Don't try to pick market tops and bottoms. Buy high and sell higher!

- Thomas J. Reavis

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April 24, 2007

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I’m a momentum trader. I don’t try to pick bottoms and tops of markets. In my thirty plus years as a trader in the “pits” of the Chicago Mercantile Exchange I had the opportunity to view first hand the best traders in the world and how they made their money. There were few, if any, bottom pickers. There I learned to let the market tell you where it wants to go and go with it. My father taught me to “follow the guys driving the big cars”. Those guys “buy high and sell higher”. The stock indexes seem to want to go higher, lead by the Dow. I want to be long the Indexes.

While the market news in the last few weeks has been anything but easy to get your arms around, the “Goldilocks Scenario” continues to buoy the market. The economy appears to be running neither too hot nor too cold. It’s just right for the bulls. Take-over activity is very strong in American corporations. Housing starts were better than expected this month. Core inflation seems to be under control, even moderating. Core inflation was up just 0.1%. Wall Street was predicting double that. Even year-over-year prices were up just 2.5%, down from recent highs of 2.9%.

On the other hand, Fed economists see first quarter growth below 2%. S&P earnings are projected to climb just 3.4% year-over-year. That would be the slowest earnings growth in more than 3 1/2 years. The dollar is in a freefall against world currencies with the exception of the yen. The dollar is at historic low levels against the Euro and the Pound Sterling surged above $2.00 for the first time in 15 years. The CPI rose a whopping 0.6% last month, although most of that came from a spike in energy costs as gasoline soared 10.6%. Don’t forget about the big one! Sub-prime mortgage problems continue to expand as some of the big U.S. banks saw net credit losses jump amid home-equity loan woes. The National Home Builders Association forecasted gloomy expectations for spring as builders face record high inventories and weak sales. Finally, another drop in mortgage applications this week increased fears of a continued slowing of the U.S. economy.

Well, how do we make any sense out of all that conflicting data? And most importantly, how do we make money on it? I like the Treasuries . I believe the Fed will be forced to cut interest rates and I think they will do it twice before the end of the year. The home building industry is critical to America. We can not afford to have the sub-prime problems spill over into the prime lenders. We can’t afford to have a jump in unemployment from the home construction industry. First quarter earnings saw larger banks and industries related to home building feeling the pinch. The Fed has been caught in the “damned if you do, damned if you don’t” position for months. They want to cut rates. They need to cut rates but they couldn’t because of fears of accelerating inflation. Last weeks tame news on inflation and renewed signs of strain on housing may have put a floor in on the treasuries. Barring strong evidence of inflationary pressures picking up again I would begin to trade the treasuries from the long side. I believe that a rate cut is inevitable and necessary and will bring an end to the sub-prime lending mess. It will allow borrowers to refinance at a reasonable rate or sell to more qualified buyers. It will bring new buyers back to the market. With nearly optimal employment, people have money to spend and there are pent up demand for housing.

To view the US Weekly Chart, go here.

Finally, I like the Stock Indexes. I believe they are set to move higher. I repeat, “Goldilocks Scenario” is working for investors. The American economy is not too hot or too cold. It is a good investment environment. There are all kinds of money out there waiting to be invested. Companies are sitting on cash. They are only looking for a catalyst to invest it. The liquidity of the private equity crowd is truly amazing. Few companies are out of reach as a buy out target for these cash rich firms. The sharp decline of the U. S. dollar has added the trump card. Most of you are aware that travel from abroad will hit all time record levels this summer. Euro currency and Pound Sterling goes a long way in America today. Our goods and services look dirt cheap to them and so do our stocks and companies. I would not be afraid to buy the indexes at these high levels. Remember, “Buy high and sell higher”.

To view the Dow Jones Weekly Chart, go here.

To view the S&P Weekly Chart, go here.

I look for the American stock market to stay strong through 2007. The economy is growing at a much slower rate than the double digit gains we are used to seeing over the last few years but it is growing at a steady, consistent rate. The biggest danger to investors in America, oddly enough, seems to be coming from the world’s fastest growing economy, China. They have become a huge customer of our goods and resources. We have an enormous vested interest in their success. So much so, that in February, a one day sell-off in the Chinese stock market sent markets around the world reeling, including the American markets which eventually suffered over a 6% short-term decline. These types of scares from an economy that is growing at an astounding rate will probably continue. Because they occur overnight in the U.S., stop protection is possible but sometimes inefficient.

I recommend using proven day-trading systems for the indexes in this market . The vix and the average-true-range of the indexes have expanded sharply over the last month. This increase means increase opportunity to day-traders. The last few years has seen very small trading ranges. Day-trading systems historically have had much better performance during periods of higher volatility and wide trading ranges. Using day-trading systems, of course, lowers the risk of overnight exposure and lowers margin requirements. Keep in mind that day-trading approaches historically have not shown a high correlation in returns to the underlying Indexes. These systems will trade from the short side at times. This approach can bring diversification, stability and increased profits to the standard stock and bond portfolio.

Thomas J. Reavis belongs to an elite class of brokers. For over 30 years, he was one of only 625 full members of the Chicago Mercantile Exchange (CME). He has been an independent trader and market maker in the “pits” since 1973.

In 1994 he began to direct his experience, market knowledge and market “feel” to managing money for investors and studying and evaluating the best trading software available. A strong reliance on sound trading principals, the ability to stay calm, think clearly and “follow the plan” in high pressure situations and excellent money management skills are the tools which have continually made him successful and continue to make him one of the best futures brokers and specifically, one of the best system trading brokers.

He has actively traded on the floor of the Exchange in the Cattle and Hog pits, the Deutsche Mark and Swiss Franc pits, and the Standard and Poor’s 500 Index. His close friendships and professional relationships established with filling brokers over three decades aid in providing his clients the very best trade execution. His ability to actually go into the pits to personally execute orders and solve problems has proven invaluable to his clients.

Tom understands the goals and acceptable risk levels of his clients vary greatly. Good communication allows him to understand and serve the best interests of all his clients whether large or small.

Trade Like A Professional!

Register now for a 2-week complimentary subscription to one of the world’s most sought after daily market letters! News, charts and trading ideas to make you a more successful trader. Also receive a complimentary 30-day simulated trading account using one of our state-of-the-art trading platforms. Hone your trading skills without risking your money. Practice makes perfect! Sign up now!