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.

Our Video Related to this Blog:

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.

Market Will Reward Real Value Going Forward

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:

Stocks rallied again yesterday and are doing so again this morning. Deconstructing this rally can provide investors with a lot of useful information going forward. While much of what it is taking place so far is short covering, some of that can turn into sustainable price increases and some of it can't. The market is also showing a clear preference for value over growth and hard assets over future promises, which makes perfect sense in a down economy with impending inflation.

The biggest up moves have been seen in the financial stocks. Many of them have massive short positions and in such cases any little piece of news can cause a big rally. It is also quite easy to have a big percentage gain if your company's stock was as low as 97 cents as Citigroup was. A move to 1.85 (the price as I write this) means a rally of over 85%. In the very short term, the big money is in the financials (if you trade them, watch them like a hawk). Nothing has really changed in their underlying value however. Many are still essentially insolvent, even if they haven't been fully nationalized yet like AIG, FNM, and FRE. Interestingly, bankrupt AIG, Fannie and Freddie are still trading and are in the pennies. They have not participated in the rally. You can expect many of the financials to come right back down and at some point to stay there.

Commodity stocks have also had nice rallies in many cases, but nothing like the financials. The represent extreme value and the possibility of sustainable action in long term (many of them actually bottomed sometime between last October and December and made a bullish divergence with the rest of market by not going to new lows in the recent sell off). In most cases they own large deposits of oil or metals, as opposed to worthless pieces of paper. These will not only maintain their value, but increase it at rates faster than inflation. In contrast to these hard asset stocks are growth stocks, which frequently have very limited real assets but are valued based on their future business. These are the stars in long term bull markets (think tech stocks in the 1990s), but are put on the back burner in long term bear markets. The IBD 100 is good proxy for this group. It has underperformed the market indices in this rally and this is not surprising. The days of easy money in this group are not likely to return soon.

Like all rallies off the bottom, the first down move will be important. Minimally, you don't want to see the recent lows broken and you would like to see the low of the first down move put in by next Friday and then a rally follow that. If the market breaks the lows from last week, a drop to the next major support levels is likely. This will almost certainly happen in the future, but doesn't have to happen right now. Long down moves in bear markets are frequently interupted by nice rallies on the upside.

NEXT: Today's Economic Lunacy

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.