Thursday, May 14, 2009

Market Pull Back or Top?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Stocks had a sharp drop yesterday. Some people have already stated that the market has topped out. While certainly this is possible, the argument is weak. The market doesn't go up every day, although this may not have seemed to be the case lately. Even the best rallies have sharp drops. As was mentioned in this blog several days ago, there were a lot of stocks in the market that were overextended and floating way beyond their 10-day moving averages. A decline for them was inevitable and is now taking place. If they drop enough, they offer a major trading opportunity. In general, small oil producers and drillers offer the best deals in this scenario. While some areas of the market may already be in decline, others will perk up. The PPI report today indicated a whiff of inflation and you can expect much worse in the future.

The Nasdaq was down 3% yesterday. It is the only major stock index that has hit its 200-day moving average - classic resistance in a bear market rally. It hoovered at that level for 9 days. The Dow and S&P 500 have yet to get to this key level. It is not unreasonable to assume they will before the rally ends. Oil managed to go down slightly despite a massive drop in oil and gasoline in U.S. storage. I have noticed this lack of reaction on the storage news several times during the rally that began in February. The market has only reacted to the good or bad news two or three days later. So much for the Efficient Market Hypothesis.

While oil itself dropped a small amount, small cap oil stocks were down as much as 15%. The ones that were floating well above their 10-day moving average need to come down to at least their 20-day (the 30-day or 40-day would be even better) moving average to restore some balance. They become good trading buys at that point, especially if gaps are filled by the drop and the RSI has fallen to around 50. HTE, which had about a 50% rally in only four trading days is a good example of this type of stock. PDS less so. In many cases, coal stocks were even more extended than oil and they need even more selling to get to a bargain price. Take a look as MEE for example (don't buy it, at least not yet, just take a look at it). The incipient rally in natural gas has another type of profile (a rally at the beginning and one that has been going on for awhile have different trading rules). UNG needs to come back down to its 50-day moving average before it becomes interesting.

While inflation effects oil and other commodity prices, it is even more important to gold and silver. The PPI report this morning was up 0.3% after dropping 1.2% in March. Year over year, PPI is down 3.7%, although core prices are UP 3.4% (yes up, they have never been negative). Food prices rose 1.5% in April with a record jump in eggs and large price increases in vegetables and meats. Energy prices supposedly fell last month (yeah, that's realistic). The deflation that the government claims took place in its highly manipulated reports is dependent on falling oil prices. Once they go back up - and this has been happening since February - the deflation that never really existed is going to turn into very ugly inflation. Unlike the deflation, the inflation will be real.

NEXT: The Scamdemic in Insurance, Autos and Swine Flu

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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