Wednesday, October 28, 2009

Markets Enter Danger Zone

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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Almost all markets are at critical points right now. The 50-day moving averages have been broken in all the major stock indices, except for the Dow. SLV has also broken its 50-day. Gold is holding above its 50-day and hit key support at $1025 earlier. There is about a $5 gap under that level that could be filled. The RSI picture is highly negative as well. All major stock indices have broken the key 50 level, as have SLV and GLD. Long term interest rates have not only started heading up, but are trying to break a 29-year downtrend line (this would mean a many year period of rising rates). The only thing that is rallying is the U.S. trade-weighted dollar. It bounced off of the 75 level - a place where there is no technical support. The dollar rally has mostly been orchestrated by the European Central Bank, which is desperately trying to keep the euro under 1.50.

The 3rd quarter U.S. GDP figures are out this Thursday. Consensus is for a 3.2% rise. A much lower number could tank stocks. A larger number would be bullish. Regardless of what happens, the false message of economic recovery that has been repeated continually by the U.S. government will be shown up to be the fantasy that it is at some point and the pretense that the stock market rally has been based on will evaporate. It will soon become obvious though that the only way for the U.S. government to handle our ongoing economic problems will be to print more money... and more money .... and more money. At that point, stocks and the inflation trade (precious metal, energy, and agriculture) will decouple. These have been mostly moving together since March. As of now, it is not possible to say when this separation will take place.

At the moment, it is necessary to worry about everything going down. Gold and silver miners have been particularly hard hit, with small cap stocks next on the list. Some mining stocks had two and sometimes three gaps on their charts, with only one gap having been filled so far. Watch out for prices returning to levels where there is a gap. Miners are affected by the price movement of gold and by the overall stock market, so they are getting a double whammy right now. These are also highly volatile stocks prone to sharp drops and rallies. You need to buy on the dips and either hold on or sell every time there is a peak.

The struggle between the U.S. dollar and the markets is likely to continue for some time. The stock market is essentially a house of cards that can start to wobble even with a small dollar rally. A sharp drop in stocks will invariably be met by a new flood of liquidity from the Fed., which will in turn make the dollar go back down. The Fed learned that this was necessary based on last fall's market meltdown and will now repeat this action every time there is a threat to the markets. Any sharp drop will therefore likely be followed by a sharp rise. This is typical of secular bear markets. Over many years they go up and down a lot, but ultimately get nowhere. The Dow was 10,000 in 1999 and is around 10,000 right now. Gold on the other was around $250 in 1999 and is over $1000 right now. The long term trends determine where the money can be made.

NEXT: Mark to Model GDP

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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