Pondering Week

With the first significant strike of the bears since March 09, the market went down and then bounced. We are at the 50 Day Simple Moving Average (50D SMA) point for most US market indexes. Volume of trading has been light the last few days (except option expiration day, last Friday). The big Wall Street folks are probably taking a pause to digest all the news and set the strategy to drive the market above this year high or take the indexes to new lows for the year. Government debts and defaults are on most people’s mind. Other than Greek, investors are worried about other European countries. Relatively, US dollar is strong vs. the Euros. That has negative impact on commodities and metals. Gold is a metal used as a hedge for fear. So, it may behave differently temporarily than other metals. Even Oil moved well since the Feb 2 bounce point. Oil, Gold, and US dollar are in sync for now. US interest rate action by the Federal Reserve Bank last week may still play apart although that news was practically glossed over by the bouncing bull momentum last week.

Summary: Watch for the traffic direction this week.

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The Bears Are Awake

With China and Obama in the news, and some over expectations of earning, ost market indexes broke the 50 day price simple moving average SMA. And all will have broken them if we have another down day on Monday. The bears are awake, albeit not embolden. The dip this week was fast and swift. At 5%+ that is the largest dip since Feb 2009. Intel, IBM, earlier and now Google provided the hints earlier. The hints on other stocks could be as early as January 11 with Alcoa’s earnings miss, and others on no news. The investment pros have been very careful.

Short term the market indexes are oversold. Bounce, short-live or trend reversing, is pending.

US dollars may head higher now that it bounced on the recent (apparent) bottom. That will put pressure on gold and oil, and related stocks.

Summary: If you want to buy the dip, which was a good strategy for almost all of 2009, be more patience this time. This may not be the dip, as short sellers may try to short on the rebounce in the next few trading days.

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Where Are the Bears — Continue to be Very Careful

We continue to see new lows on the VIX index, not seen since the Bear Stearn bail out in 2008. You can click at the VIX button on the right navigation bar. Low VIX generally means that market volatility is low, stocks are heading higher. Since we are still in economic turmoil, VIX may decide to stay low for a while — the new new normal as some media put it. According to the Financial Times, there are relatively few bears out there (those those bet the market to go down) in their recent investors survey. So, few people are selling their stocks and bears are afraid to short the market. Mutual funds are also reportedly relatively low in cash and high in equity. US dollar is trying to form a bottom the last few weeks and if its breaks its downtrend, that will affect metals, oil, and other commodities prices. With the earning reports of companies season rolling in the next few weeks, the January rally may be challenged. Or perhaps we will finally see the 5% correction that has been elusive the last 10 months, or not.

Summary: Continue to be very careful if you continue to play along the long side. I will try to post when I see something interesting.

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Thansgiving View: More cautious as you play along

In line with a low noise alert approach, here is an important  point to ponder in the market.  The US equity market continues its upward movement since the last time we wrote about playing along.  All the pull-backs in the majors (SPY, DIA)  have been dips. Even the bond market (see AGG and LQD) have manage to pull off a horizontal trading range recently. If one is agile, one can make  few percents in return better than the meager savings and CD interest rates.

Risk aversion is fluctuation but apparently increased recently as investors are more cautious. You can see that in the gold prices (GLD) — making new highs, seemingly fed by fear for inflation and downward spiral of the US dollar.  Last week, the short term treasure yield dipped below zero. This is an indication of the risk aversion as we move toward the end of the year.   Housing and employment news have not broken the market  uptrend since March.  Our monthly indicator (sidebar right) is still in equity.  In fact with little to guide the sentiment of the market other then same old ‘green shoots or recession is technical over’ messages from our govt and the press, the US dollar vs Gold or other currencies have become a closely correlated surrogate for market direction the last two months.  You can follow US dollar reasonably easy by watch the UUP ETF. Shopping data the next few weeks and any significant re-bounce of the US dollars may trigger a possible break of the trend.  As we move toward the first week of January, the downside risk is higher.  Then with those worries built into the market, stock prices can climb.

Summary: Play along but be more cautious. Play chicken with the market may be a good short term strategy.

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Post Summer View – Play along

Investors and traders are back from summer vacation.  The  US major indexes rallied for 10 days closing positively since Sept 1st.  There are  many dip buyers and very few short sellers  (those who bet the market going down).  So, if we decide to follow the trend and ignore all those expert opinions, the media, and Fed Chairman Ben Bernanke, etc. we should  in the market. Go with the herd with tight stop loss. Or if you were stopped out, then you may be waiting for a reasonable dip to get back on the bus loaded with investors.  That may be workable as long as you stay with the DIA, QQQQ, or SPY major index ETF.  Individual stocks are riskier because of analyst down and upgrades and earning surprise pre-announcements.  This strategy may work all the way until January 1, 2010.  Essentially the strategy should be similar to the theme of the August 9th post.

In the next few days, the chance of a dip is quite high.  Having said that, technical indicators that warn of a overbought condition need to take into account of the current bully sentiment bias.

Gold raised above the $1000 high for a day recently (GLD is the popular ETF for the metal).  That could be driven mostly by the weakness in the US dollars.  The news of the $1000 break out will bring out a lot of lookers and potential buyers. This herd effect, in addition to the fundamental demand for the metal or investors seeking a hedge again inflation, or dollar decline, will keep the overall momentum forward.  Fluctuation in prices should be expected with some many speculators. Silver and other commodities are similarly favorable while the US dollars is still trending downward.

Summary: Play along with the herd of bullish investors and dip buyers. But be very careful in the amount committed and set your stops. Our monthly indicator on the right navigation bar is  still  pointing to ‘in stock.’

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History of Financial Products

PBS has a great serious that we should all take the time to revisit the history of financial products and the centuries of innovation. Interesting how other than science, money did and will continue to change our life and history. The Ascent of Money.

Summary: By understanding history we have a better perspective to try to manage the future.  We should better understand the relative  immaturity and underlying danger of some of these products – often wrapped in complexity or sugar.

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Another Voice to Listen To Occasionally

Despite his role as the adviser to Ron Paul for President campaign last year, and the expected noise associated with his intention to run for Senate in 2010, Peter Schiff has a common sense approach to the economy and the financial market.  Yes. He is against big government. You can look him up on Wikipedia to understand his background.

In this video, 58 minutes, he spoke about the 2008 and why it should not surprise anyone. Here we will learn something about his common sense view on spotting a bubble.  I think it is a useful perspective when we look at any financial products offered to us.

In another more recent video, he talked about the Gold and Silver Rally the last week of August. Same value: common sense interpretation of a sector rally.

Make this a learning opportunity on managing money, political aspiration or the speaker aside.  You will also find counterpoints on PBS or the web funded by other political interest. Unfortunately that iis the noise filtering skill we independent investor has use t through our life everyday. It is indeed confusing with all these message sources with different agenda.

Summary: Very often common sense can detect financial frauds and bubbles effective. Getting the training intellectually and mentally (gut) to use that common sense is an important first goal for those who wish to manage their own money independently.

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Two Portfolio Management Ideas

Before the month end assessment post, here are to good articles from the Wall Street Journal that will help us be better investors.

http://online.wsj.com/article/SB125149410400267863.html

http://online.wsj.com/article/SB10001424052970204044204574358610957274366.html?mod=googlenews_wsj

Summary:

Do not blindly chase recent historical investment of other people, including your own success . Be objective and minimize the hype and emotion around following the herd or the winning streaks.

For most independent personal investors, most of our money our money is better off in liquid (easy to buy and sell) investment products. Liquid financial products are ETF, mutual funds, individual stocks and options, and others.

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Summer Rally Continues to Breakout Higher

The Friday positive employment report helped push the major US stock indexes higher. Despite some pull-back  the last few days  in the emerging countries, the US bulls continue to charge forward.  A lot of the momentum is  fueled by mutual funds managers who have to put the new inflow of money to work.  The funds  also  have to follow the market now that all the standard 20, 50 200 days moving averages were passed. The bus is fully loaded with regular investors re-entering the market, no one likes to get left behind.

With the earning report season coming to a close and on many positive notes, the sentiment is bullish overall until this autumn.  Some may bet the ’super bear market rally’ uptrend could reach into December — with January a place to watch. I will leave this as note to look back the end of January.

To understand  how the bearish sides are thinking, here is an article from  the more bearish / conservative oriented forum Safehaven.com.  Articles like these tends to be lengthy and convoluted. The message is:  ” We’re still on an overall major buy signal. Shorting just because we’re so overbought is too risky. Sticking with the overall trend makes the most sense. Dealing with pullbacks is something we’ll have to deal with. …Some exposure is necessary at all times when on a buy signal. Keep with the trend please. …the bulls now a bit over 20% more than the bears. This is not where bull markets run in to trouble, It usually takes nearly 40% more bulls before things get out of hand from a sentiment perspective”

If we follow the monthly-trend dash board indicator  on the right-hand side of this web page,  we are biased on  holding more stocks than cash.  What percentage of your cash should be in the market is your own choice based on risk aversion.  Cash deposit rate are still at 1.7-2.2% for savings or money market accounts.

Summary: The overall  market is overbought according to the technical analysis folks.  While we keep alert for pull backs, follow the uptrend by investing in stocks that are not overly extended and keep a stop loss (break loss) order underneath.  The bear market rally uptrend has not been broken.

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Post Expiration Day Fireworks

We are indeed in a whipsaw. Compared with last week,  this week major US  stock indexes are heading upwards to the upper region of the resistance level.  Bearish sentiment was reversed the last 4 days when technical resistance price levels at the the lower range was not broken by the DJIA (DIA) and the SP500 (SPY).   The bullish momentum this week was a result of Intel, IBM, and the good earning news at Goldman Sachs.  Bank of America and Citibank failed to impressed however.   It is still hard to call as bulls and bears still have their reasons to bet one way or the other. Volume is still light as many are waiting for a firework break down or break out off the upper and lower range limits. Friday was options expiration day usually associated with higher volume, but was lighter than expected.  To a sense of the bull and bear perspective about the famous technical head and shoulder argument, check out this video to understand how charts affect trading behaviors, Financial Times.

There are practically no good news when everyone (including the government and the academics are still predicting increasing unemployment.  And with low volume, the computer trading programs can come in and swoop up or dump the market.   A good example was the bump in DJIA on the  rumor that  Dr. ‘Doom’ Roubini has a change of mind.   See the Wall Street Journal’s report about the Dr. Roubini’s effect.

Summary:  Go with the flow (long or short) after the breakout or breakdown with tight stops. You can choose individual stocks or sectors that have momentum.   For example:  for upside bets, consider commodities, Brazil, India, China and technologies.  Be careful about betting on stocks that are extended one way or the other way. Otherwise, continue to stay in cash and wait a little longer for the monthly indicator before getting too agressive one way or another.

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