Buy When There's Blood on the Street - Just Make Sure It's Not Your Own

 

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.

Monday August 8th, the first trading day after S&P downgraded U.S. debt, was a crash day in the American stock market.  Asia held up much better and so did much of Europe, except for Germany.

The Dow Industrials were down 635 points (5.55%), the S&P 500 was down 80 points (6.66%), Nasdaq was down 175 points (6.90%) and the Russell 2000 64 points (8.89%). The DAX in Germany was down slightly more than 5%, whereas the Nikkei in Japan and the Hang Seng in Hong Kong were down a little more than 2%.  A crash is traditionally defined as a drop of 5% or more in a day. The Nasdaq and Russell 2000 already had a crash day last week. U.S. stocks had numerous crashes during the Credit Crisis in 2008.

Stocks looked like they were about to enter freefall - a severe uninterrupted drop - around 3:00PM.  President Obama delivered a statement on the S&P downgrade and caused a temporary short-term move up instead. The market would have washed out otherwise and been ready for its first rally.

As is, the market is at the end of its first stage of selling, we may just have to wait a little longer.  The technical indicators on the daily charts have either hit their lowest points or are very close to them. Some short covering and opportunistic buying should lead to a quick sharp rally for a few days. This rally is for traders only. The weekly technicals have yet to bottom out and nothing longer term should be expected.  

Technical bottoms and price bottoms are not the same. The technicals will have to gather some strength before stocks can enter a new rally phase. The ultimate price bottom is probably as much as two months out, which would put it somewhere in October. Until then, choppy action that brings the indices intermittently lower should be expected. While the indices may not go a lot lower, individual stocks, especially small cap, high-beta stocks (those known for their volatility) can indeed go much lower. This also includes high flyers that have yet to have had a big drop. In major selloffs, almost everything goes down.

Once a bottom is established, the volatile stocks you wanted to avoid in the selloff are the ones you want to own. This is where you will make the most money. Small, emerging, and leveraged are the keys. Smaller cap stocks will go down the most and then back up the most (just make sure the drop was market related and not because the business of the company is threatened). Emerging markets, both the BRICs (Brazil, Russia, India, and China) as well as smaller ones will have the same up and down behavior. Russia was down 12% on August 8th for instance. You will do better still if you use leverage on your buys. There are ETFs that provide 200% and 300% exposure. For the emerging markets, these include LBJ (300% Latin America), YINN (300% China), RUSL (300% Russia), EDC (300% Emerging Markets), INDL (200% India) and UBR (200% Brazil). For small cap stocks, TNA (300% long the Russell 2000 index) is the most leveraged play.

Traders should be able to make good use of these ETFs to move in and out of the market. Investors with a longer-term perspective will want to wait until a market bottom has had time to fully develop.  

Disclosure: Waiting to buy.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Did Gold Peak on Octobler 18th?

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.


Gold as measured by the ETF GLD fell 3.2% in New York trading on Tuesday. Its chart looks very similar to December 2009 when it experienced an intermediate peak.

Early last December, gold had been rallying for three months. Sentiment was extremely bullish. GLD (and SGOL and IAU, the other ETFs which hold physical gold) was well above its simple 50-day moving average. The technical indicator RSI had become extremely overbought on the daily charts in late November, rising above 80. After a slight dip below 80, the RSI then rose to a merely overbought 80 as the price of gold hit a higher high. This negative divergence signaled the gold rally was done for the next few months. Gold then gapped down and had a sharp drop with the RSI quickly fallingl toward a neutral 50. 

More recently, gold has been rallying since late July. Sentiment has been extremely bullish for quite awhile. Gold has been trading well above its simple 50-day moving average. Gold became overbought by the last week of September and entered extremely overbought territory on the daily charts at the end of the month with the RSI rising above 80. By early October, the RSI was even higher. Then there was a quick dip below 80 and the RSI rose and hit 80 while the price of gold hitting new highs. The negative divergence once again signaled trouble. On Tuesday, gold gapped down and had a sharp drop. The RSI had even a bigger drop falling toward 50. The pattern is almost identical to December's, although gold was a bit more overbought and overbought for a longer period this time around. 

If gold follows last December's pattern, it will fall toward its simple 200-day moving average. For longer term holders, this is not a significant move. Shorter term position traders should be more concerned. Regardless of your investing time frame, this doesn't look like a good time to add to positions. In long-term bull markets, and gold has been in a long-term bull market since 2001, investors should add to positions when the price of an asset is around its 200-day moving average.  

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

There is no intention in this article to endorse the purchase or sale of any security.

Why Investors Should be Cautious on Gold and Silver

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.


While U.S. stocks peaked in late April, silver peaked in mid-May and gold in late June. While the S&P 500, Dow Industrials, and Nasdaq have all given bear market trading signals, neither gold nor silver have done so. The technical indicators for both metals are deteriorating however and more serious drops could lie ahead.

Gold and silver are unique in that they are monetary metals and the market treats them as currency subsitutes. The is more the case for gold than it is for silver. Of all the metals, gold has the least industrial use. Only about 13% of annual output is used in manufacturing, mostly for electronic products such as cell phones and computers. Gold is not useless as many commentators claim, unless you live like the Amish. Silver, on the other hand, has a greater industrial role with 50% of its production being used for this purpose. Silver will therefore be more strongly impacted by economic developments than will gold.

Both gold and silver are still trading in a bullish chart pattern with their 50-day simple moving averages above their 200-days. Their technincal indicators though have turned negative on the daily charts. Most have moved below the point that divides bullish from bearish action. The trend indicator DMI (directional movement index) gave a sell signal for gold (GLD) in early July around the same time that the more serious bear market signal took place on the S&P 500 and Dow Industrials. Yesterday, the price of silver (SLV) closed below its 200-day moving average. Gold is still trading above this key line.

In the long-term, gold and silver will prove to be two of the best investments in the market. This doesn't mean that they will go up every day or that they can't have significant reversals. A double-dip recession will certainly be a negative for silver prices, although perhaps less so than for copper or other industrial metals this time around. If silver starts to trade consistently below its 200-day moving average, it too will be giving a bear market signal. It is still too early to tell whether or not gold will follow. A price drop  to the 200-day moving average, currently at 111.61 and rising for GLD, is almost certain at this point though.

Disclosure: No Positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Gold Breaks $1000!

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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As of this morning, gold has been above $1000 an ounce three times. The first time was in March 2008 when it reached $1033 and the second was February 20th of this year when gold reached $1006. Slightly after 4 AM New York time, gold traded at $1007. Gold also traded close to the $1000 mark in July 2008 and early this June. Unlike previous attempts to break the $1000 an ounce level, this one is taking place at the beginning of gold's bullish seasonal period that runs from August to February.

Gold has had a spectacular rise that began only last Tuesday. Most of the technical indicators on both the daily and weekly charts are not even remotely overbought. The technical patterns look more like a pre-rally. They have not even reached the usual rally formations yet. Until they do, choppy trading around the strong resistance level of $1000 is quite likely. A break higher now is possible, but is not likely to last too long initially. A rally will take hold after awhile however. Gold now has a long 18-month base and that can act as a springboard for a long and powerful breakout that can last for several months.

Silver was as high as 16.80 this morning and is trading at a yearly high. It is trading in a band of resistance between 16 and 19. It may get stuck in this area for awhile as well. Once it clears the 19 area it is likely to go to new highs breaking through the 21 level reached in March 2008. Silver always follows gold.

As would be expected the U.S. dollar is not doing well this morning. DXY, the ETF for the trade-weighted dollar, traded as low as 77.14 pre-market. This is a new low for the sell off that began in March and well below the breakdown level of 78.33. This is the third time this level has been breached. The dollar is weak and the precious metals are strong because the G20 made a pledge this weekend to keep their unprecedented stimulus efforts going. Stocks are rallying as well, not reflecting any potential growth in the global economy as the mainstream media is reporting, but because more liquidity rallies stocks. If it is interpreted as inflationary, it also causes gold and silver to rally and the U.S. dollar to tank. The market's message today is quite clear.

NEXT: Inflation Versus Recession

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

Market Behavior Next Few Days Critical

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.

Our Video Related to this Blog:

Healthy markets go up in the first four trading days of the month. This is even more of a truism when the month begins a new quarter. The quarter that begins on July 1 is also the beginning of the half year. Only the first trading days of the year in January are more critical in determining market direction. This January the market was basically flat, so the investing intent of the big players was indeterminate. The first few days of April saw heavy buying in an up market, confirming the rally that began in early March. The next few trading days should provide valuable information on whether or not the big players will keep supporting the current rally. If they don't, it's in trouble.

Yesterday was an up day with the Dow closing above its 200-day moving average for the first time in two weeks. Trading volume was anemic however, coming in well below average. Moves on low volume shouldn't be trusted. In the oil space, DXO also traded and closed above its 200-day moving average for the first time in months. Volume was also anemic. In contrast the Nasdaq has held above its 200-day for quite awhile now and unlike the Dow, its 50-day is also above the 200-day creating a bull pattern. The volume patterns for Nasdaq are also fairly bullish.

What isn't bullish are the technical indicators. The Nasdaq could easily hit a new high for the current rally in the next few days. If this takes place on low volume watch out. The technicals will not be hitting new highs creating negative divergences and possibly double negative divergences (a very bearish pattern). This would be particularly problematical if the new high was on July 3rd. The trading day before July 4th is almost always an up day, even in the worst of markets. Even in 2002, the Nasdaq was up 100 points that day. The volume was almost non-existent though, since the day before July 4th usually has the second lowest trading volume of the year (only the day after Thanksgiving is lower). In 2002, the big rally on the day before July 4th was followed by one of the ugliest sell offs ever. So a big rally that day indicates little about future market direction.

If the market rallies on Wednesday and next Monday and the volume picks up to above average levels, the market is acting in a healthy manner and the big players are still bullish. If it sells off on those days, but manages to rally on Thursday, this is a bearish pattern. Any drop on Thursday should be considered mega bearish. The monthly employment report will be released this Thursday instead of Friday this month, so watch for market reaction. The next few days should be interesting to say the least.

NEXT: Oil Storage, Stocks, and States

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

Stock Market Turns Ugly

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.

Our Video Related to this Blog:

This blog advised getting out of the market early last week. Those who sold were quite happy they did yesterday. The main U.S. indices were down between 2.4% and 3.9%. Europe and Asia got hit as well, but were down somewhat less than the U.S. The media is sighting a World Bank report forecasting that the global economy would shrink 2.9% this year instead of the 1.7% they had previously predicted (who woke them up?). The markets were technically weak and were set up for a fall no matter what happened though.

The Dow, although the weakest of the U.S indices, had the smallest drop of 2.4%. The Dow had closed below its 200-day moving average all five days last week and then demonstrated further weakness by closing below its 50-day moving average yesterday. The 50-day is below the 200-day in a typical bear market pattern. The Nasdaq on the other hand has the 50-day above the 200-day in a typical bull market pattern and is the strongest of the major indices by far. It dropped 3.3% yesterday, but closed above its 50-day and 200-day, still a healthy picture in contrast to the sickly looking Dow.

The S&P 500 and the small cap Russell 2000 have a different picture altogether. Both have the 50-day close to the 200-day and are trying to change from a bear market to bull market pattern. The 50-day crossing the 200-day from below is usually considered a buy signal, but it is not working out in this case because the technical indicators are turning down. The 50-day had already slightly crossed the 200-day for the Russell 2000 and they are touching each other for the S&P. The Russell had the biggest drop yesterday, falling 3.9%. It closed below the 50-day and right on its 200-day. The S&P dropped 3.1% and closed just below the strong support offered by the joined 50-day, 200-day. Breaking strong support is never a good sign technically.

One of the worst hit groups yesterday was oil drillers. Take a look at PDS, often mentioned in this blog. The triple leveraged ETF for oil companies, ERX also had a large drop yesterday after already selling down for the previous seven days. Light sweet crude closed at 67.50 yesterday, but was as low as 66.37 in Asian trading last night. I am looking for oil to hit support in the 58-62 range. Oil companies started selling off before oil did and in all likelihood they will be rallying before oil hits bottom.

I will be briefly discussing the current state of the market at the Fundamental Class tonight. See our webite for details.

NEXT: Technical Damage Continues; Fed Decision Today

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

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.

Our Video Related to this Blog:

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
http://investing.meetup.com/21

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.

Stocks/OIl Trying to Bottom, Gold at Resistance

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.

Our Video Related to this Blog:

The news is filled with a fearful vision of the future. All you see in print and hear on TV is how the economy and financial system are imploding everywhere. It is under exactly such circumstances that market bottoms take place. Once everyone knows the news and agrees on the situation, there is no one left to sell. The opposite happens at market tops. The last time I watched CNBC News on a frequent basis was in September 2007. Everyone was confident. Fed rate cuts were going to fix everything. It was going to be clear sailing ahead. The U.S. stock market peaked three weeks later.

So far the Dow has held above the low of 7181.47 that it reached on October 10, 2002. A significant break of that number would have serious implications, although not necessarily immediately. The Dow is severely oversold on a monthly basis. The monthly RSI has actually fallen a tinge below 20 (where 20/80 are the oversold/overbought extremes). The has not happened since 1971, which is as far back as my data goes. You should assume that this did occur in the 1930s during the Great Depression and that the RSI on the monthly charts dipped even lower. This doesn't mean that the Dow can't go any lower right now, but any major selling would be met with buying almost immediately. An announcement of the newest bank bailout plan will be the impetus for the market to rally (selling could take place first for a short time if the market's reaction is negative).

While the long-term chart picture indicates a rally will be coming soon, this rally is a tradeable event. You can not buy and go on vacation. When you get your profits, you need to take them. The most likely scenario for the next several months is a lot of volatility on the Dow and the other stock indices. Profits one month can disappear the next. The 200-month moving average, around 8600 right now, should be considered strong resistance. The market needs to break above it and stay above this line for a number of months before any type of sustainable rally pattern can be established.

While stocks are are hitting support, gold is hitting resistance and you almost always get selling at resistance. Gold got to at least 1007 in intraday trading on Friday. Just as stocks are in a long-term bear market, gold is in a long-term bull. Its previous all time high is at 1033. When this level is breached, the long term uptrend is confirmed and you should be looking for 1200 as the next stop. Meanwhile, don't take your eye off of oil. The March contract expired on Friday. In the last few months, there has been a lot of selling during the first few days of a new contract. So far today this is not happening and this would be one sign that the oil could be getting ready to turn around.

NEXT: Dow Breaks Key Support Indicating a Much Lower Low

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.