Daily Stock Picks Report Archive

FRE & FNM had good news this morning.   The US Treasury and the Federal Reserve are doing a variety of things to strengthen these two government sponsored firms.  Collectively, these two companies provide trillions of dollars of mortgages and are central in stabilizing the fragile housing industry and financial markets.

Credit lines, borrowing ability, stock purchases by the US Government, and opening the Fed Discount window to these two companies for borrowing money from the Federal Reserve are the primary strategies to bolster Freddie Mac (FRE) and Fannie Mae (FNM).  I purchased the August 7.50 calls in my wife’s IRA on Friday at $4.10 per contract and FRE stock at $6.04 average.  This government action is going to provide a big stimulus to all financial stocks, including my position with BAC.  This should provide what we call in the business, a "V" bottom in the price charts of BAC, FRE and FNM describing the shape of the stock chart.

We probably will see several days of consecutive rises in these financial stocks, especially FRE and FNM.  Typically what happens in a situation like FRE and FNM is that the stock rises sharply for several days followed by a more gradual rise in price.  Everyday does not have to be a rise in stock price to see an upward direction in price.  I doubt that the financial stocks will have a sharp sell-off on this rise as we have seen in the past.

It would not be surprising to see these two stocks double in price or more in the next couple of months but of course, that is no guarantee, just a strong hunch. 

 The public needed this confidence boost and the mutual funds, hedge funds, money managers and individual investors-traders are going to pile into this sector tomorrow morning. 

The S & P futures are substantially up tonight, about 1%, and the European markets are set to have a very positive open.  We just have to monitor the market sentiment, the trading action in the financial stocks and most importantly, the signals that the stock charts are giving us.  A strong warning to all, don’t get complacent about your current position in these financial stocks (or any stock for that matter).  It is easy to fall into a fantasy la-la land because you are making profits from a stock. 

As I have said to myself and to others for many years that your job is to keep flying the aircraft.  Don’t let the emotional highs or lows affect your flying.  The ideal state of mind that I can describe to be in when investing or trading is to be calm, alert, aggressive, decisive, disciplined and unemotional.  Easier said than done but that is your goal.

Let’s talk about some thoughts I had when choosing to buy the financials this last week, especially FRE and FNM.  Look at a daily chart of the two stocks with 15 months of price history.  You will see the shape of the chart looks like a banana curve that is pointing down at the end, which represents the current price.  The stock price is going down at a faster and faster rate until it goes straight down.  You see the increasing volume in price that correlates with that drop.

When I see that, I study the news that is causing that kind of drop, the overall factors that could influence this stock but most importantly, I study what people are saying about that company.  Analysts, fund managers, television commentators, journalists listing their story on a website, occasionally Yahoo message boards on that stock, and I try to figure out in a common sense way if what all these people are saying is true or false.

When I noticed the drop in FRE and FNM early last week I said to myself that it wasn’t ready yet.  I felt there was more "panic" left in the stock as well as the general financial stocks overall.  All I heard was "the sky is falling" over and over on CNBC from all the talking heads.

Along with that drop is a lot of panic selling in the stock, which caused it to drop from $22 to $4 in the last month of trading in FRE and $28 to $7 in FNM.  FNM has the perfect textbook chart, corresponding news that caused it to drop, volume increase, investor and market sentiment indicators that all add up to a wonderful opportunity that comes along only a handful of times throughout the year.  (This year has been plentiful of stocks that have done this).

What is so challenging for everyone who is trying to find the right stock to buy and the right time to buy it.  What you will hear from me over and over throughout the months and years is that these opportunities require you to do something at the moment when your emotions tell you not to do it.  I try to find the maximum point of enthusiasm in the investors’ minds regarding a particular stock and that is the time you want to sell your long position or open a short position.  You get your final cue to buy or sell using stock charts after you have learned how to set up your stock charts using technical indicators.  It is used for telling you when to buy and sell for ALL trading strategies, long term or short term investing.

In this case of FRE and FNM, I try to gauge the maximum point of fear and panic to find the entry point to buy these stocks long or cover a short position. 

And it takes a lot of emotional fortitude to do something  that appears that you are the only one doing that.  Our human nature is that we want confirmation that we are doing the right thing when we see everyone else is doing that too.  But like I said in a report last week that you don’t make a lot of money doing the same thing everyone else is doing at the same time.  My friend Warren Buffet said that too in different words.  But that is how large quantities of money is made in the financial markets–the largest in fact.

Because the whole herd is going a certain way – does that mean they are going in the right direction?  NO!  Do sheep think about whether the lead sheep is doing the right thing?  No.  The good news is that you can train yourself to evaluate whether the herd is going the right way and whether you want to stay with that direction, even though it feels uncomfortable to be different.

Will you take the time to read this story and see this picture?  I haven’t forgot about this story from over 3 years ago because it makes my point very clear.  I guarantee that you will hear this subject from me again.

http://rebeccaskloot.blogspot.com/2005/07/of-note-counting-sheep.html

Getting back to FRE and FNM….. I doubt that I’ll be selling those positions tomorrow.  It is likely that the buying will continue for a few days but I am prepared that anything could happen.  I try to trade what I see, not what I expect to see.

ESLR probably starts rising with the positive change in sentiment in the market.

BAC should move up nicely this week as well but not as fast and sharply as FRE and FNM.  I was stopped out at $21.31 at the open on Friday.  Repurchase at $21.  This happens a lot when you are trying to buy a stock based on a buy signal.  If you have too tight of a stop loss, you are going to lose too often.   I am holding until I get a sell signal.

SQM idea I was looking for last week is a No-Go.

HK at $50.50 to $51 is something I am still evaluating if that could be a decent short position.  That would be a small position if any occurs at all.

ICE, Intercontinental looks very interesting as a long.  I did not see this until looking this weekend.  I am a day late to buy long….I’d sure like to get a lower price, maybe at $83-85 but I think it will jump at the open with most other stocks because of the FRE and FNM positive news.

By the way, before I forget, this is not the time to be selling short stocks in a deeply oversold market right now, unless some specific sector has really gone up quickly.  I think I might have said this last week.

Mitch King