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.

How Media Manipulates Investors to do the Wrong Thing

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:

As anyone who reads this blog knows that we have watching oil closely for quite awhile now and recommended buying DXO on the evening of February 17th. Oil double bottomed the next day. Did all the media investing pundits tell you to start buying at that point like the New York Investing meetup did? No, not at all. All of these geniuses missed it. So what happens when Wall Street misses the bottom, as it invariably does? Suddenly negative articles permeate the media about how dangerous it is to invest in that stock or asset... how its likely to go even lower yet... how you better get out in case you thought you timed it right. And while you're selling or staying on the sidelines the big money is picking up bargain goods behind the scenes. I have seen this ploy over and over and over again. You should be aware of it and make sure that you don't let yourself be shaken out of a profitable investment.

What is going on in the oil market right now is a quintessential example of how the media allows itself to be used by big money sources to misreport to the average investor what is really going on. There has been an unending drum beat in coverage of the oil markets about how demand is going down (while exaggerated, this is in and of itself a true statement), but with little or no mention of the supply side of the equation. We pointed out yesterday that a drop of 1.4 million a barrels a day globally is projected and sometimes in the same article you can find out that OPEC has cut 4.2 million barrels a day of production. Kindergarten economics tells you when supply drops much more than demand, price goes up. Not only is this simple analysis missing in media articles about the oil markets, the headline usually screams something about demand dropping for oil and how negative this is. I have seen this mindless idiocy echoed on comments on numerous investing sites. Many investors became irate when oil started going up and insisted manipulation was going on in the market because how could price go up when demand is going down? The average investor is indeed quite gullible (and knows nothing about economics).

Even when the mainstream media reports oil supply, it does so in a misleading way. The big supply news is always U.S. oil reserves in Cushing, Oklahoma (as if on one outside the United States uses any oil). Oil sold off sharply yesterday after a 'big' increase in supply was announced. 'Oil glut' and 'awash in oil' were phrases investors heard from the media. Oh really? Let's analyze just how big this 'oil glut' is (figures thanks to Bob Pascazio). U.S. oil inventories rose 700,000 barrels. Sounds like a lot if you don't know that there are 351.3 million barrels in storage. The increase in oil reserves was less than a 0.002%. The U.S. uses 833,000 barrels of oil an hour. So the 700,000 increase represents less than one hour more supply of oil. We have only a little over 17 days of usage in total storage. Even a minor disruption in supply and we would be out of oil before you knew it. Some glut!

This blog is being published late today because I wanted to see if suddenly oil went up today after all the negative press yesterday. DXO was mostly flat during the morning, but then started zooming in the afternoon. How surprising! Maybe all of those articles that appeared in the press yesterday saying OPEC isn't going to cut aren't true after all. The media not given investors the real story? Now I wonder who could benefit from that?

NEXT: Market Will Reward Real Value Going Forward

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 Look for Bottom, Oil Rallies

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 market is going up and down like a yo-yo today, alternating between negative and positive. Stocks are trying to find a bottom and will probably do so soon. No matter how negative the outlook is for the economy and earnings, stocks can only go so low before having a rebound because the selling gets exhausted. At this point media reports have gotten about as gloomy as they can get, with each person making a more negative price low projection than the last (Everyone is always about as bullish as they can get at a top also). While stocks grope for a bottom, oil looks like it found one last month.

On Friday the Dow hit a new low of 6443 and the S&P500 hit a new low of 667. Nasdaq broke its November low of 1295 (the last index to do so) and traded down to 1269 at one point. The close wasn't as bad because heavy buying came in at the end of a day. Professionals tend to trade at the close and their willingness to load up on stocks on a Friday is a bullish sign that indicates they think the risk of an upside surprise is becoming bigger than the risk of a downside one.

Oil is behaving particularly bullish. The near term futures were up 4.4% on Friday despite the horrendous jobs reports. For months the media pundits have been telling you that oil can't go up until the economy shows signs of recovery. The New York Investing meetup has maintained this is not the case, but you should focus on the supply picture instead. Supply has been dropping and the economic news has only gotten worse. In the last few weeks, oil has rallied from the $33 a barrel range to over $48 this morning. New York Investing recommended DXO (200% long NYMEX light sweet crude) at one of its classes on the evening of Feb 17th. You could have picked it up the next day at the bottom (and some people did). The position has been profitable ever since (almost 50% at its best) despite the horrendous market sell off.

The stock indices are sitting above important support levels. The Dow has a band of support between 5600 and 6200. The S&P 500 has a band of support between 600 and 630 or so. Nasdaq has support at 1240. The Russell 2000 at 325 and 300. Even the upper end of these prices might be enough for a bottom at the moment since the market is itching to rally. At the very least you might want to start picking up some of the many bargain stocks out there when the indices fall to these levels.

NEXT: Stocks - the Good, the Bad and the Ugly

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.

The Fed Should be Careful What It Wishes For

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:

Volatility is still the predominant feature of the U.S. stock market, with multi-hundred point moves being a daily occurrence on the Dow. For the moment, a Monday rally pattern seems to have replaced the Monday crash pattern that began in mid-September. The media reported yesterday's big move up in stocks as the market's approval of Fed chair Bernanke's endorsement of a new economic stimulus package. This of course makes no sense. The number of stimulus packages, special Fed lending facilities, special Fed asset purchasing programs, bailouts, bailout bills and government loans since the credit crisis began is now somewhere in the double digits - there have been so many, I've lost count. The need for more is just an admission of failure for all of the other initiatives, many of which were claimed to be just what was needed to turn things around. Apparently, the turning hasn't taken place yet.

The Fed announced even another new program this morning (for $540 billion this time). It will start buying commercial paper and dollar denominated CDs directly from money market funds. If you have been following this blog, you may have thought this was already being done. However, what was taking place is the Fed has been lending banks, a $123 billion so far, the money for this type of purchase. However, $341 billion has been withdrawn from money market funds by institutional investors since that program began. So the Fed has decided to eliminate the middleman (or more appropriately the middle-bank) and put an increased amount of funding behind this operation. This new program should not be confused with the one that begins on October 27th when the Fed will begin buying up to a trillion plus of commercial paper from an array of companies. The security of U.S. money market funds was supposed to have been assured about a month ago with the (legally questionable) establishment of a $50 billion dollar government insurance fund. It looks like things aren't exactly working as planned.

Today's country to announce the latest multi-billion dollar injection into its banking system is France. The French government will provide $14 billion in funding to the nations six largest banks. This appears to be part of their half a trillion bank rescue package announced several days ago. Between these two bailout announcements, French authorities were embarrassed once again with another bank trading scandal. Caisse d'Epargne announced an $800 million loss from derivative trading that allegedly took place because of rogue traders. It makes you wonder if there are there any controls on trading operations in French banks. Regardless, the biggest banks in France, just as in other advanced economies, will be assured of survival. Smaller and medium sized banks will be the ones taking the hit from the credit crisis.

The close to infinite liquidity being poured into the world's financial system is having the immediate desired effect of lowering interbank lending rates, which fell to their lowest level in a month yesterday. While the liquidity tsunami is good in the short-term, if successful it could lead to a very ugly long-term. Examination of a U.S. Adjusted Monetary Base chart shows a line going straight up (http://research.stlouisfed.org/fred2/series/BASE). This figure is currency in circulation, plus bank reserves and a massive increase in bank reserves is what is causing its vertical rise. Since banks are not lending at the moment, the inflationary effects will be muted from these additional reserves as long as the economy remains weak. A roaring economy where banks are lending out their reserves full stop would translate to an annual U.S. inflation rate somewhere around 2000% if the current rate of increase was maintained - and that would certainly make the stock market go up.

NEXT: Stock Market Enters the Bermuda Triangle

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.

Will Double Digit Crashes Follow Triple Digit Losses?

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:

In the last nine trading days the Dow has lost 2271 points or 20.9% of its value. Within this nine days there have been three or four days (depending on your definition) with market crashes. As of yesterday, there have been an unprecedented 6 trading days in a row with triple digit losses. The market meltdown is by no means limited to the U.S., but is global. As bad as the short-term picture is, the long-term could be much worse. Last night in Japan, the Nikkei began testing its 2002 low in a sell off that has lasted 18 years so far. If the U.S. markets follow this pattern, they will not bottom before 2225.

If you define a crash as a closing drop of 5% or more on the major indices, Thursday was the third crash day in less than two weeks (it was the fourth, if you just consider intraday drops). In an unusual trading pattern, the Dow and S&P were down more than the Nasdaq. This was caused by the SEC lifting the short selling ban on financials, which included Dow stocks GE and GM, and of which the Nasdaq has few. While the Nasdaq dropped 95 points or 5.5% to 1645, the Dow dropped 679 points or 7.3% to 8579 and the S&P dropped 75 points or 7.6% to 909. This was the first Dow close below 9000 in five years. The Russell 2000 dropped the most of all, losing 47 points or 8.7%. Trading volume was above average, but not at the spectacular level that indicates a wash out bottom. The VIX, the volatility index, hit 64.92 - way above its top of 55 in 2002, but still considerably below the historic 150 high during the 1987 crash.

As bad as it was in the U.S., worse things happened in overseas markets. The Nikkei dropped 1042 points or 11.4% to close at 8115. Drops greater than 8% took place in Australia, Hong Kong, India, the Philippines and Singapore. Indonesia closed its markets and suspended trading indefinitely. Russia did the same - again. Austria closed it market for half a day when stocks dropped 10% on the open. The major European indices were down 5% to 8% in mid-day trading. Light sweet crude fell below $82, but gold and silver both held up in the drop.

Markets don't go down forever and an explosive bounce will be taking place some time soon. Today, the Dow decisively broke its 200-month moving average (around 8470) on the open. Nasdaq and the S&P 500 broke this level several days ago. While a test of the 2002 lows for the S&P 500 and the Dow is now likely, Nasdaq may fare a little better. Look for support for the Dow around 7200/7300, S&P around 800, and Nasdaq around 1500. While it looks like we could be getting there today, market bottoms on Fridays are an unusual event.

NEXT: Do the Markets Indicate a Depression?

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.