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ll those wise heads who have been calling the end of the bear market will have to wait just a little longer before being able to say “I told you so” as the FTSE 100 delivers a rather alarming setback to start the week.

The failure at a combination of the 50 day moving average and a line of resistance from January at 3,950 proves once again the danger of giving this market the benefit of the doubt. But for those who would still like to, only an end of day close below the grey 20 day moving average at 3,758 is the trigger for a retest of the lows.

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Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.

1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.

2. Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan – and stick to it.
Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.

If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.

5. How did you find out about the stock?
Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities?  You’ll start to notice quickly if you have subscribed to a good newsletter or not.

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?

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Your stock trading rules are your money. When you follow your rules you make money. However if you break your own stock trading rules the most likely outcome is that you will lose money.

Once you have a reliable set of stock trading rules it is important to keep them in mind. Here is one discipline that can reap rewards. Read these rules before your day starts and also read the rules when your day ends.

Rule 1: I must follow my rules.

Naturally if you develop a set of rules they are to be followed. It is human nature to want to vary or break rules and it takes discipline to continue to act in accordance with the established rules.

Rule 2: I will never risk more than 3% of my total portfolio on any one stock trade.

There are many old traders. There are many bold traders. But there are never any old bold traders. Protecting your capital base is fundamental to successful stock market trading over time.

Rule 3: I will cut my losses at 5% to 15% when I am wrong without question.

Some traders have an even lower tolerance for loss. The key point here is to have set points (stop loss) within the limits of your tolerance for loss. Stay informed about the performance of you stock and stick to your stop loss point.

Rule 4: Never set price targets.

This is a style that will allow me to get the most out of rising stocks. Simply let the profits run. Realistically, I can never pick tops. Never feel a stock has risen too high too quickly. Be willing to give back a good percentage of profits in the hope of much bigger profits.

The big money is made from trading the really BIG moves that I can occasionally catch.

Rule 5: Master one style.

Keep learning and getting better at this one method of trading. Never jump from one trading style to another. Master one style rather than become average at implementing several styles.

Rule 6: Let price and volume be my guides.

Never listen to any opinion about the stock market or individual stocks you are considering trading or are already trading. Everything is reflected in the price and volume.

Rule 7: Take all valid signals that show up.

Don’t make excuses. If an entry signal shows up you have no excuse not to take it.

Rule 8: Never trade from intra-day data. There is always stock price variation within the course of any trading day. Relying on this data for momentum trading can lead to some wrong decisions.

Rule 9: Take time out.

Successful stock trading isn’t solely about trading. It’s also about emotional strength and physical fitness. Reduce the stress every day by taking time off the computer and working on other areas. A stressful trader will not make it in the long term.

Rule 10: Be an above average trader.

In order to succeed in the stock market you don’t need to do anything exceptional. You simply need to not do what the average trader does. The average trader is inconsistent and undisciplined. Ask yourself every day, “Did I follow my method today?” If your answer is no then you are in trouble and it’s time to recommit yourself to your stock trading rules.

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Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.

1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.

2. Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan – and stick to it.
Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.

If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.

5. How did you find out about the stock?
Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities?  You’ll start to notice quickly if you have subscribed to a good newsletter or not.

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?

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Bill Gates is super rich but his once high-flying software company has been in the doldrums since mid-2002 after falling from the $35 level. The problem with Microsoft (MSFT) has been its failure to grow both its revenues and earnings at the superlative rates the company once enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit in the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).

But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a growth stock.

Its PEG on the surface of 1.51 is not cheap, but if you discount in the cash of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 currently costs $380 a contract (100 shares).

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option strategy. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.

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If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.

A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.

Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.

All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!

Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.

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OK, the activities of our beloved Indices have been nothing short of spectacular over the past few days but is this down to the sort of activity that most pundits reckon it is? That is to say, are all our problems sorted and are we all about to set sail happily forever forward into a new Bull Run?

Nah, we didn’t think so either. All of us here at the GT Office reckon in the first instance that you should seriously expect and beware the so called “Dead Cat Bounce” and expect a fair amount of Profit taking over the next 24 hours as Traders try and gauge in their own minds exactly what they think has happened and in these instances the first thing they do is protect and lock in profits first. So please, please, paleeeeeese no open long positions left unattended. Quite beyond the fact that we feel this is seriously against GT Rule No 1, in the present climate this would be extremely unwise as the markets have shown themselves to be extremely unpredictable and to be honest this current situation has, we think, more to do with the “last stage thrashes” of the current Bear market rather than a straight forward start of a new Bull Run.

The only thing that baffled us here in GT Land was the complete lack of any form of last minute sell off in New York last night with the DJIA steaming upwards right through the close. Not even a last minute little 10 minute “twitch” and slippage of a 100 points or so which I must confess caught a few of us off guard but hey nobodies perfect.

Either way we don’t care what sort of direction the Indices take over the next few days or so do we GT’s, do we, as long as it is moving in one direction or another and there are opportunities for profitable trades up or down?

Usual drill, keep your powder dry, stay safe and your back covered at all times.

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There is an old stock market and trading saying “Bears make money, Bulls make money and Pigs get killed” and by this it means that in troubled times (anytime really) don’t get too greedy. Set your target, hit it and get out.

How many times have you found yourself after taking a hit, going straight back in to trade and then hanging on just that too much in a trade hoping to make back the funds you just lost in your previous trade only to lose more as the market turns and you get caught?

If all of us are entirely truthful then the answer would be most of us really but that is not good enough. Don’t get suckered into the philosophy of the “constant big hit”.

Sure we all love it when we have our positions in place and the market takes off in the direction we are facing and off we go hanging on to its coat tails for dear life. However, let these experiences be ones we savour and appreciate and not constantly expect or need.

In the next few days the markets are likely to get very choppy and up and down like a yoyo (indeed at the time of writing the DJIA futures have just pulled back about 200 odd points) so if you hang round for too long you run the risk of getting caught.

Remember GT Rules. Get in, strike hard, hit the target and get out…..quickly

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Hmnnn, this weekend’s comment is more about the general situation rather than anything specific and is more a plea to the Politicians to stick to what they supposedly know best and that is also to stay out of areas that you are more than likely to cause damage in i.e. the present market situation.

If you ask most people in the know about trends, charts and market fluctuations and the general consensus would appear to be that we are in the final stages (albeit temporary) of the present Bear market.

Now again ask the same individuals and you will get the common answer that a typical end to any Bear phase is usually categorised by some fairly spectacular swings and thrashings around as panic sets in and we get to a situation of almost wholesale capitulation and people by and large desert the marketplace and almost create a vacuum and the logical conclusion to all of this is that as we all know Nature abhors a vacuum and therefore positive elements swing into play, life moves on and a new phase begins.

To bring about a true end to a Bear phase as opposed to a gerrymandered one (i.e. fiddled by Politicians) this has to happen as otherwise market forces can’t be satisfied that they have found the true bottom to the market and sooner or later they will. Well if you look back at last week we experienced some pretty spectacular swings and thrashes. Friday alone on the DJIA saw an almost unprecedented 1000 point rally at one point followed by the now to be expected end of day sell off – in this case a loss of 400 points in just over an hour.

My point about the Politicians is that half way through the afternoon on Friday (British time) President Bush took the stage to address the American people and when he had finished the DJIA promptly shipped 200 points. I’d hate to see things when “Dubya” really fouls up! I think the idea is to try and portray confidence and leadership Mr Bush. What the markets and the traders don’t want to hear is “we’ve got ourselves a little situation here and we gotta hang in there for a while till things get a little less tough….etc…and who knows things could pick up if we all pull together (and if it all falls apart again in four months time do I care, by that time it’s someone elses problem?)”

This afternoon (Sunday) Gordon Brown addressed reporters from Paris where he had been attending a meeting of European Finance Ministers and Leaders and said that he hoped that stability and confidence would be restored to the markets within days. Way to go Gordon, what about in between? Was that an invitation to the Bears to give it one last final Hoorah over the next day or so or what?

Hmnnn.

At the end of the day as far as those of us in the GT Camp are concerned the next few days though likely to be extremely choppy, will actually throw up more opportunities and trading situations than would otherwise be possibly the case so stand by for opportunities either long or short but be prepared to get out quick and don’t hang about too long or else you might find profitable situations getting reversed in pretty quick order.

Keep the powder dry and stay safe!

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Just thought we would pop this “into the mix” before “the great unwashed” that masquerade as our Financial Services Authorities weigh in with another “pop” at short sellers. Its an article from the LA Times that throws up some interesting statistics about short selling that in turn sheds some light on why in fact the various indices continued to plummet (and some would say actually accelerated their decline) after the ban on short selling was introduced.

Here it is: LA Times Business

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Just a quick heads up about the pre market action on the FTSE. Early morning futures were showing that about 2 hours ago the important 4,000 level was breached for the first time in 5 years. What does this mean? Nothing really as we feel that there are still opportunities for wild swings in either direction but if things do calm down slightly then perhaps now might be the time to perhaps think in terms of short term buying but again as always keep those stops in place at all times.

Addendum. As of the time of this edit (8.06 am BST) the levels above have been well and truly blown apart but now is not the time for complete panic in the GT Jungle. Keep your heads down , ammunition ready, powder dry and wait for the hysteria to wash over and pass (as it will) and then start to head out for the rich pickings that will inevitably be found lying all over the place left behind by those less informed.

Addendum Part 2 – the Index fights back? Seriously the FTSE (and also the DJIA) is bouncing around at unprecedented levels at the moment but this does not mean “man the lifeboat” by any measure for those GT’ers out there. Far from it, what it actually represents are a massive range of potential opportunities for those who get it right and follow their game plan and stick to disciplined trading. In the forthcoming days the forum for this web site will be up and running and to coincide with that we will be setting a small library of basic articles on what Indicators there are out there to use and a beginners guide to understanding charts etc.

So to sum up. Keep your heads down until the firing stops. Stay safe but be ready to take advantage of the many unsuspecting bargain opportunities that will undoubtedly present themselves in the next days or weeks. Be prepared to buy and (perhaps more importantly) sell at a moments notice if necessary but always keep an eye out for the bigger picture.

As the late Sir John Templeton said. The best time to buy is always at the point of maximum pessimism and lets be honest, if todays media is to be believed then we are either there now or not far off, but we know better  than that, don’t we fellow GT’ers?

Quick, pass me the ammunition

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OK anyone who happened to be trading yesterday will have got caught up in what has now turned out to be a two day (almost daily occurence) i.e the late market US Sell off. Yesterday it was over 500 points in the space of 30 minutes and at one point made market indicators look like penny arcade slot machines. The upshot of all of this is that we feleel here at the GT office that the DJIA is MASSIVELY OVERSOLD at present as any glance at whatever indicators you would like to use will tell you but that doesn’t mean that we have found a market bottom yet. What is does mean is that beware a fairly short term hefty upswing anytime soon SO POTENTIAL SELLERS BEWARE, KEEP THOSE STOPS IN PLACE.

The index effectively commenced freefall the moment the two trend lines illustrated were breached so beware:

10 Year Chart of the DJIA

As far as GT Rules are concerned? Get in if you want to as there are some potentially fairly massive short term profits to be had…but as always, get in strike hard and get out as soon as you can, trade in the market for anytime longer than about 30 minutes at a go and “buyer beware”.

Usual deal…please read the disclaimer. We have to say this to keep the legal boys happy…pah what do we care? Well a lot really as we want to make sure that all of you out there in “the jungle” try and lose as little as possible and make as much as you can.

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The market was rallying this afternoon, but one clue suggested it wouldn’t last.  We don’t know if you noticed, but when the NASDAQ was up 46 points, decliners outpaced advancers 5 to 4.  After days of panicked selling, the market was finally seeing some relief.  Yet more stocks remained lower than bounced.  It’s very hard to excited by that kind of limited rally.  Volume was of the capitulatory variety, but the action wasn’t.  When the major buying begins, it should lift nearly every stock – at least in the near-term.  Be careful buying into upward momentum where there’s thin participation.  Typically, that’s a trap to capture longs chasing the appearance of a bottom that just formed and not wanting to miss the rally off that bottom.

If you’re looking to jump in for a short-term ride on the long side, think about doing so on weakness, not strength.  Consider looking at the intraday charts, say the 5 or 10 minute charts, and look for a positive divergence.  Beware though, divergences on intraday charts tend to play out very quickly.  And as always, keep stops in place.  With the VIX in the upper 50s and the put call ratio printing above 1.0 daily, we’re going to see tons of volatility and whipsaw action.

Early this morning, the Federal Reserve led a worldwide coordinated effort to cut interest rates.  Futures, which had been down sharply, quickly reversed and appeared to signal a very bullish open.  But by the time the market opened, stocks were down quite sharply once again.  After a very quick rally (the NASDAQ moved up 90 points in the first 30-35 minutes), the markets sold off hard over the next few hours, then rallied in the afternoon session and hit intraday highs.  Then during the last 30 minutes of the session, the market was once again in freefall mode.  So despite the fact that the indices were ”only” off in the 1-2% range, the intraday volatility was incredible.  When you consider the pre-market volatility, it may have been the most volatile session ever.  That’s what happens when the VIX climbs to record levels.

Don’t expect much different trading conditions over the next few trading sessions.  Uncertainty is feared by all on Wall Street and we are LOADED with uncertainty right now.  We’ve never seen a period like this before.  Don’t take any unnecessary risks and be sure to keep positions smaller than normal and stops in place.

Protect your capital during this period of major uncertainty.

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The Lead from the US: Negative. At the London close, the Dow was 35.4 points lower and plunged to end 508.39 points down at 9,447.11, while the Nasdaq was 6.1 points off at the London close and finished 108.08 points down at 1,754.88.

Commodity & Currency Watch: The US dollar gained 0.26% to Y101.58 but lost 0.98% to $1.3621 against the euro. WTI added $2.25 to $90.06, as Gold climbed by $15.8 to $882.0 oz.
London Expects: The FTSE 100 index is seen opening by 135 to 270 points lower by spread bettors after closing 16.03 points up at 4,605.22 on Tuesday.

The Technical View: The charting reality of the FTSE 100 is that there is little in the way of support or resistance on the way up or down between 4,000 and 5,000. This meant that once 5,000 was lost “properly in the past few days, there was a high risk of 4,000 being hit, and rather obligingly the banking sector seems to be the fundamental vehicle for the decline.

With the FTSE 100 indicated near 4,400 at the moment we have the rather wide parameters of yesterday’s 4,745 high and the 4,000 level to play with.

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