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MACD, the Moving Average Convergence/Divergence indicator, developed and popularized by Gerald Appel, provides a uniquely sensitive measurement of the intensity of the trading public’s sentiment and provides early clues to trend continuation or reversal. According to Appel, this indicator is particularly dependable in signaling entry points after a sharp decline. The MACD indicator may be applied to the stock market as a whole or to individual stocks or mutual funds.

The MACD indicator uses three exponential moving averages: a short or fast average, a long or slow average, and an exponential average of the difference between the short and long moving averages, which is used as a signal line. (See Moving Averages below for a discussion on simple and exponential moving averages.)

• MACD reveals overbought and oversold conditions for securities and market indexes, and generates signals that predict trend reversals with significant accuracy.
• MACD produces less frequent whipsaws, as compared with moving averages.
• Telescan uses a type of shorthand to refer to MACD indicators. An “8-17-9 MACD”, for example, uses a short (fast) moving average of eight days or weeks, a long (slow) moving average of 17 days or weeks, and an exponential moving average of nine days or weeks. (The use of days or weeks depends on the time span of the stock graph.)
• Gerald Appel recommends an 8-17-9 MACD to generate buy signals and a 12-25-9 MACD to confirm a sell signal for a stock, which has had a strong bullish move.
• Regardless of the accuracy of this indicator, one should not rely on a single indicator. Study as many technical and fundamental indicators as possible before arriving at your investment decisions.

This is a classic breakout with all the right signs of support.
High volume, high accumulation and a significant breakout which hasn’t completed yet.

Not bad for 20+% gain if you caught the breakout and 50+% if you caught it near the bottom. Notice also the 2 bull flags along the way.

Loeb’s Trading Tactics:

* The market is a battlefield. Make sure you are on the winning side
* You must trade with the actions of the market and not simply by how you might think the market should trade
* Knowledge through experience is one trait that separates successful stock market speculators from everyone else
* To do well in short-term trading, it takes full-time attention and dedication
* Exploit all new trends quickly and aggressively
* The best traders are usually psychologists. The worst are usually accountants
* Stocks act like human beings and go through the same stages and phases as people do, including infancy, growth, maturity, and decline. The key in trading is to be able to recognize which stage the stock is in and to take advantage of that opportunity
* Successful traders are intelligent, they understand human psychology, they practice pure objectivity, and they have natural quickness
* To succeed in trading you must 1) aim high, 2) control the risks, and 3) be unafraid to keep uninvested reserves and be patient
* The stock market is more an art than a science and far more complex than most people understand
* It takes considerable amount of self-control to trade well
* The more experienced and successful you become, the less you should diversify
* Big money is always made in the market’s leaders
* The best stocks will always seem overpriced to the majority of investors
* Resist the urge and temptation to change your strategy for each and every different market cycle
* Traders should always close a trade when good reasons exist to do so
* Tops in stocks usually occur when the advance in price stalls as volume or activity increases, or if the prices decline and the activity increases
* A sell signal occurs when a stock rises sharply on big volume but ends the day at no gain or at a loss
* Every new market cycle produces a new list of fresh leaders
* Pyramid your buys - start with an initial position and then add to it only if the trade moves in your favor
* Stocks are always way overvalued in a bull market and way undervalued in a bear market
* Expectation, not the news itself, is what moves the market
* What everyone else knows is not worth knowing
* Three basis elements should be considered when evaluating a stock - 1) quality (fundamentals, liquidity, management), 2) price, and 3) trend (the most important)
* Always sell when you start patting yourself on the back for being smarter than the market

Stock chart of the day. Would you trade VLO at this point?

Courtesy of Optionaddict.net

Here is a compilation of my Ten Commandments of Trading. In my sole opinion, these are the “fundamentals” of becoming a successful trader. Look these over and feel free to comment at will. Keep in mind this took a couple hours to compile, so be nice.

1. Thou shalt have a trading plan

If you don’t have a plan, get one. What is your approach? What are your rules? These are questions that you need to answer before you can title yourself a trader. Creating a plan gives you something to follow, an outline of where you want to be, and what is required in between.

2. Thou shalt not trade with emotion

This includes, fear, greed and lack of discipline. There is no room for it in this equation. Find a way to get a better handle on it, and/or walk away from it. I can tell you from experience that you will have an impossible time being successful at trading when making emotional decisions.

3. Thou shalt embrace losing

A trader has to fight a lot of expensive enemies within himself. It is inevitable, it is going to happen, therefore you should plan for it. If I know I am going to lose, I will try and make it easier on myself in anticipation. Please do not judge the success of a trader by the win loss percentage they have. It’s not about winning or losing; it’s about making money.

4. Thou shalt know how to control losses
As a trader, you will have many losing trades. The idea is that if you keep them small, you give your winners a chance to outpace them. If you can successfully do this, you will be a profitable trader. Identify places on a chart that you know prices should not go in order to take your loss (broken support/resistance for example).

5. Thou shalt not turn a trade into an investment

If you didn’t chuckle after you read this rule, then perhaps you need to revisit rules 1,2,3 and 4 again. Have you turned a trade into something longer in duration than expected? Do you remember why you did this? Sure…it was because the stock went against me and I figured “It will come back.” When you feel the need to stay in a trade until you are right, something is wrong. Know where you are getting out before you get in. STICK TO THE PLAN!

6. Thou shalt remember: Tips are for waiters

Jesse Livermore said it best…”The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking and reaching your own conclusions” He goes on to further state…”The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.” Wouldn’t you agree? It is so easy to take the stock pick from someone assuming they have done all the work for you. Truth is, they probably know less than you. This includes commentary you listen to on the television, something you’ve read on a website, or discovered on this crappy blog. My point is… do your own research, trade your own trades, and be original in your analysis and activities.

7. Thou shalt repeat after me “A gain is not a gain until you sell”

Kenny Rogers said “You never count your money when you’re sitting at the table.” That profit is not realized, so don’t mentally take inventory of it until the trade is closed and you have realized that gain. This will create emotion, and you will stay in trades for the numbers rather than the logical reasons.

8. Thou shalt not know too little about too much

I guess it is hard not to in your position. You are learning to trade. But you need to try to differentiate what you know, and what you are learning. You also must remember that the basics are called basics for a reason. They are the foundation we stand on. Next time you overrule a trend because of a candle formation, or something silly like that, remember that discipline trumps conviction. No matter how strongly you feel that the “*Double Bottom Outside Inverted Triangle Reversal Pattern” will result in a failure of the beautiful uptrend the stock has been trading in, you must defer back to the principles of discipline when you trade. Discipline will allow you to trade tomorrow, whereas the gut feeling of a new trader will send you to the poor house later today.

*- This is not an actual pattern, so please don’t e-mail me and ask where to learn more about it. Just think of it as an exaggeration of a funny role we have all played.

9. Thou shalt trade with the trend

It takes a trader a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. Try to pick a style that you can easily adapt to a changing market. At times the “motion of the ocean” will differ and different approaches are warranted. It is at these times you need to be able to recognize the changes and adapt accordingly.

10. Thou shalt take the easy opportunities

You don’t need to trade everything. There are opportunities that present themselves everywhere and everyday in this market. Just remember two things: Number 1: Its not necessary to play every move, its only necessary to have a high winning percentage on the trades you choose to make. Number 2: Don’t go for the trades that don’t totally jump out at you as an easy analysis. I call these the “Easy Trades.” The trades where you are not 100% sold and convinced of what is going to happen, stay away from them.

1. Get educated - If you are not, the market will make you pay. If you play the market without educating yourself, the market will inevitably take your hard earned money. You may get lucky once or twice, but in the long run the market will take it all. It is definitely cheaper to get educated about the market rather than learn by trial and error.

2. Don’t trade with capital you cannot afford to lose - The stress of trading is high enough. Scared money never makes money. The market is unforgiving and will take your last dime if you let it. Trade only with capital that you can afford to lose.

3. Know why you are entering a position - Don’t gamble and enter a position just to be in the market. Enter with a plan. Have a target for the position that you enter. More importantly, have an exit strategy for the position if you are wrong. Jesse Livermore, one of the greatest traders to ever live, said 10% was the most he was willing to lose on a single trade.

4. Never average down on a losing position - If you have entered a position and you are wrong why compound that loss by adding more. In 2000, we recall many people averaging down on long positions only to see them fall lower. Example, Bought LU(Lucent) @ $80.00 in the year 2000. Added more stock in 2001 @ $45. In 2004, the stock we trading at $2.50. Never average down on you’re losing positions. It is a recipe for disaster.

5. Never put all of your capital on one position - If you leverage yourself too much on one position you will not be able to take another position should a better one come along. Also, it becomes very difficult to control emotions when you are over leveraged in one stock.

6. Sell your losing positions and keep your winners - It is human nature to want to keep your losing position until you are even or positive. Most investors sell the winning position to hold the loser. However, the winner continues to win and the loser continues to lose. We’ve seen this happen time and time again. Remember keep your winners and cut the losers.

7. Let your winning position run and cut your losers fast - This is a hard one. Many times when you get a small profit you take it too quickly only to see the position go to new highs. Know why you are selling the winner. That is how you make the big profits.

8. Never change your stop price - Once you place a stop price, whether physical or mental, always abide by it. So many times we have seen stops ignored and the losses become enormous. Stops are a form of damage control or insurance. If you loose too much on a given position, it could knock you out of the game completely.

9. Learn to lose small - The market is unforgiving. This is a humbling profession and in order to survive you must keep all losses small and understand that they will happen. Once you learn to lose small, you will be on your way to success.

10. Buying and selling on news and tips is always wrong - News and tips are the same. The market/stock already has the news priced in. This is why many times a stock sells off on great news and rallies on bad news. It’s already factored in.

11. Trade what you see, not what you believe - As much as you hope, pray, wish…a trade will act the way it will act. Watch price action and charts; it tells you everything. Once you turn towards faith and hope, just get out!

12. Entry points are everything - The correct entry point will make all the difference. Step back, and wait patiently. If you miss it, we promise another trade will come along shortly.

13. Quick and easy - A day trade is supposed to work out in an allotted time. This time should be thought about prior to entering a trade. Once in the trade, if it doesn’t materialize within that time frame, chances are it will turn out to be a loss. Dump the position if it doesn’t work out in that time frame. Example - Entering a long position as a day trade, we expect a run-up in price within 5 minutes. If we’re still sitting in that position in 10 minutes, chances are it’s either losing already or will become a loser. Take the FLAT OUT or SMALL LOSS!

14. Stops - Always use stops. Even better, use a mental stop, but only if you truly can abide by it.

15. Big loss - No profitable day trader takes a big loss. Small losses are the key to success. If you are making $200 per day trade, then the most you should ever lose on one day trade is $200. Example of the wrong way - If you make $200 on 9 straight trades and on the 10th trade you lose $2,000, how much did I make or lose? (-$200). You might be batting 90%, but you’re a losing trader!

16. Patience - Trading is like being a lion and waiting in the long grasses to pounce. Stay back and wait for the perfect time to jump on the trade. Do not worry if you have not made a trade all day. One will come along. Jumping out at the wrong time will only mean you go hungry.

17. Entering the trade - Before buying or selling a swing trade or day trade always do your DD (due diligence). Analyze the charts, read the technicals and fundamentals, then enter. Know the reason you are entering, and know what you expect to make out of it. Never let it become a losing trade.

18. Never let a winner become a loser - Never enter a position, be in the money significantly, and then watch as that position becomes a loser. Once you are in the money on a trade, set a stop at least at break even, or set a trailing stop.

19. Never let your emotions affect your trade - A good trader has no emotions. We are supposed to trade based only on what we see. Just because you’re trade was up $1000 dollars 10 minutes ago and now is only up $700, doesn’t mean you shouldn’t sell at +$700. Too many times we have seen people get attached to their max profit and only realize their mistake when that position goes negative. Any profit is a good profit.

20. No trader ever went broke taking a profit.

21. Bulls make money, Bears make money, but Pigs get slaughtered - Stay humble in the market. Expect each position to pay you off, but don’t expect too much. Be smart about knowing when you have made enough. Get out and wait for the next trade.

22. Tips are factored in as well - The market is like a time machine and will amaze you at what is already factored into the price. Many times a stock will sell off on good news. Buy on rumor Sell on news.

23. Market knows best - Realize that the market is always right. If a stock is falling/rising there is a reason. Do not try and force your views on the stock. It’s a losing battle.

I must admit, I am not smart enough to have devised these ridiculously simple trading rules. A great trader gave them to me some 15 years ago. However, I will tell you, they work. If you follow these rules, breaking them as infrequently as possible, you will make money year in and year out, some years better than others, some years worse - but you will make money. The rules are simple. Adherence to the rules is difficult.
“Old Rules…but Very Good Rules”

If I’ve learned anything in my 17 years of trading, I’ve learned that the simple methods work best. Those who need to rely upon complex stochastics, linear weighted moving averages, smoothing techniques, Fibonacci numbers etc., usually find that they have so many things rolling around in their heads that they cannot make a rational decision. One technique says buy; another says sell. Another says sit tight while another says add to the trade. It sounds like a cliche, but simple methods work best.

1. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

How to Identify Short Candidates
Friday February 8, 2:11 pm ET
By David Brown

Gather a group of portfolio managers and active traders together and you’ll hear about a broad assortment of diverse strategies, but one point on which you’ll likely find agreement is that the most difficult task is selecting stocks for shorting. This might seem easier when the market is falling, but in fact consistently finding stocks that will underperform the market indexes is difficult under any conditions. After all, companies are in business to do well and management is focused on bolstering shareholder wealth — using any and all available tactics.
Many traders will just play the charts. That is, they will use their favorite technical indicators to find good short-term or swing trades, such as shorting stocks, buying puts, or opening options spreads. For them, technicals seem to be more reliable than fundamentals when playing the short side. And for very short-term trades, this may be true. However, for longer-term position trading, long/short strategies, pairs trades, or portfolio hedging, pure technical trading often loses its effectiveness, and fundamentals gain much more importance.

For the past 30 years, after applying quantitative models to develop the lunar landing module for NASA, I have been applying my expertise to the equity markets to seek small systematic edges in the challenging pursuit of alpha. Throughout that time, I have been an active investor, trader, analyst, newsletter author, and the CEO of two publicly traded companies serving the investment community, and I currently lead an equity research firm that serves institutional investors, portfolio managers, and self-directed investors.

In my view, these are the five fundamental factors (or “red flags”) that are most useful in identifying stocks poised to underperform the market:

1. Company Growth Ratio. Stock valuation versus anticipated future earnings performance is a cornerstone of any short strategy, often through a trailing or forward PEG ratio. I prefer a slightly different version that I call Company Growth Ratio (CGR). It is the projected 5-year EPS growth rate divided by the projected next fiscal year P/E. So, high is good, low is bad (which is the opposite of PEG). This factor has tested well as an indicator of 3-12 month performance both on the long and short sides.

Investors rarely confine their interest in a stock to only the current year’s data since that data is already discounted. So in essence we are asking, “How much must we pay for the growth that we expect over the next 5 years?” Rather than use current P/E, we use the Projected P/E, i.e., the P/E that will exist if at its current price the company earns what is expected during the next fiscal year. In other words, we assume that most investors are pricing in the next year’s growth. , as shown in the following chart.

2. Net revisors. This factor is the percentage of Wall Street analysts who follow the stock who have lowered their current year earnings estimates during the past 30 days. If a large percentage of analysts have done so, then lowered expectations for the company’s earnings is relatively new news. Again, this indicator tests well in its ability to forecast lower prices ahead. Thus, by combining these first two indicators, we are saying that we want companies that are relatively overvalued in light of their future growth prospects (factor #1) and have had the current year earnings forecast lowered by a significant number of analysts in the past 30 days.

3. Projected next year’s earnings growth. We want to focus on companies that are expected to show decreased earnings next year versus the current fiscal year. The greater the percentage decrease identified by analysts, the more we like them as a short candidate. So not only do we want the company to be overvalued against next year’s projected earnings (factor #1) but we want that earnings figure to be lower than what is expected this year.

4. Value and growth ratios. Frequently, companies that have exhibited poor growth have a relatively low P/E and hence a high perceived value. But here we want stocks that are forecasted to have poor growth and yet still have poor value (i.e., a rich price). Surprisingly, this is not hard to find. Poor value is represented by relatively high price to book, price to cash flow, and price to sales, as well as low dividend yield. Poor growth is represented by declining forward year-over-year projected growth rates in earnings, revenues, and cash flow.

5. Earnings quality. Here we look for factors like poor ratios of cash flow to reported earnings, slowing receivables and inventory turnover, and aggressive accounting practices (as identified by a forensic accounting score.) Overall earnings quality is a factor which has significantly increased in importance over the past 5-7 years. I suppose we have Enron to thank for that.

As an example, the following chart illustrates the historical performance of my composite long-term value rank. It shows the cumulative bottom decile return of the S&P 400 mid-cap universe vs. the overall index return, rebalanced monthly for a 10-year period.

When making a final selection of short candidates, it’s also good to stick with the weaker overall sectors with respect to recent price performance.

One important caution is to stay away from individual stocks carrying high short interest levels. That might seem counterintuitive, but excessive short interest can easily fuel a powerful short-covering rally — leaving you holding the bag.

So how has this model performed? Well, let me give you a real world illustration of how I have used these factors in an integrated manner. In October 2007, Forbes Magazine invited me to participate in the annual “Love Only One” stock-picking contest in which a dozen institutional analysts were invited to submit a long pick and five were asked for a single short pick — all to be held for a full 12-month period starting with the closing price on October 31, 2007. Each of us would be judged on how the selected stock performed over that time period. I was asked to select a short.

With the help of my team at Sabrient, we initially identified five short candidates for entry positions out of a large database of stocks having analyst consensus estimates to work with. The following table shows how much each had fallen as of January 22, 2008.

Our top pick was FreightCar America Inc. (NasdaqGS:RAIL - News), and it was submitted to Forbes as my single short selection. The CGR was in the lowest 7% of our stock database. Net revisors was in the 50th percentile — not too bad. Projected earnings growth next year was in the 30th percentile. Its value rank was in the 35th percentile and the growth rank was quite low, appearing in the 17th percentile. Finally, the earnings quality metric produced a terrible score, all the way down in the 2nd percentile. All of these combined to create a composite score in the bottom five of all eligible stocks.

I should emphasize that this does not mean RAIL is the worst company in America — far from it. It just means that its prospects when combined with its current earnings outlook made a price decline highly likely. The other four companies in our bottom five were Palm (NasdaqGS:PALM - News), USG Corp. (NYSE:USG - News), Idearc Inc. (NYSE:IAR - News), and First Community Bancorp (NasdaqGS:FCBP - News).

As shown, all five have fallen substantially. In fact, as of 1/22/07 (less than 3 months), the average drop was an astounding -35.9% while the S&P 500 was down only -15.4%.

Of course, it’s easier to find these stocks when you have access to a robust computer model and database like a quant research firm. Also, keep in mind that a fundamental outlook can change suddenly due to significant events like mergers, takeovers, strategic partnerships, breakthrough products, etc.

Nevertheless, when you are looking for short plays and have identified a list of possible candidates through other means (e.g., charts), focusing on stocks with the weakest fundamentals should help enhance your returns. I have found that the fundamental red flags include:

1. Low Company Growth Ratio (projected 5-year EPS growth rate divided by the projected next fiscal year P/E)

2. Reduced current year earnings projections by Wall Street during the past 30 days

3. High percentage decrease in earnings expectations for next year

4. Poor value (high price ratios) coupled with poor growth prospects (declining projections for earnings, revenues, cash flow)

5. Poor earnings quality, including declining ratio of cash flow to earnings, slowing receivables, and aggressive accounting practices.

This should encourage you to look beyond the charts and technical factors when seeking longer-term position trades on the short side, such as for long/short strategies, pairs trades, or portfolio hedging.

Look no further than Chindia, 2 economic powerhouses, both with explosive growth. Expect it for the next 10 yrs while the DOW and NYSE cannot sustain even half that amount. With a potential recession around the corner and a falling dollar, the economy of the US will remain flat. This will not translate well into thriving stock exchange. However, this does not mean all sectors of the US will fail to disappoint.

Technology is still in the upswing as Oracle, Cisco, Apple, Rimm, Google continue their dominance in the marketplace. Agriculture is also strong with commodity prices being pressured upward as energy costs continue to escalate. Look for companies to Mosanto to keep delivering excellent numbers. Another industry that may not be thought of much is shipping. Buffet has invested heavily into into BNI (Burlington Northern), a railroad company shipping between the East and West. Don’t forget RIG and DRYS as they continue to move shipments around. NOV, an oil play on the discovery of oil should be checked as well as they focus on the dominance of their drilling rentals.

Financials, you might think may have bottomed or have begun to bottom out. But the worst may be yet to come. Trying to catch the bottom of an industry is very difficult. Although the industry as of this writing is completely oversold, 24% on the BPI index, it is still risky. Homebuilders are in the same category and should be bought with very careful deliberation. The government may bail out the financial banks, but they will not be bailing out the homebuilders. Buy best of breed in the hottest sectors and avoid the fallout of what could be a challenging 2008.