Every once in a while, a strange pattern that is either bullish or bearish will catch my eye and when it happens repeatedly during my weekly review of the HEDGEfolios universe, I spend more time on it. I normally don’t look at them as proof of anything - just something that creates a pause and makes me pay closer attention to many of the other indicators I follow. This week, I noticed a high number of stocks that closed at or near the low of the week. This is a classic technical analysis issue that presents itself well with Candlesticks, but I’ll spare the techspeak and just sum it up by saying  - it is a warning sign.  I decided to look at the actual numbers and found that Friday’s action had over 31% of the 3044 stocks closing within one-half percent (0.5%) of the low.  Anecdotally, the last time I saw this situation affecting so many charts was the beginning of April.  Note that the HEDGEfolios Timing Indicator gave its last new bearish reading on April 10th.  I am not saying that I expect the market to decline immediately, but this poor closing action from last week certainly has my interest piqued.  I still have a bullish reading on the market, but it’s an increasingly skeptical one.

I met some great people at the Money Show and learned a few things that will hopefully make me and HEDGEfolios better. One of the most valuable things I learned didn’t come at the conference center and instead, I found it on the train back to my hotel. Not from some brainiac market wizard or guru as they are often called, but from a really nice couple that had attended the conference as investors. I was reminded of a simple fact, but the most important fact of them all when it comes to what I do on this site - NEVER TAKE THE INDIVIDUAL INVESTOR FOR GRANTED. I admit to slipping into this situation all too often. I spend so much time thinking about what I am trying to achieve with HEDGEfolios that I sometimes fail to appreciate what investors are trying to achieve. Those of us providing services or products to help investors need to spend more time finding out what they want rather than trying to convince them that they need to take what we are giving. The individual investor takes a back seat to the volume flowing through mutual funds, hedge funds, etc. and while institutional managers make the decisions - they are after all making decisions for the individual investor. So thank you Burnie and Maureen, you reminded me to never take the needs of individual investors for granted.

I am much more excited about IBM than the Dow going over 12,000. It may be simplistic and to some of you, it may seem ignorant of the bigger picture. Sorry for that, but IBM is much more important, at least to me. IBM posted earnings that were substantially higher than analyst estimates based upon improving revenues and margins and the outlook for next quarter is also encouraging. The Dow, on the other hand, did none of those things and never will. Please remember that the Dow is a measurement of prices, not justifications for those prices. Other than making a correct broad market bet by purchasing the DIA, you will not profit from fixating on Dow 12,000 or Dow 120,000 for that matter. You will make money by doing a thorough analysis of the fundamentals of companies like IBM and making sure that the technicals are supporting your number crunching.

At the Money Show in San Francisco, I have been struck by a theme that has been pervasive in many lectures, questions from the audience, and sideline discussions on which I have eavesdropped. There has been a constant focus on betting on the market, fearing the market, doubting the market, hyping the market, falling in love with the market, etc. etc. This is a very wrong, very dangerous and very paralyzing concept to adopt. Yep - I know I have done my share of preaching about making sure that the market is behind you and market timing in general. However, I want to clarify my thoughts on this: There are always individual stocks to buy and sell, regardless of the current reading or direction of the Dow or any other measure of the market. A bullish market makes it easier to pick individual stocks and a bearish market makes it more difficult. Neither will make it a sure thing that you cannot lose or you cannot win.

When I last gave an UP signal on IBM, it was July 24, 2006 and the stock had been suffering through a 3-month slide since I gave the DOWN signal on April 10, 2006 at $82.27. Most market technicians were pretty negative on the market in July due to high oil, the FOMC, Geopolitics, blah blah blah. Apparently, lots to worry about that would paralyze many investors and prevent them from buying something like IBM. But you have to fight through all that crap. If you don’t, you will not make a lot of money. You may make some, but I doubt you will make a lot. There are always stocks to buy, even if we break above 12,000 or fall to 10,000, there are always stocks to buy.

A quick post as I am short on time out here in San Francisco and I still need to update the signals for this week…

The show has been worthwhile so far - at least for me. It’s been a great opportunity to learn from some investing luminaries and talk with the ones that interest me. The day started off with presentations by Bill Bennett, Ned Davis, Ken Fisher, Knight Kiplinger and Ralph Bloch and finished with a great discussion on the BART with a wonderful couple who attended the show. When I have some free moments, I’ll probably write summaries of the more interesting comments from other presenters but here’s a quick take from this morning. These are not direct quotes, just my abridged paraphrasing:

Bill Bennett: Listen to everyone here and you will likely leave smarter or just more confused.

Ken Fisher: Much of stuff you may hear is mythology and often untrue so if you listen, don’t believe all of it.

Knight Kiplinger: Don’t listen to us, make up your own mind.

Ned Davis: Listen to me, if you can, because my info is only available to institutional investors.

Ralph Bloch: You should have listened to me before I retired.

Did you get all that? Actually, I enjoyed their thoughts and have great admiration for all of these guys, but Ralph Bloch has always been worth more than the cost of admission (which in this case was free.) The primary message from Ralph was “blend fundamental and technical anaylsis” when you invest. This is a foundational concept for HEDGEfolios and I am a bit biased, but if you ever get a chance to listen to Ralph, take it.

I just thought I would get out in front of the hype with my title, but trying to top the financial media can be tough these days. We are firmly in the the land of the absurd when new Dow highs are reported on CNBC within a few minutes of the open. I am looking forward to going over 12,000 so I can finally throw a party and congratulate myself on being bullish. Oh wait. I have had a bullish bias since July 10th when it wasn’t quite as popular and more importantly, when prices were a lot lower than they are today. It’s a bit annoying (call it envy) that I am watching smarties on tv get a lot of publicity for being bullish the last few weeks and I cannot remember seeing most of them in June or July, except for a few that were negative then. Economists, market strategists and weathermen seem to have an amazing ability to be forgiven or forgotten for their poor calls and lauded for the good ones. Please hold me to a higher standard. It’s pretty easy to see what I said and when - just look at the HEDGEfolios Timing Indicator and read through all my posts in the Market section of READ.

Given my upcoming travel, I took an early run through all the charts so it’s easier for me to wrap up my analysis on Sunday. It would be an understatement to say how much bullish momentum there is and yet it is worth a mention. I spent an unusually high amount of time analyzing DOWN signals that are wrong. There are quite a few so it took a while. Anyway - as I have mentioned in the past, each investing style has its strengths, weaknesses and limitations. Mine is no different and I try to emphasize my strengths, recognize common weaknesses, and respect my limitations. I am always concerned about exiting UP signals too early and then, failing to change them when they don’t head lower. Last night, I analyzed over 400 DOWN signals that I wished were UP and I was struck by action that consists of large price swings on marginal to low relative volume. It will be easier for me to evaluate when I have the benefit of a full week’s worth of volume, but I am scared. Yep - scared that I might throw in the towel on these and then see them and the rest of the market selloff. It would put me in good company because it appears from my view of the action that the shorts have gotten their proverbial asses handed to them and that might make it easier for them to cover those same asses. I never like to attribute bullish moves solely to short covering, but there has been a lot of that at work this week. It’s a combination of short covering, declined selling pressure and increasing buying power. It will be tough to ignore this data and hold off on covering my own ass on wrong DOWN signals but I will do it if it looks like the momentum will continue.

Earnings and guidance have been impressive to the markets but not so much for me. The reductions to estimates before earnings season began have made it easier to beat. I am amazed when a stock like COST can decline on a warning or reduced estimates in August and then trade higher than those levels when they marginally beat. Regardless, we are just starting with earnings and I am going to reserve judgment until it’s over. I have not changed any of my views in the What Next post and yet, it doesn’t seem the market cares much about my concerns. Until CNBC stops showing how many points below Dow 5,000,000 we are, it just won’t matter.

I will be attending the Money Show in San Francisco from Monday to Wednesday of next week.  I wasn’t asked to give a presentation so I will be keeping my mouth shut.  I look forward to listening and learning from some of the excellent market strategists, traders, analysts, etc. that will be out there. If you happen to run into me, I’ll be happy to spend a few minutes with you and look forward to getting some of your feedback(good or bad.)  If you want more of my time, I have some flexibility to fit in a few more meetings, but you’ll have to email your request in advance.

The market’s reaction to yesterday’s plane crash into a tall New York City building was eerily similar to past events. No, I am not talking about 9-11 and the World Trade Center.

Actually, I was reminded of April 18, 2002 when a small plane crashed into the Pirelli skyscraper in Milan and the August 10, 2006 foiled terrorist attacks in the United Kingdom. When the news broke on the Milan crash, the memories of 9-11 were less than a year old and it was no wonder that the market sold off. A plane, a tall building, explosion, fire, smoke, firefighters, emergency workers helping bloodied businessmen - all the elements were there except for one thing, terror. The Dow lurched sharply lower by about 200 points as soon as the news of the crash spread. When the cause shifted from terror to operator error, all these losses reversed and the close was only 14 points lower for the day.

When the British announced that they had interrupted a serious terrorist plot on August 10, 2006, the market had not yet opened. However, the S&P 500 had declined each of the preceding 3 trading days for a combined drop of 13 points and the day before, it closed near the low and fell beneath the 200-day moving average. With the announcement from Britain, the market opened with a good mood, traded up most of the day and finished with a 6-point increase on the S&P 500. Art Hogan of Jefferies summed up the sentiments on that day by saying, “Today was encouraging that the market could look beyond the day’s headlines. The pullback in energy certainly helped today, too. Hopefully we can shift our attention away from the geopolitics and back toward the state of the economy.”

The markets do not have advanced warning of terrorist attacks or accidents that look like terrorist attacks. Yet, each time something like yesterday happens, there is a weird false sense of security that gets factored into the trading. It only lasts for a day, but it can provide a weird and meaningful change in sentiment. I wonder whether the market would have done as well on these three days if the non-terror events had never happened. Somehow, we become optimistic about the future because something negative didn’t happen. Maybe it does take the edge off and forces us to look towards some of the positives that are actually happening, but I still don’t like the idea of a terror relief rally.

I changed the Alcoa signal to UP this week and I wish I hadn’t. No, it’s not just that the stock is down the day after their “not so great” earnings. Actually, it’s holding up pretty well as I write this and we’ll see how it closes. Any close above the open will be a victory for Alcoa longs. The main reason I am disappointed has to do with some of my underlying portfolio management.  One of the rules I try to live by is to hold off on signal changes until the company reports its most recent quarter. Obviously, I disregarded that one for AA. Instead, I chose to look at the improving technicals last week and my belief that analysts and investors had already been negative enough on AA. I gave it a lot of thought especially in light of the commentary that appeared on tv yesterday and it may turn out ok, but that doesn’t matter. What matters is sticking with your investing rules until you are sure that they don’t work most of the time. They’ll never be 100% right but they should guide you and prevent you from making stupid mistakes. I cannot promise I won’t make similar mistakes in the future, but next time I am going to remind myself to wait until earnings are reported.

There’s almost nothing about the current markets and how they are being covered by the media that isn’t reminiscent of 1999 and 2000. I don’t have a problem with it as long as “it’s different this time.” Shoot - that was a slogan from back then too! Oh well, enjoy the bull market if you are long and for all you bears, I can feel you loading up on this one. It’s just a sensation but I am feeling a lot of flashback hell (memories that are painful to relive). On its surface, last week looked like it added a lot of strength. Digging deeper, I didn’t find many new UP signals and that is a consistent pattern over the past month. However, the bullish move will not end just because there is a shortage of new places to park money. In fact, if the money that is still sitting on the sidelines finally comes in, it will likely just bid up the recent winners and we will see a push higher. However, if new capital does not show up before this thing starts to sell off, I expect the next bear move to begin. I don’t know when that is coming, but as I wrote this weekend in my thoughts about what’s next, I see some tough factors affecting the market.  Just remember, it doesn’t matter what I think or anyone else for that matter.  It only matters what happens.  North Korea is heating up (pardon the pun) and yet, the markets shrugged it off, at least for now.  Earnings season begins tonight and it really deserves a lot of your attention (and mine too.)  I am hoping that digging into the 10Q’s will help me avoid the flashback hell.

If Google does buy YouTube, I hope it doesn’t turn out to be BOOB Tube. I cannot help looking at this transaction like a cross between Ebay buying Skype and the Napster disaster. At first I thought about Time Warner “having to do” a deal with AOL at the peak of its hype. But then, AOL actually had significant cash flow to justify some kind of valuation. In this case and at least for the moment, YouTube has minimal revenues since starting to sell ads in March. I have seen some interesting guesses on their revenue generating potential, but who knows what the real numbers are. YouTube’s recent announcement that it now serves 100 million videos daily at its site is a big deal. No doubt. But they didn’t say they reported $100 million in revenues or $100 million in profits. We do know that they have about $1 million a month in estimated bandwidth costs, but that’s chump change for someone like Google. It does make me wonder that if video content is such a great space, that maybe we should be talking about buyouts of companies like AKAM that are actually making money delivering the content.

Frankly, I think this whole thing is a fad that will fade. I remember MP3.com, their IPO, their being sued into oblivion, their sale to Vivendi, and finally, the dismantled scraps being picked over by CNET. How about Napster? The greatest similarity to YouTube was an amazing growth story used by the same peer-to-peer crowd that loves YouTube. It was free, it was fun and it was a huge community. But it didn’t make money and it had huge copyright issues. Again, the similarities are eery. Napster was fantastic and at the end of the day, a failure by big music to recognize a shift in the media’s distribution. It took Apple to get it right with iTunes and the iPod.

Some times, free stuff works because it is free. But investors have a tough time with cool things that don’t make money. Take Skype for example. I love Skype and so do millions of its users. However, Ebay paid $2.6 Billion for something that generated about $80 Million in revenues for the first half of 2006. Just look at what has happened to EBAY stock since last September when it agreed to buy Skype (down about 25%). There are other reasons, but this is certainly one of them. Was it worth it? Ebay management is not providing much clarity on Skype revenues and expenses, but the CFO did suggest that they hoped to do $200 Million in annual 2006 revenues. You need some amazing growth rates to justify the price they paid. Assuming they reach their 2006 sales goals, is Skpe worth 13 times sales? Verizon is trading at 1.25 times sales, AT&T is at 2.25 times, and Quest is at 1.17 times. Skype revenues will have to grow 25% each year until 2014, before it comes close to 2 times revenues.

In YouTube’s case, I think the business model has some huge limitations that might cause it to crumble once someone tries to make serious money with it. I wonder how many ads users are willing to watch for a 2-minute vid clip, if any. How many users will switch to alternative sites that will inevitably become popular if they stay like the free version of YouTube? We saw that with all the knock offs that showed up to replace Napster. Some of those sites were domiciled in foreign countries that have minimal respect for intellectual property or the consequences of breaking copyright law. I expect that to happen with video as much as it did with music and don’t see barriers to entry as it relates to the technology.

Google is visionary and I have a tough time criticizing them because of their contribution to making my research life so much easier. But I am going to make an exception. I agree with Mark Cuban and don’t like the idea of a purchase, but would rather see a business relationship. I just don’t have a clue what they would be buying other than a ton of lawsuits. Google is great at making money off search. Their attempts to make money in other areas is not good. If they find a way to have YouTube leverage the search mechanism, then there is a chance it can work. But I doubt it, not at this price.