Bull Markets Climb a Wall of Worry

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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An old market adage from the 1800s is that bull markets climb a wall of worry. At almost every step of the way (except at the end), there is substantial hand wringing about stocks being over priced, overbought, overextended and ahead of themselves. You will hear and read over and over again how current prices are not justified and the rally has gone way too far. Despite all the numerous reasons cited, most of which seem quite reasonable, stock prices continue to go up and up. Based on these criteria, we are currently in major bull market.

This type of opinion for stocks has been pervasive in the mainstream financial media from almost the beginning of the current rally (the oil market is even worse, with a constant barrage of negative headlines and news of impending price collapses that are supposedly going to take place any moment). It has however reached new heights in this rally with the CEO of NYSE Euronext giving a public interview stating the current rally is likely to run out of steam and stocks return to their previous lows. Considering the NYSE Euronext makes its money on the amount of trading that takes place, widely publicized comments from its CEO to talk down the market and discourage people from trading are a bit curious to say the least. There is definitely more to this story than meets the eye.

As we pointed out in the blog a few days ago, the big money in rallies like the current one is made by buying very low-priced stocks with good fundamentals. A case in point would be diamond company Harry Winston (HWD). While the media was telling you to stay out of the market, you could have almost doubled you money in this stock in less than two weeks. The stock is indeed now overextended, but should offer some opportunity for buying it on a drop later next week or even earlier the following week. While oil the commodity is moving sideways, a number of oil stocks are moving up. We mentioned in this blog drillers was the place to look, one the best deals seems to be Precision Drillers (PDS). A few shippers, also mentioned here as a place to look, have had explosive rallies in the last couple of days.

If you have a longer term perspective, media coverage can actually be very helpful. Just look for stocks that they are bashing. One of the best examples I have ever seen of this was in an article published in yesterday's IBD ("Bottom Fishing Can Land a Smelly Catch"). While every point made in this article applies to HWD (try to find an IBD stock that went up a 100% in the last two weeks - don't bother looking, there aren't any), the article is actually about MEMC Electronics (WFR). While most of the article bashes WFR as one of the worst stocks in the world, a careful reader would note that WFR had similar problems in 2001 to those that it has today and it was selling as low as $1.05 at that time. Within 6 years, WFR went up to $96.08. So you could have made 95 times (or 9500%) your investment by buying the stock when things looked worse. But don't worry, IBD is doing its best to make sure you don't fall into that trap again!

NEXT: Nasdaq Confirms Double Bottom - 200 MA Next

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.

Rallies Make You Rich, No Matter What the Type

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 major indices were flat yesterday a lot was going on below the surface in the market. Oil went on another incredible roller coaster ride, opening way down, getting close to even and then closing with smaller losses. It's back above the breakout point again in European trading this morning. A lot of small cap stocks, including some oil and gas drillers and producers, had major rallies yesterday however. In fact, the beaten down inexpensive under $5 stocks - the ones that almost every financial advisor tells you categorically to avoid are the stars of this rally. This is nothing new, its always the case in short-covering, technically based rallies.

Oil is repeating the behavior pattern at $50 that took place when it traded around $40. It went above $40 and was driven back below it over and over again. The oil "experts" were repeatedly quoted in the media that a price over $40 couldn't be justified. Oil would then go below $40 and would shortly thereafter bounce right back above it. It then shot up to $45, which the "experts" said was too high. It then promptly went to $50. Yesterday was the 4th time light sweet crude was driven below the key $50.50 breakout point. This morning in European trading it shot back above it. The market has continually shown that the oil "experts" the mainstream media quotes are wrong. Nothing succeeds like failure in financial media coverage however (much like in Washington, D.C.). The media seems to seek out "experts" who have never made a correct prediction in their entire careers.

The "experts" will also tell you not to buy stocks under $5 and stocks that have had huge price drops because they are unsafe. Better to stick with 'sure things' like Enron and those Bernie Madoff funds instead. When the market has has a major drop, buying low-priced, beaten down stocks are the key to making the most money in the rally that follows. Just make sure the company is financially viable - a current ratio around 2.0 and positive operating cash flow are the signs the company is likely to continue its operations. Low or no debt is even better, but not necessary. Running out of cash and failure to make debt payments is what drives companies into bankruptcy. On a fundamental basis, you can find a number of low-priced stocks that have very low price earnings ratios, price to book values well below one and even with price cash flow ratios below one (the price is below the amount of cash generated for the most recent year). There are also stocks with real dividends above 20%. These stocks are major bargains by any criteria. Oil and gas, coal (even in its bright, shiny form), and shipping are the richest source of these stocks. There are a few bargains in technology as well.

Yet is the mainstream media telling you to buy, buy, buy? Not at all. It is filling you with fear and telling you this is a suckers rally. Every rally is actually a suckers rally however. In a bull market, the suckers are the people who buy and then hold. In a bear market, its the people who sit on the sidelines and don't buy at the bottom or close to the bottom or even after the market is off the bottom because the financial media is warning them about losing money. If you are doing this, just remember every major financial publication had nice things to say about Enron. How much money do you think you'll make if you follow the investment advice of those people?

NEXT: The Deflation Boogieman, Oil and Intel

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.