Wednesday, June 17, 2009

Best to Step Aside and Watch the Market

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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While the market drop yesterday didn't seem like anything out of the ordinary, the technicals were more damaged than the price drop indicated. Another down day today will give the market indices an even more negative tinge. The Dow (the weakest of the indices) fell and closed below its 200-day moving average yesterday and the S&P 500 and Russell 2000 are testing that line today. A close below their 200s at any point in the next few days would add even more negativity to the story that the technical indicators are telling. Oil also looks like it could have a strong pull back soon as well. Gold and silver have already begun a correction after hitting strong resistance. The U.S. dollar is trying to rally (with lots of help from the powers that be) and bonds are rallying as well.

It is interesting to note that when the dollar started to rally, almost all other asset classes sold off. My interpretation of this is that the rallies we have been seeing are dependent on the Fed and Treasury's massive liquidity injections into the financial system. Any threat to diminish those will damage stocks, precious metals, and oil - at least in the short term. It will help bonds and the dollar. The 10-year was trading at 3.65% this morning, well off from last weeks high of 4.00% (when bond prices go up, interest rates go down) and the trade-weighted dollar was at 80.84. The Fed independently, and then with central bankers from other countries, has made noises in the last week or two about withdrawing liquidity from the system. The markets are reacting, or perhaps more accurately, foolishly overreacting to this. There is no chance of this happening for a long, long time even though one Wall Street economist stated today the recession was over - and she meant the recession on the planet earth!

The EIA oil storage report came out this morning and the picture was mixed. Oil in storage dropped by 3.9 million barrels, but gasoline increased by a whopping 3.4 million barrels. Gasoline is the prime use for oil in the summer months and at least in the short term there is too much of it around. Light sweet crude had already traded as low as 69.28 a barrel early in the morning. I am still interested in owning oil, but not until it falls to around 60 or so (the charts will indicate where). There should be another rally into the summer after that. As for natural gas, it still looks like a good buy whenever it drops. This may or may not happen after its weekly storage report tomorrow, which comes out at 10:30AM New York time.

Trading is all about playing the probabilities. Stocks or commodities that have gone up for a long time and are close to major resistance points usually do not have a high probability of making you a lot more money. The change of falling prices become much higher than the chance of rising prices. At points like these, you should get out. More aggressive traders might want to even take on some short positions when this happens. ETFs are the best vehicle for doing this. Shorting individual stocks is much riskier and not for the inexperienced.

NEXT: Building a BRIC House; Nat Gas and Market Update

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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