First of the Month Indicator Gives Bear Market Signal

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.


It was a horrendous day in the markets on Friday June 4th. Trouble began when the euro broke support and selling then spread from Europe to North America. A disappointing U.S. jobs report added to the downward pressure and stocks sank. The small cap Russell 2000 had a mini-crash. The first four trading days of the month were down for the second month in a row, indicating we have established a bear market trading pattern.

Problems began in Europe with rumors of a possible default of a major French bank. Another European country, Hungary, indicated its finances were in trouble. The euro (FXE) fell below the key 1.20 level and traded as low as 1.1919 taken out the 1.1920 low in March 2006. Adding to the woes in Europe was the May employment report that came in well below expectations. Almost all the jobs added were from Census hiring and those jobs will disappear almost as quickly as they appeared. U.S. markets gapped down on the open.

Selling in U.S. stocks was almost continuous throughout the day. By the close, the Dow was down 323 points or 3.2%. The S&P 500 dropped 38 points or 3.4%. Nasdaq was worse still, losing 84 points of 3.6%. The Russell 2000 though gave up 33 points or 5.0%. The rule of thumb is a 5.0% drop in one day is a mini-crash. The Dow closed at 9932, which is the second recent close below the key 10,000 level. This one took place on Friday, so it appears as a loss of technical strength on the weakly charts, a more serious problem than if it had occurred just on the daily charts as was previously the case.

Even worse was that all four major indices were down for the first four trading days of the month. This is a typical bear market pattern. It does occasionally happen in bull market rallies though, so to be significant there needs to be two months in a row with a loss in the first four trading days. May also saw just such a loss, so the two down months in a row have now taken place. A bear market doesn't mean the market isn't going to go up again. Bear markets are known for their sharp and sudden short covering rallies. Traditionally, it means that traders should switch to shorting the rallies instead of buying the dips. Adept short-term traders can of course play the market both ways.

Classic market watchers will not consider stocks to be in a bear market until they've lost 20% of their value. Investors of course should never accept that type of loss. By the time that confirmation takes place; a lot of money is already gone from your brokerage account. So far, the Dow is down 11.5%, the S&P 500 12.5%, the Nasdaq 12.3% and the Russell 2000 15.0% from their respective peaks. Market observers agree that this is a correction because all the indices are down more than 10%.  Informing investors of how much they've lost after the fact is not particularly helpful. The idea is to avoid these events before they take place. If you check, you will see I published a number of articles warning of the sell off before it started.

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.

The Santa Claus Rally and the January Effect

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.

The Santa Claus rally is a move up in stocks that takes place around December 25th. This rally was already part of Wall Street lore in the 1800s, and was memorialized in the ditty: 'If Santa fails to make a call, the bear will come to Broad and Wall'. There is no general agreement on the exact dates of the rally. It is defined as beginning from a few to several days before Christmas or immediately thereafter. It ends either in the current year or two or three days into the next year. It is most useful to think about it as two separate phenomenon. The first as the trading period around Christmas day and the second as the first four trading days of the new year. Each has its own message.

The bullishness in stocks around December 25th probably doesn't have much to do with the holiday per se, but with year end adjustments within the financial system. Instead of calling it the Santa Claus Rally, it would probably be more accurate to refer to it as the Year End Rally. If you look at long-term charts, you will note that the VIX, the volatility index, is either low or drops around the end of the most years. This is bullish for stocks. The VIX hit a yearly low on December 22nd in 2009 trading below 20 for the first time since the summer of 2008. An exceptionally low VIX while bullish in the short term sets the stock market up for eventual selling however.

What happens at the end of the year and at the beginning of the year can be quite different however and the two shouldn't be lumped together. Investment money tends to be reallocated at the beginning of a quarter and this is most pronounced in the first quarter. Investors should watch closely what sectors rally and what sectors of the market experience selling during the first four trading days of the year. This tells you where money is flowing. If the stock market overall sells off in the first four days, this is a bearish signal at least for the first quarter. It indicates big money is withdrawing its support from stocks.

The first four days trading signal is sometimes lumped in with the January Effect, but shouldn't be. The January Effect is a tendency for stocks to rally during the first month of the year, with small caps outperforming big and mid-caps. The January Effect was noted in the U.S. by the 1920s and perhaps even earlier. It has been observed in a number of stock markets throughout the world. The effect seems to have become dampened in recent years.

Trading volume tends to be low around the end of the year because many people are away because of the holidays. This can exaggerate price movements. Liquidity coming from the Fed and other central banks will have a more pronounced impact than usual. If you look at a chart for the U.S. Monetary Base, you will see that it has been rising vertically in the last few months. It is not surprising that the current liquidity fueled rally in stocks is continuing.

NEXT: NovaGold Leads Mining Group on Takeover

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.

The January 8th Meeting of the New York Investing meetup

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 New York Investing meetup monthly meeting on January 8th had a record turnout of 200 people. The first talk was our view for the stock market in 2009. This was followed up by an excellent talk by Jeff Glenn on manipulation in the gold and silver markets. The final talk was on the latest scandals, including Madoff, Dryer, and Saytam compter, recent economic figures and then a review of some Saint Louis Fed charts that clearly show the financial sytem is in serious trouble.

While the indicators for the U.S. stock market were highly negative in the beginning of 2008, they were essentially neutral for 2009. A comparison was made of the charts for the major stock indices at the beginning of 2008 and 2009. In 2008 there was a large drop, while in 2009 almost everything went sideways. One way of interpreting this is that the market will move in an overall sideways pattern this year, albeit with possible big moves up and down. This does not mean the market can't go lower, it most certainly can. Our long term prediction is that it will. The Dow still has not hit major support at 7200 and this could happen even in the earlier part of this year. Lower lows are also possible. A flat market for the year can include the scenario of significant selling and recovery toward the opening price at the end of the year.

Jeff Glenn's talk on gold and silver manipulation helped clarify how central governments try to control the price of gold and silver through leasing. How much gold the U.S. actually owns is not really known, since there has been no audit since 1955. A lot of government action seems to take place with precious metals, but there is little transparency. Investors should ask themselves, "Why the need for secrecy?" Jeff also stated that he thought it very possible that gold could skyrocket one day because of a sudden revaluation by the government. I agree that this is indeed a realistic possibility. You will need to own gold and silver before this day arrives if it does occur.

The final talk was on the Madoff scandal and how incredible it was the SEC missed this obvious scam that seems to have gone on for decades. We also reviewed the accusations of major security fraud against Drier, the head of one of the largest New York law firms, and how Satyam Com hid its declining sales by lying about it cash holdings (something that is almost impossible to do because it requires multiple parties outside the company to be involved with the fraud). After that we warned the employment report and the GDP figures this month would be ugly. We wrapped up by showing updated charts on the Monetary Base and Banking Reserves from the St. Louis Fed.

Our next general meeting will be February 3rd and we will be having a guest lecture on investing in art.

NEXT: The U.S. Trade Deficit - There's Good News and Bad News

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.

Seesaw Market Action Continues on Day Three of 2009

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:

After rising on the first and falling on the second trading day of the year, U.S. markets rallied on the third. The seesaw action indicates that the big money is still ambivalent about whether or not to put money into the stock market. Nevertheless, certain sectors of the market are seeing major buying committments, with energy being the top performer by far. Mining and Agricultural stocks have also done quite well. All three groups are inflation plays. On the flip side, industry groups strongly impacted by recession and the Credit Crisis remain investing pariahs. Market players lack of interest in these stocks indicate they do not forsee that the current recession will be over soon, nor that the financial system is yet on its way to recovery.

While the market rallied yesterday, it was nothing to write home about. The Dow was up 0.7% and the S&P500 0.8%. Nasdaq did much better, rising 1.5% and small caps did the best of all with the Russell 2000 rising 1.9%. While trading volume rose on the day, it was still below average for the Dow (trading volume below average indicates lack of enthusiasm for the move). For a third consecutive day, the only really outstanding volume was in oil.

While energy stocks once again did well, they were only the second best perfoming group yesterday. Mining stocks moved to the number one position. Double digit gains have been seen in the big international miners so far this year making them some of the biggest winners in the market. Overall, a higher percentage of energy related stocks have done well though. Joining these group toward the top of the list were Agriculture, Tranportation, and Chemicals.

As usual, the bottom position was held by Savings and Loans. There seems to be absolutely no buying interest in this group . Next to the bottom were the safe-haven Utilities, which are apparently not considered so safe at the moment (this group is usually held up by their high dividends, although these could become insignificant during a period of high inflation). Just above Utilities were Consumer, Food/Beverage, Retail and Medical stocks. Consumer and Retail stocks are deeply impacted by recession so it makes sense for them to be on this list. Food/Beverage and Medical stocks are usually safe-havens in a recession. The big money doesn't seem interested in putting any more money into these sectors however.

As of this writing the fourth trading day of the year looks like it will be down. If so, it will only add to the apparent lack of interest on trader's part in putting money into stocks in 2009. Without that, the fuel needed for an overall sustainable rally will just not be there.

NEXT: Early Year Trading Signal Goes Neutral

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.