Wednesday, August 19, 2009

Stock Market Gappy, Inflation Worries Surface

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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Global market weakness started again in Asia last night. At one point, the Shanghai market was down more than 5%, but recovered slightly to close down 4.3%. So far this month Shanghai is down almost 20%. Hong Kong was down 1.7% and the Nikkei in Japan was down 0.8%. This was a greater amount that their dead cat bounces on Tuesday. Europe was down strongly this morning and the U.S. markets gapped down again, just like they did on Monday. Strong buying came in immediately to fill the gap. The gap on Monday was partially filled in Tuesday's trading.

Since the market has had a long rise and has been flat for a few weeks now, a gap down where the gap is not filled would be a breakaway gap (or more appropriately a breakdown gap). This is the only type of gap that doesn't have to be filled. The breakdown gap establishes a new ceiling for trading and indicates the beginning of a longer sell off. This hasn't happened yet, but there were two almosts in the last three days. The VIX (volatility index) had its third spike up on the open in three days. When the VIX goes up, stocks go down. The dollar was just above 79.00 recently, still keeping above its 78.33 breakdown level.

A survey of fund managers by Merrill Lynch indicates fund manager optimism is at its highest level in 6 years. This is a contrary indicator. Fund managers love buying at the top and selling at the bottom, which is why as much as 85% of mutual funds fail to beat the S&P 500 in any given year. This doesn't mean the market is going down next week however. Within the next few months though is quite possible.

There are some important articles out today about inflation. One states the Fed has no exit strategy from its stimulus programs (in fact, it is extending them). The one getting the most attention though is an Op-Ed piece by Warren Buffet in the New York Times, entitled "The Greenback Effect". Buffett very gently points out that printing money can cause inflation and there could be trouble on the horizon for the U.S. While the New York Investing meetup has been pointing this out for the last two years, this reality-based view is not supported by the government, Wall Street or the mainstream media. Buffet deserves credit for stating the obvious.

NEXT: Oil Up; Retail, Employment and Economy Down

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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