Time to Start Accumulating? Where's the Bottom after Today's Massive Drop

Today was not a good day in the stock market, as the S&P 500 went down -8.8% from 1213.27 to 1106.42 (-106.85). The market broke below the previous low of around 1133.

Where's the Bottom?

Based on Previous Chart analysis, there could be a good chance that the bottom of 1070-1077 could hold. If the market easily breaks through this level, the market would truly be in trouble.

But we believe that the 1070-1077 level could hold.

If the market does get there, we will not necessarily go straight up. The Bottoming process takes time. In fact, we believe we could have a very volatile, very violent trading range, and we could even have a bear market rally all the way up to 1270, 1330 or even 1387 before re-testing the low.



The average bear market decline is said to be around 30%, and we are currently around 30% below the recent high of 1576.

1077 is also the 61.8% retracement from the 2002 low of 768.63.

Should we get back in the market?

While the market needs time to recover, it is possible that we are near the bottom.

It is difficult to time the bottom, but there are some possibilities:

1. It might be time to start slowly accumulating some index funds. One can invest a little bit at a time over the next year or so. Over the long term (10 years), people could say that this could be a valuable buying opportunity. However, we may have to withstand the great volatility ahead.
   
2. Start looking over potential buys for the long term. While it is not wise to try to catch a falling knife, keep stocks on your watch list.
   
3. Make sure you are not taking too much risk in your discretionary portfolio.
   
4. It might be time to review your goals. What do you want to do with the money you are investing? And when do you need it by?
   
5. Remember to diversify.
   
6. What sectors would be good to own at this time? Cash rich companies? Consumer Staples? Determine your strategy.
   

Today's Chart

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

Crude Oil and Natural Gas Chart, Support and Trendlines

The Chart above shows Crude oil support levels at $100 a barrel and $87.71 a barrel. The 50% and 61.8% retracement from the three year lows matches horizontal resistance, which is good validation.

The bottom chart shows the ratio of Crude Oil to Natural Gas. We see the trend line of this ratio. If the ratio of Crude Oil to Natural goes back to trendline (around 12:1), then that means either Crude Oil continues to drop or Natural Gas increases or a combination of both.

Today's Chart

Pipelines from Alaska; Sarah Palin and Energy Independence; Profit from this

While reading a New York Times article on recent Republican VP Selection Sarah Palin of Alaska, I discover this:

Her intense pursuit of a pipeline to deliver natural gas from the North Slope of Alaska to market in the Lower 48 led to what her administration has claimed as a major triumph: the Legislature this summer approved her plan to give a $500 million subsidy to TransCanada, a Canadian company, to help build the project.

I discover TransCanada is trading in the US as TRP.

TransCanada is $22 billion Canadian Company focusing on Pipelines and Energy.

There is a lot of natural resources in Alaska (even if there is controversy regarding drilling there). There is also a trend where the U.S. is trying its best to not have to depend on foreign oil.

These trends are good for Pipeline companies such as TransCanada, because eventually, Natural Gas and other resources could be marketed to the lower 48 states.

TRP has a forward PE of 16.58, and a yield of around 3.70%.

Chinese Demographic: Lonely Young Tech Savvy People Looking for Friends, Fun, and Games Online

Pearl Research Calls them the "Phoenix Generation". These people are China's 16 to 30 year olds who have $135 billion in spending power.

These young people have grown up during China's economic boom, and they are very tech savvy.

Many of these young people are also lonely. Because of China's one child per family policy, these people have no brothers and sisters and are looking for friends. Since Chinese don't normally organize around sports or church, China's Phoenix Generation uses the Web and Social Networks to Fill that void.

According to a joint study by advertising companies JWT and IAC, 16 to 25 year olds in China:

1. Using the Internet to make friends: China, about 75 percent; U.S. 30 percent.
   
2. Going online to find, share opinions: China, about 75 percent; U.S., 43 percent.
   
3. Expressing personal opinions or writing about themselves online: China, 72 percent; U.S., 56 percent
   

Many ideas above from this article.

Profit from this

Chinese Social Networking would be one way to play this.

Chinese Online Games

However a more interesting way is through Chinese Online Games especially MMORPG, Massively Multi player Online Role Playing Games such as Activision-Blizzard's (ATVI) very popular World of Warcraft game.

Many people around the world, especially, East Asians and Chinese, have taken these online games and MMORPGs to a new level.

1. Activision Blizzard (ATVI): Aside from making the popular Guitar Hero and Call of Duty Games, ATVI also owns the World of Warcraft MMORPG franchise. As of 2008, World of Warcraft has a subscriber base of 16 million.
   
2. Shanda Interactive (SNDA): Chinese Online Game Company. They too have MMORPGs.
   
3. The9 Limited (NCTY): Chinse Online Game Company. They have MMORPGs games as well, and they are allowed to operate World of Warcraft in China.
   
4. Perfect World (PWRD): Another Chinese Online Game Company that provides MMORPG (and other) games.
   
5. Giant Interactive (GA): Chinese Online Game Company including MMORPG games.
   
6. NetEase (NTES): Chinese company has an Online Game Service, Advertising services, and Wireless value Added Service Departments.
   

Stock Performance Now

Stock Performance: Aug. 11, 2008 to Aug. 22, 2008

1. SPY (S&P 500 ETF): -0.81%
   
2. QQQQ (Nasdaq ETF): -0.54%
   
3. ATVI: +2.88%
   
4. NCTY: -13.35%
   
5. SNDA: +13.81%
   
6. GA: +5.92%
   
7. PWRD: +0.92%
   
8. NTES: +17.54%
   

Time for Healthcare Information System Stocks?

For some time now, I have been watching Healthcare Information System stocks. All around the world, there is a trend towards digitizing medical and patient information. Healthcare Information System companies have a bright future.

However over the last three years, the stock price of several of the companies I have been watching have gone nowhere.

Over the last 6 days (August 5, 2008 to August 12, 2008), I've noticed good performance from these stocks:

1. SPY (S&P 500 ETF): +0.77%
   
2. IWM (Russell 2000 ETF): +3.27%
   
3. IYH (Healthcare ETF): +1.33%
   
4. QSII (Quality Systems): +24.2%
   
5. MDRX (Allscripts): +26.69%
   
6. CERN (Cerner): +4.11%
   

Over the last 97 Days (March 27, 2008 to August 12, 2008), the performance has been similar:

1. SPY: -2.1%
   
2. IWM: +7.56%
   
3. IYH: +7.06%
   
4. QSII: +30.36%
   
5. MDRX: +73.4%
   
6. CERN: +21.3%
   

The Three Companies, QSII, MDRX, and CERN have been outperforming recently.

Stock Performance Comparison

Quality Systems (QSII)

Market Cap: $1.1 B
Forward PE: 19.57
5 Yr Est Growth: 20%
PEG: 0.98 (less than 1 is low!)

Allscripts (MDRX)

Market Cap: $890 M
Forward PE: 20.95
5 Yr Est Growth: 22.27%
PEG: 0.94

Cerner (CERN)

Market Cap: $3.78 B
Forward PE: 18.09
5 Yr Est Growth: 23.66%
PEG: 0.76



With a long term future, these stocks are the growth stocks of the future, and maybe these stocks will finally break out and do something over the next few years.

Two More Quality Growth Stocks from Screen (CELG, MR)

I recently ran a Growth Screen and found two stocks at the top of the screen.

1. Celgene (CELG): Biotech company has a forward PE of 33 and a 5 year estimated growth of 35.79%, for a low PEG of 0.92. Stock is near very near its 52 week high or has just broken above recent high.
   
2. Mindray Medical (MR): Chinese Medical Device Company that operates in three segments: Patient Monitoring and Life Support, In-Vitro Diagnostic Products, and Medical Imaging Systems. It has a forward PE of 28 and a 5 year estimated growth rate of 39% for a low PEG of 0.72. The stock which has been public for less than 2 years, is near or has passed its all time high.