Is The Economy Really Ok?

The GDP quarterly number came out better than estimated this morning showing a reading of 0.6% (annualized).  The estimates were for 0.5%.  Since it’s not negative, many pundits are saying “see, we’re not in a recession because the number is positive.”  Not to get to economist on you but most of that growth was based on our trade and export activity.  So, if you strip that out, the actual American economy probably isn’t growing.  But, regardless if we’re growing at -1%, +1%, 0% or any other number you can dream of, I think it doesn’t matter.  When you’re growing at 5% and then it slows to +1% or -1%, it feels like a recession.  That’s why consumer confidence is at its lowest level since 1982.  So, it’s not the absolute number, it’s the growth rate (or lack thereof). 

What you and I have to concentrate on is how do we profit from it?  What we need to figure out is what to buy and what to sell.  I think we clearly have an American economy with no growth and a global economy (primarily in developing countries) that is growing extremely fast.  China said last week that they are growing at over 10% per year.  Whether they’re lying or not, we know they are growing fast.  So, I’m really feeling as if there is tremendous opportunity in the emerging market stocks because their economies haven’t slowed but their stocks have sold off 40-50%.

ETFs such as FXI & FNI are some of my favorites.  FXI is just China but FNI is China & India.  I’m watching these carefully and haven’t pulled the trigger just yet but watching closely.  I think a lot of money can still be made owning these and shorting U.S. companies, probably U.S. industrials.

Also, watch the material stocks.  They’ve sold off recently.  Companies like XTO Energy, Transocean Offshore (RIG), and the ETF MOO may be at a perfect buy point now.  But, let’s let this Fed decision pass and see if the rotation out of these and into technology will continue.

Gold Update

Gold is still falling and it seems destined for at least $825/ounce.  But, $800 is not out of the question.  I will be looking to short gold into strength over the next few days assuming we get any strength.  Don’t fight the trend in gold right now.  It’s falling and you just can’t own this from the long side.

 

Is A Correction Too Predictable?

Many of my indicators are suggesting we’re due for at least a correction and possibly the resumption of the down market.  About 75% of the stocks on NYSE are above their 40-day moving average, the S&P 500 is at a place it has typically rolled over, The percentage of stocks above their 10-day moving average has been falling showing that fewer stocks are participating in this run, and the supply/demand picture is still very weak.  All of that adds up to a correction.  The problem is I think it’s very anticipated and we have a Fed decision tomorrow.  When things are too obvious in the markets, it tends to go the opposite. 

If we get a blowoff top meaning a big up day on heavy volume, that will really suck the bulls in and cause the shorts to run.  That will be the time to execute on putting more shorts on.  On the other hand, if the sell off from today spills into tomorrow, I will more than likely take some long positions off the table and raise more cash and lower my beta (how much I move vs. the market) which is already pretty low.

Stay tuned.

Is The Bull Run Over In Gold?

When gold was in the upper $900s last month, I wrote that I thought it would fall to potentially $830.  It did indeed fall from $1,000 an ounce to around $860 an ounce.  Then we got the bounce back to about $940 an ounce.  Now, we’re seeing another round of selling.  The question is are we just pausing or is the bull run really over for the time being?

Today, we’re around $877.  Technically speaking, gold is definitely under some pressure.  There are some fundamental reasons including the dollar rising that could keep pressure on gold.  But, I typically trade gold based on the fundamentals because it’s much easier and it swings so much.  We’re at a key level right now for a couple of reasons:

1. We’re at the same level we were earlier this month which should be a floor if it’s a correction, and
2. A lot of traders have committed funds at these levels looking at the volume.

Based on my work, I believe gold will fall further.  Some of the many oscillators I watch are showing some character changes in recent weeks.  In addition, it’s been falling on heavier volume, the damage done in early March was for real, and for those technically oriented, I’m seeing a possible head and shoulders pattern.

So, where do I think it’s going?  If (and that’s an if) it doesn’t hold here, we’ll head down to $825 and then potentially $800.  Even that would only be a 20% correction from the highs.  It could easily do that and still be in a long-term bull market still.  Don’t forget that.

I don’t think that this is the end of the gold run.  But, certainly caution is warranted.  My buddy Richard Reiley has had a lot of cash in his gold & oil portfolio for some time.  I couldn’t agree more with that stance right now.

Rotation But No New Buying

In the last few days, we’ve seen a rotation from commodities and commodity stocks into the “regular stuff”.  Technology, healthcare, etc. have been doing fine.  I think this is only temporary though.  We haven’t been seeing any new money come into the market, just a rotation.  It looks like profit taking from the ag plays into other beaten up areas.  I suspect though we’ll begin to see that trade unwind over the next few days. 

Once again we saw a weak and tired looking market yesterday .  Downside volume was more than the upside volume and the overall volume was lower.I’ve writing that the market is just floating up.  It still appears the sellers are just pausing and waiting to short into higher levels.  The exceptions to this are energy service companies and the shippers.  Companies like EXM, DRYS, HAL, RIG, etc. are still doing just fine. 

I haven’t made any moves in the past few days but considering shorting more of the general market while at the same time buying more of the strong names.

Are Commodities A Bubble

The rationalization in 1999 for tech stocks going up forever seemed convincing just as the rationalization for housing stocks going up forever in 2005 seemed logical.  Now, we know the world is developing faster than ever and the shortage of food and commodities is real.  But, should the prices be going up this fast.  It’s too hard to tell.  I don’t think it matters.  I think it’s fine to participate as I am but always have an exit strategy to keep you safe.  You can invest in almost anything as long as you know why you bought it and what would make you sell it.  But for now, I’m still bullish.

Apple, Inc & On The Air

On March 6th, I mentioned Apple, Inc. (AAPL) looked compelling based on both fundamentals and technicals.  That was in the mid $120s.  I purchased it then and it’s now sitting at $160, but down $8 today.  I’ll be watching this closely over the next couple of days to see if it begins to lag as opposed to leading as it’s been doing.  I’ve been expecting the market to rollover soon as I mentioned Friday.  We’re getting a reasonable sell off today.  Apple is leading the way down.  Stay tuned.

I’ll be filling in on the Biz Radio Network tonight for Daniel Frishberg.  I’ll be hosting The MoneyMan Report from 4-6 CST.  In Houston, you can listen on 1110 AM and in Dallas you can hear the program on 1360.  My guests will include Dan Fitzpatrick & Bryan Perry from Changewave Investing.

Coming To Houston

The Learning Center at Biz Radio has scheduled a class for this Wednesday evening at no charge!  Dave Dyer and myself will be there live to promote our course on finding hidden gems and turn them into a profit.  We’ll be discussing how Dave & I achieved success in the markets and how you can replicate that. 

Dave’s background is much different than mine and he’ll discuss what techniques he used that enabled him to quit his job several years ago and make a fortune in the stock market.  I grew up around this stuff and currently manage money for individuals and companies.  With our different approaches and styles, we’ll share with you how together our techniques have been very profitable.

At this event, we’ll be discussing the various topics that will be taught in the course.  We’ll toss around some various ideas and share with you our thoughts on the current markets.  With the markets as volatile and rocky as they have been, we think our course will help you stay in the game but more importantly teach when you shouldn’t even be playing the game. 

I hope to see you there.

Date and time: April 23, 2008

Time: 6:30pm to 8:30pm

Location: To Be Announced

Cost: Free

To get registered, call Cynthia at: 713-490-8714  

 

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Tempting, But….

Today ended a volatile options expiration week with a big up day (volatility doesn’t just mean going down).  In the last couple of days, we’ve seen some of the biggest companies in the world report earnings better than most expected.  Google led the way with the biggest surprise.  The stock was up $90, almost 20% today!  Bloomberg reported some out of the money options were trading at $.10 last night.  So, you could buy 100 contracts for $1,000.  Today, they were worth over $17.50 per contract.  That’s a 17,500% return.  That’s not a misprint.  $1,000 turns into $175,000.  Now, that’s a nice day trade.  And no, I didn’t make that trade in case you were wondering if I was bragging.  It shows you the power of leverage and how options can increase returns at times quite a bit.  Of course, had Google reported weaker earnings, that $1,000 would’ve been gone in a flash.  So, it works both ways.

But, getting back to the earnings of other companies.  So far, they’ve surprised me that they’ve been so good.  Of course, some of them just “weren’t as bad as we thought”.  That’s what we heard about some of the financial earnings like Wells Fargo, JP Morgan, & Citigroup.  I think the worst is over for these companies.  The stocks have probably bottomed as well.  I don’t feel that way about other non-financial stocks.

I mentioned on Biz Radio last night that today would be a good test for the markets.  They had every reason to rally and rally hard.  On the surface, they did do that.  But, it failed the test.  The volume was weak and the internals were even weaker.  There was tremendous evidence today that the rally was due to the sellers taking a break, not the buyers taking charge.  Light volume, options expiration, and a little bit of good news.  That’s the making of a sharp increase.  But, I’m afraid it’ll be short-lived. 

I feel like I’m on an island right now.  So many are turning bullish.  The confidence is reaching an extreme level.  It’s really hard emotionally to not jump on board this train.  It’s so tempting.  But, my discipline is more important than my emotions.  I’m staying flexible and on up days like today I’m still making reasonable money because I own a lot of stuff going up right now.  I own the ag, the tech, some of the financials, but I also own some short positions which keeps my protected on the nasty down days.  My game plan going forward is to sell some stocks that have advanced here recently, short more, and potentially buy some materials stocks that have sold off in the last few days.  There’s been a slight rotation from materials and ag into financials and technology.  This may go on for a while but only for a while.  I think this is a floating market.  It’s investors that are negative on the market pausing.  In other words, the short sellers are locking in profits looking to re-establish at higher levels.  There are also those investors making short term trades (swing traders).  What’s missing are investors rushing in as if the train is leaving the station.  I’ll buy it at whatever cost.  That’s not happening now and I still need proof that it’s happening before I dive in.

Well, I’m on my way down to Rockport, Texas for a weekend of relaxation.  My kids love fishing.  They’ll sit there all day and just fish off the dock.  I’ll do a little fishing and catch up on some reading.  The weekends is when I get caught up on reading most of my research reports and data that comes in during the week.  It’s so much that I have to just put it off until the weekend.  I’m currently reading “The Black Swan”.  It’s a book about how to prepare for the unknown rather than wasting energy, money, and time preparing for the known.  Not sure how to do that but we’ll see how the book progresses.  Also, I’ll be watching my Spurs tomorrow versus the Phoenix Suns.  That one is sure to go 7 games.  At least the Spurs have home court advantage.

Have a nice weekend.

More Confidence In The Market & Food Shortages

My Crazy Investor is now at its lowest level since late 2007.  This translates to showing investors are as confident as they’ve been since that time.  Sounds good, right?  If we were in a bull market, yes.  But, we’re not.  We’re still in a very tough market.  Rallies are normal and we need to embrace them but don’t fall in love with those positions.  The S&P 500 will likely reach 1388 which is the place its peaked the last 3 times in 2008.  If we get through there, you’re probably looking at it going to its 200 day moving average of 1400-1410. 

I bring these technical places up because many people watch this stuff.  If I’m correct and we rally to these places, we need to continue to monitor volume, breadth, etc.  Is it going up on higher volume?  Is the upside volume very high?  Are many sectors participating?  Those answers in a few days will tell us if the character of the market is changing.  I believe we’ll float up on weaker volume and it’ll be an opportunity to sell stocks you’ve been wanting to sell and to add to short positions. 

Food Shortages

This is the 3rd day in the last week I’ve read or seen food shortages being reported.  Today, it’s North Korea.  Reports are suggesting we’re entering a “potential humanitarian crisis”.  It takes a month’s salary to buy a few days worth of rice.  Last week it was Egypt talking about riots regarding food.

This problem is starting to escalate.  You combine shortages with developing nations demanding more because they are coming into the middle class and eating better on top of government mandates for ethanol, etc., you’ve got rising food prices.

The solution for you and I is to own companies benefiting from agricultural business.  In addition, only simply the agricultural commodities.  There are numerous companies and commodities to invest in.  You can also use ETFs like Powershares DB Agriculture Fund (DBA) and/or the Market Vectors Agriculture Business ETF (MOO).  Just remember you still have to have an exit strategy even the fundamentals look so good. 

Sideways Market?

It’s hard to believe, but since mid January, the S&P 500 is actually flat.  A lot of volatility, but flat if you bought and held it.  This makes sense as our leading economic indicators we’re watching have flattened out in the last couple of months as well.  However, we’re entering a period where companies are now starting to report earnings and GE kicked off the season with crappy results.  This morning, Goldman Sachs said earnings this quarter will be “awful”.  So, the market has begun to discount the financial companies and their results and maybe those stocks have bottomed.  Now, we’re seeing the stock market adjusting down for crappy corporate profits by non-financial companies. 

But, the market is in a range.  It’s not a stock pickers market but rather it’s a sell the rally buy the dip market similar to 2005.  Two weeks ago, I was writing about the overconfidence I saw and the red flag that presented.  That was the sell the rally moment.  The market has started to drop since then and we still have a ways to go before the fear spikes high enough for me to get positive on the short term.

So, could we get more of the same?  A lot of volatility but essentially not going anywhere?  Definitely.  I’ve mentioned it would be much easier if we had a give up attitude on stocks rather than a hopeful attitude.  That would cause fear to spike really high and a real bottom could be put in.

For now, we’re probably in a recession.  The economic data will continue to come in weak.  However, at some point, as the analyst downgrades come in and stocks fall, the will overshoot.  In other words, the economy will eventually turn, profits will bottom, and stocks will have sold off more.  That will be our opportunity.

Don’t be afraid to trade but don’t fall in love with stocks here unless their hedged properly with some short positions.