Never Mind Predictions, Watch the Present
12/30/04 8:24 AM ET

"I think and think for months and years. Ninety-nine times, the conclusion is false. The hundredth time, I am right."

-- Albert Einstein

The conclusion of 2004 is nearly upon us. No matter how much we thought about it in advance, few of us accurately predicted how things would turn out. That didn't mean we were unable to produce some pretty good returns.

Making accurate predictions is certainly one good way to make money in the stock market, but being a great prognosticator isn't the only way to conquer the market beast. An investor can do very well by simply reacting to the market as it gyrates and employing an effective money management scheme. It isn't necessary to know the future if you learn to handle the present.

The point above is an extremely important one, but because Wall Street earns its money by selling its predictive abilities, it is not appreciated by the vast majority of investors. Investors are taught that they have to rely on the "experts" to tell them what is going to happen. We pay great sums of money to read the predictions of professionals who have seldom, if ever, made accurate predictions.

What investors should be doing is focusing on the action that is in front of them today. If you have winning stocks, then let them run. If you are starting to accumulate losses, then do some selling. The secret to market success, and you should tattoo this on the back of your hand so you never forget it, is portfolio or money management. Picking good stocks and making accurate predictions sure can help, but having a system in which you cut losses and take gains is the key to long-term success.

It is my strong belief that the vast majority of investors would improve their results if they simply developed some sort of strategy for selling laggard stocks in their portfolios. Unfortunately, individuals often have a very strong psychological resistance to admitting mistakes and selling losing stocks.

In addition, Wall Street strongly encourages individuals to keep putting more money into weak stocks. The phrase "buying opportunity" is a Wall Street favorite, but few realize how dangerous it is.

As we launch into the new year, spend less time worrying about what the market might do and expend more effort on developing a money management approach that preserves and protects your capital. Learn to respect what the market is telling us day to day, and leave the big dramatic predictions to the publicity-hungry pundits.

This morning's early indications are mostly flat. Overseas markets did little last night, and oil is drifting back down after a rally yesterday.

It looks like many market participants have already made their end-of-the-year moves and are going to take some time off. I'm expecting the market to hold fairly steady and not do too much one way or the other. However, there should continue to be some good trading opportunities, particularly in smaller-cap stocks, for the fast-moving trader.

Looking at a Positive Open
12/30/04 9:20 AM ET

We have a slightly positive start on the way. The main thing to keep in mind during the last two days of the year is that it is going to be a generally positive environment. Cash inflows are positive, the bears are on vacation, and there isn't likely to be any great institutional selling pressure. Many folks have already concluded their year and simply want stocks to hold steady until they come back next week and start implementing their 2005 strategy.

We should continue to see good short-term trades in some of the thinner stocks, as the "hot money" momentum boys who are still in town look to rack up some last-minute gains. If they can't find good action, they create it, and that is easier to do when the market is thin.

Good luck, and go get 'em.

Thin Action, and Economic Reports Drag
12/30/04 10:13 AM ET

The Chicago PMI number was reported at 61.2% vs. consensus estimates of 63% and a November reading of 65.2%. The Help-Wanted Index as also a bit soft. The market dipped just slightly on the news.

We have positive breadth with the chip stocks acting well once again. Biotechnology and oils are the laggards.

It is tough to read much into the action. It's choppy and random, and market participants don't seem to have any strong emotions at the moment. We continue to have a positive bias and some healthy action in smaller stocks, but the thin trading is keeping it tricky.

Time to Evaluate Your Trading Approach
12/30/04 11:13 AM ET

It's that time once again, when we reflect back on our trading over the past year and make resolutions that, hopefully, will improve our results in the year to come. Whether you find the idea of New Year's resolutions valid or not, it certainly is valuable to evaluate your trading on a periodic basis and look for ways to improve.

All resolutions about trading really are about style. It is our methodology that is the heart and soul of what we do. Therefore, we either work on improving the way in which we execute our existing style or we work on amending our style if good execution doesn't seem to solve our problems. For most of us, we need to do a little bit of both -- improve execution and make some changes to our methodology.

Problems with execution tend to be caused either by not having a clear style to begin with or from ignoring what you know you should be doing. Many traders struggle with "style drift." They intend to make a quick technical trade based on a good chart, and when it doesn't work, they suddenly become long-term fundamental investors. So before you do anything, make sure that you have an approach to the market that is clear and that can be followed. Only after you have done that can you work on improving your execution.

Experienced traders who have developed good discipline tend to focus more on tinkering with their overall trading strategy. Increasing position sizes, changing time frames, being a more aggressive shorter, using charts or fundamentals more, playing momentum, or being more anticipatory are all potential things to consider when evaluating your trading approach.

Don't forget to keep the big picture in mind as you consider your trading and what you might want to change. Evaluate some of your fundamental beliefs about the market and make sure you don't blindly buy into the conventional wisdom. If you want to make major changes in your trading, you have to be prepared to question everything you believe about the market.

The market is slowly rolling over but breadth is still positive. It is slow going, and I think some folks are going to be taking long lunches today.

Not So Fast With the Bubbly
12/30/04 12:45 PM ET

The market is doing nothing here at midday. All the major indices are close to unchanged on the day. Breadth is still positive and chip stocks are leading but overall there is very little of interest. It looks like the primary emotion at work right now is "Let's just finish up the year without anything major happening."

I imagine that many folks are going to take some time off for the New Year's holiday even though there is no market closing in association with the New Year's holiday. I don't know who makes that decision to keep the markets open but it sure is a poor one in my opinion.

The argument that it is the last day of the year and traders need time to make portfolio adjustments is just plain lame. If they know there is a half day of trading or none at all, they can certainly act a little earlier.

One of my goals for 2005 is to establish a trade association to serve as a voice for individual market participants. Institutional Wall Street doesn't represent our interests and often does things that hurt the small investor.

Individual market participants are too dispersed and unorganized to be a force on Wall Street. A trade organization that represents the thousands of individuals who devote time to the market would be a force that Wall Street couldn't ignore.

Thin Volume Could Add Volatility
12/30/04 1:37 PM ET

The market continues to do very little, although breadth has been improving slowly as the day progresses. I suspect things will continue to meander along with a slightly positive bias through the end of the year. I don't think we will see any fireworks although we are likely to have a little volatility due to the thin trading.

I cracked a tooth or lost a filling or something and have to run to see the dentist. I should be back before the close. I left an old column to be posted a little later today that I think bears repeating.

Ten Commandments of Trading
12/30/04 2:30 PM ET

There are many different ways to successfully trade the market, but there are certain things that all successful traders seem to have in common. Live those Ten Commandments and they shall reap a bountiful harvest! Go forth my friends and sin no more!

I. Thou shall never stop educating thyself.

II. Thou shall have a plan.

III. Thou shall be disciplined.

IV. Thou shall be patient.

V. Thou shall strive to stay objective.

VI. Thou shall be humble and hold no fear of admitting mistakes.

VII. Thou shall act aggressively when the odds lie in thy favor.

VIII. Thou shall be persistent and stay optimistic.

IX. Thou shall stay mentally and physically healthy.

X. Thou shall protect thy capital.

Maybe Some Noisemaking at the Close Tomorrow
12/30/04 6:25 PM ET

My dental appointment took much longer than I thought it would but it doesn't look like I missed too much.

Technology and retail stocks helped keep breadth positive while oil and drugs helped put the DJIA in the red. Overall, it was another typical day of holiday trading, with a positive bias, light volume and some good small-cap action.

Tomorrow is likely to be very similar to today, but don't be surprised if we see some fun and games at the close as fund managers look for ways to squeeze a few more bonus dollars out of the market.

Have a good evening. I'll see you in the morning.