How to survive the market sinkhole

August 10, 2007 9:19 am

First, we should be clear about why some of this is going on. Aside from all of the underlying fundamental and very apparent technical conditions that helped to get us to this point, there is one overlooked item. This is definitely the repeal of the uptick rule.

According to Investopedia the “short sale uptick rule was, “established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.”

That was what it used to be. But on July 6th, in a stunning reversal, the rule has been lifted. The intent was to help stabilize markets in a declining market. In that type of environment, as sales increased, certain traders (“shorters”) were locked out of adding to the selling pressure.

You know, I just thought of something; they must think we are stupid because I think I hear that analysts are now saying that the economy is slowing and not healthy. I am sure I did. In fact, did Joe Battipaglia say he is 50% cash? I think he did…. Was this what they were all saying just a week ago? No, I do not think so.

I am so sick of the talking heads telling us that they are in or out when they only seems to tell us where they are when the market is moving in their direction. Honestly, I am hard pressed to even believe I just wrote that, but it is so seems so obvious.

The regulators have given us this volatility by removing the safety trigger and holding of by any significant FED moves. It is very clear that no matter what is said by the gals and fellas on the tube, the regulators are the ones that need to take it back. The way this needs to be is by “operation flood-me.” This is the way in which the FED comes in and puts some additional liquidity to help avert a credit gridlock. During this vacation heavy time, traders are gone, business is slower and credit will traditionally slow.

This morning the FED added an additional $19 billion of liquidity though open market operations over what they have done last week. That is a good thing that helped to pull the index futures off of their early morning low’s.

Here is what needs to be done. (Assuming you have cash as we have advised since mid-July)
1) Do not panic
2) Do not panic (needed to be said twice)
3) Buy a FEW shares of the most “beat-up” areas:
a. Apple is getting oversold, nip softly
b. Housing stocks are in the toilet, look at dollar cost averaging in to TOL, KBH (carefully)
c. If you are BRAVE, add a very small position of financials (SCHW is a good start and then add to larger firms such as LEH)
d. Re-evaluate your International Equity Mutual Funds. Move allocation to domestic securities.
4) Watch for further FED action.
a. If they continue to add liquidity, go back to #3 one more time and then go to #5
b. If they discontinue the liquidity flow, Skip to #7
5) Look to add positions that held up through the storm like:
a. ZUMZ, SNDK, ZEUS, STLD, NOK, SFLY
6) Continue to scour the portfolio for positions that underperform and add sell stops
7) Add fixed income positions in the form of AA or better rated Preferred Stocks
8) Add Sell Stops across portfolio to contain risk. Be careful not to panic….
9) Do not get sucked into the Automatic bounce but slow down and think about your moves. If they do not work out immediately, stick to your disciplines and adjust accordingly.

Later today, we will have a more detailed discussion of a few of these important items. We will also post a podcast with a roundup of the important portfolio protection and market opportunities later today. Make sure to subscribe.

Horowitz & Company clients may be long and or/short some of the positions listed as of the date of this writing.

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