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.

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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.

Market Pull Back or Top?

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 had a sharp drop yesterday. Some people have already stated that the market has topped out. While certainly this is possible, the argument is weak. The market doesn't go up every day, although this may not have seemed to be the case lately. Even the best rallies have sharp drops. As was mentioned in this blog several days ago, there were a lot of stocks in the market that were overextended and floating way beyond their 10-day moving averages. A decline for them was inevitable and is now taking place. If they drop enough, they offer a major trading opportunity. In general, small oil producers and drillers offer the best deals in this scenario. While some areas of the market may already be in decline, others will perk up. The PPI report today indicated a whiff of inflation and you can expect much worse in the future.

The Nasdaq was down 3% yesterday. It is the only major stock index that has hit its 200-day moving average - classic resistance in a bear market rally. It hoovered at that level for 9 days. The Dow and S&P 500 have yet to get to this key level. It is not unreasonable to assume they will before the rally ends. Oil managed to go down slightly despite a massive drop in oil and gasoline in U.S. storage. I have noticed this lack of reaction on the storage news several times during the rally that began in February. The market has only reacted to the good or bad news two or three days later. So much for the Efficient Market Hypothesis.

While oil itself dropped a small amount, small cap oil stocks were down as much as 15%. The ones that were floating well above their 10-day moving average need to come down to at least their 20-day (the 30-day or 40-day would be even better) moving average to restore some balance. They become good trading buys at that point, especially if gaps are filled by the drop and the RSI has fallen to around 50. HTE, which had about a 50% rally in only four trading days is a good example of this type of stock. PDS less so. In many cases, coal stocks were even more extended than oil and they need even more selling to get to a bargain price. Take a look as MEE for example (don't buy it, at least not yet, just take a look at it). The incipient rally in natural gas has another type of profile (a rally at the beginning and one that has been going on for awhile have different trading rules). UNG needs to come back down to its 50-day moving average before it becomes interesting.

While inflation effects oil and other commodity prices, it is even more important to gold and silver. The PPI report this morning was up 0.3% after dropping 1.2% in March. Year over year, PPI is down 3.7%, although core prices are UP 3.4% (yes up, they have never been negative). Food prices rose 1.5% in April with a record jump in eggs and large price increases in vegetables and meats. Energy prices supposedly fell last month (yeah, that's realistic). The deflation that the government claims took place in its highly manipulated reports is dependent on falling oil prices. Once they go back up - and this has been happening since February - the deflation that never really existed is going to turn into very ugly inflation. Unlike the deflation, the inflation will be real.

NEXT: The Scamdemic in Insurance, Autos and Swine Flu

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.

NYIM May 5th Meeting; Oil Report; Swine Flu Update

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:

We would like to thank our guest, best selling author William Cohan for a great interview at the New York Investing meetup last night. The discussion of his recent book, "House of Cards" touched on many of the major issues currently facing Wall Street and the financial system. Cohan was mostly critical of Wall Street during his talk as he was in his book. There was also a talk at the meeting about stocks, oil, gold and silver and where the opportunities currently lie. To find out even more about this topic, we urge everyone in the New York Metro area to attend the New York Hard Assets Investment Conference next Monday and Tuesday. Registration is free and can be done by going to: http://www.hardassetsny.com/. Meanwhile, more news about swine flu is coming out, but the medical authorities are finally being somewhat more responsible about informing the public about what is really going on.

While there are many point of agreement between the New York Investing meetup and William Cohan, some divergences of opinion come out during his interview. Cohan stated quite clearly that he believed significant reform was on the way for Wall Street and that he had high hopes for Timothy Geithner's tenure as Treasury Secretary. While there is certainly a strong movement for reform among the American populace, little has been done so far and anyone who reads this blog regularly knows we are not fans of Timid Tim Geithner. We certainly agree with Cohan's criticism of Congress and the large campaign donations that it accepts from Wall Street has corrupted our system. We don't agree with Cohan's favorable views of TARP, something we vehemently opposed and consider to be one of the biggest wastes of government money ever. Cohan did provide some interesting insight into the failure of Lehman Brothers saying there was really no clear answer why the authorities let it fail other than the timing of its demise (if it had been first, he believes a bailout would have taken place) and it wasn't a favored institution of the government as is Goldman Sachs. We hope to have at least excerpts of the interview out on video shortly.

The weekly oil storage report came out from the EIA this morning and it looked pretty bullish. Oil in storage was up only 600,000 barrels, while analysts has expected a rise of 2,000,000 barrels. Gasoline was down 200,000 barrels and the high demand summer driving season is just about to begin. In the meetup last night we showed how oil was well below its 200-day moving average and predicted it needs to get to that level before the current rally will end. Oil jumped up to a new 5-month high after the inventory report with light sweet crude reaching $55.55 a barrel. There is probably at least $20 more upside to the commodity, if not more, before a 2009 high is hit.

In today's media coverage, the first actual American death of someone who tested positive for swine flu was reported. Read the articles carefully however, they do NOT say that the woman who died on the Texas/Mexican border died of swine flu. Indeed the medical authorities refuse to state that she did and said that she had other 'critical underlying medical problems'. The little Mexican boy who died in Houston also had other significant medical issues. In Mexico, the current count is 42 deaths (still nowhere near the originally reported 160). No medical history is available for most of these people, who were poor and had limited access to health care. It is quite possible all of them had other medical issues as well and swine flu was not the primary cause of their deaths. This would explain why there are no swine flu deaths outside Mexico in places where advanced health care systems and accurate record keeping exist. There is no substantial proof that the current outbreak of swine flu is deadly, nor that it is even a serious disease.

NEXT: A Rally Frothing at the Mouth

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.

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.

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.