can put downward pressure on the US $ because it is seen as a hedge against inflation. That may be a good time to invest in TIPS.

6. Use technical analysis

Technical analysis is looked down on by many investors because they don’t see its real benefit to them.
Technical analysis can be used to make a good investment a great one.
If a stock looks attractive based on fundamentals, an investor can be proactive by using simple support / resistance trend lines to get the best entry and exit points.
Use stock alerts, available through Yahoo Finance, to inform you if a stock has broken through resistance, a very bullish sign or if a 50 day moving average was broken or any number of other technical signals to avoid spending too much time with the charts.

7. Mark down important dates

You should know when your stock’s ex-dividend date is, when the company will issue conference calls, earnings release dates, what dates it re-purchases shares et al.
Along side of those dates, you should have a pretty accurate prediction of the announcements. If the company is releasing earnings next week, get to know what the analysts are expecting and what the company projected for this quarter. Does the company have a history of beating expectations? Can you reasonably assume that the economic downturn has hurt the company and is that already priced into the stock?
All of these things will help you get one up on the market making you a more pro-active investor.

If you follow the tips above you will have a better grasp of the market as a whole and be able to make better decisions.
Malcolm Gladwell, in his book Blink, wrote that time wasting research can sometimes be less effective than a knowledgeable mind’s intuition.
So take that to heart and be as well prepared as you can be to take on the many opportunities in the markets.

I spend a lot of time on the Internet looking better ways to quickly gauge the markets. Today I discovered a tool that some people probably know about but it awed me.

I am speaking about FINVIZ.com of course.

FINVIZ offers a very cool heat map of the market with separated sectors and stocks. They offer lots of information about any stock on one screen, which isn’t the easiest to look at but it offers any piece of data that you might need.

Their daily with technical indicators pre-drawn charts are a nice change from the simple Yahoo and Google finance charts.

They also offer a very functional screener with many built in screens.

I could go on about the up to the minute insider trading lists and news and the many other features of the website but I suggest that you visit the site for yourself and watch their introductory video for yourself at http://www.finviz.com/help_guidedtour.ashx

Enjoy this one.