Here’s a brief summary of how bonds work:
You buy an I.O.U. from the Italian government, for, let’s say, $10,000. They agree to pay you $500 (5%) a year, and then give you your whole $10,000 back in 10 years. That $500 is set. They’re never going to give you $400 or $600. However, you can sell your I.O.S. if you need all your money back now. But what happens if no one wants it? You offer it for $10,000 (because it’s an I.O.U. for $10,000). No one takes it, so you offer it for $5,000. Now you’re mad, because you’re losing $5,000 on this deal. Some guy comes along and buys it for $5,000. He isn’t making 5% anymore. He’s making 500/5,000, or 10%. So if people don’t want the bonds, the prices fall, and the yields, or interest payments, or coupons rise. (These are all commonly used terms for interest you get on bonds).

The market decided to not do anything this week. We didn’t see the big jump I expected last week. That being said, I think we’ll probably see this jump in the next week or so.

Welcome to the first post of the Investing Club Weekly News. This will be a weekly blog post about how the stock market did in the last week, what the current outlook is, and some news from the last week. All can contribute by facebook messaging me with articles or ideas during the week, and I’ll include them when I write the post each weekend.

1. The biggest news driving the stock market this week is Greece.

Fear and optimism about this have traded back and forth in the last few weeks, and so the markets are flying up and down from day to day. (If people are optimistic, they’re willing to take risks and buy stocks. If they’re scared, they get cash and hide it under their mattresses.)

This week the market was only down a little bit, but things look ready for excitement next week. For the Standard and Poors (S&P) 500 index, 1260 is a turning point. If you look at the chart here, imagine a horizontal line drawn right about where we are now. The stock market will probably make a big jump next week, prompted by news from Greece.

1. As a result of technical issues on the website I’m using, the account will automatically terminate in a few months.
2. While I was out of town I kept up with my personal portfolio, but not with the model one. As a result, it has taken a 10% hit in the last few weeks that does not accurately reflect how my real portfolio has done or how I have handled the recent market turmoil.

I just finished Ben Graham’s The Intelligent Investor, and loved it. I plan to use my current heavy cash holdings to buy into value stocks. I will run screens over the coming few weeks and find two or three companies I like [I still own NRG]. For now, I’m sitting tight with over 60% cash, watching from the sidelines.

Well this week the market ended basically flat, and the bulls and bears both have vocal proponents in the newspapers I read today. The bulls say that a S&P downgrade isn’t the word of god handed down, and the bears point to the U.S. downgrade, but also to instability in Europe. Part of the fear in Europe is that not only will sovereign debt pull down the Eurozone’s major governments in the form of downgrades and defaults, but this will leach into the private sector. If banks like Societe Generale have too much exposure to sovereign European debt, then the “European sovereign debt crisis” just becomes a European crisis. The bulls, on the other hand, will point to lower jobless claims and an interesting note buried in U.S.A. Today: insiders are buying. Over the last few weeks company directors and executive officers have bought on a scale not seen since spring of 2008 (a great time to buy). So while individuals (the so-called “dumb money”) are cashing out of stocks, insiders and professionals (smart money) are buying. This is a recipe for a bottom in the finest sense.

Looking forward, I have re-entered positions with real money and in the model portfolio in CLF & SHOO. I like both of these, and now I am about 80% invested in the model portfolio and over 90% invested in my real one. I think next week will see good economic news in the U.S. resulting in a pop of the S&P up to around 1260, and then there will be significant resistance. At this point I will probably go back to practically all cash, and short the market down to a lower low, possibly around 1050 for the S&P 500. This is what is called a “dead cat bounce.” Betting on dead cats is risky business, and it is ill-advised for just about anyone, especially if you do not actively follow the markets. If you haven’t already bought, don’t buy now. Chances are the market will bounce next week, and then continue lower. I plan to watch it closely and try to ride it up and then flip and ride it back down. It won’t be nearly as neat or easy as it sounds.

In the model portfolio, I intend to hold onto to TRLG and NRG, as they both continue to perform. I will publish a review of NRG’s 2nd quarter results soon.

Volatility and downwards volume both hit their highest levels since the European debt crisis last spring. Volatility hit its highest close since July 1st, 2010. For SPY, today had the highest downwards volume since May 20th, 2010. The headlines today all sported coverage of a collapse into fear as the Dow slid over 500 points.

This is a great time to be in cash. The market has support at 1200, but I’m not counting on it. In the last few minutes before the close today, the market bounced off this support. Not only is it a round number, it also represented important points in April and November 2010. I’d expect some daily consolidation before we head lower to a weekly low which would act as monthly consolidation.

Looking again at the weekly chart, I expect a pullback to 1150. 1200 marks the 50% retracement level, and 1150 would be 61.8%. Not only this, 1150 would act as round number support and gap support, Finally the 1150 level is supported by the head-and-shoulders pattern the market just completed. I plan to continue to look for signs of a bottom before entering long in CLF, SHOO, and others.

It is obvious that I need to do something different. 2011 has been bad so far, and looking forward I need to change my strategy along with reacting to the current market conditions. This article will cover the former, and the latter will be discussed in part 3: a look at the market right now.

Everything I do is either a trade or an investment. I need to stop trading altogether; it doesn’t work. The overwhelming majority of my trades since I have started investing have failed. Next, I plan to switch from a holistic, numbers-based approach to a ratings and growth based approach. First because I believe using ratings will make it easier to find good investments and thus help limit the up-front research I need to do. I’m switching from value to growth simply because I want to try it and I believe it will be more profitable. I want to find companies that are performing, buy on dips, and watch them continue to rise. My new approach will first focus on ratings from S&P, Morningstar, Valueline, Yahoo!, and Thomson Reuters, as I have access to data from all of these sources. The second focus will be on earnings and price momentum in a search for volatile, high-growth stocks.

The final thing I want to do is have a ready-to-go watch list. These will be stocks that I am very familiar with and can enter as soon as I see a good entry point. So far I have APFC, CLF, SHOO, GES, and PCLN. I could readily enter into positions in any of these at any time after a few hours worth of research. I hope to expand this list if I have time to read annual reports. For now, I want to buy shares of Cliffs Natural Resources [CLF] and Steve Madden [SHOO]. The timing of these is based on the overall market, which is doing terribly. (continued in part 3: Market Tracker, 8-4)

Total Value: $125,961.05
Cash: $67,933.35
TRLG: 1,000 shares
NRG: 1,180 shares

I decided on a performance review to answer a few key questions:

1. Why has my real portfolio gained 6.8% over the same period the model portfolio has been up almost 26%?
2. Have my trades been successful this year, or should I quit trading for a longer-term outlook?
3. Have I achieved the goals set down in my 2010 performance review?

1. Over 90% of the difference in the model portfolio’s performance and my real portfolio’s performance was based on two very successful trades: BAC & TRLG. After a few entries and exits, I made around 25% in BAC. TRLG is up 56% since I bought it. I made niether of these trades in my real portfolio. They were surrounded by failed trades, but more than made up for them. I should have entered into TRLG, but I don’t regret not trading BAC with real cash.

2. My trades have been entirely unsuccessful this year. Not a single one of them has been profitable, and of the 13 positions I’ve closed this year, only 3 have been profitable. My portfolio is down 13.1% in 2011, and IWM is only down 7.6%. That’s pathetic, and something’s got to give. As much as I’ve studied technical analysis and the market, my market timing has obviously been terrible.

3. My average holding period has increased dramatically; from 26 days in 2010 to 46 days YTD, or an increase of 77%. My goal of having around a dozen trades in 2011 has already gone bust, as I’ve had 28. Long story short, this is way too many trades.

I have no sympathy for myself right now. This failure is entirely personal. I have lacked patience, and, once again, despite making good investments I’ve timed the market poorly and lost money. That being said, I’m not here to sit and wallow in self-pity. See part 2 of this article for my action plan.