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.

Oil Yes, Financials No

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:

Suddenly, oil inventories in Cushing, Oklahoma dropped by 200,000 barrels yesterday instead of increasing by 3.5 million barrels that industry 'experts' predicted. While I have predicted that this would happen in this blog and stated so at a class given this Tuesday by the New York Investing meetup, I was a lone voice in the wilderness. Before the news came out, oil ETFs were making new lows as were many financial stocks. While superficially oil and the financials looks like major bargains, only oil should be assumed to be so.

When the 'surprise' (only a surprise to people who get their information from the mass media) news came out that oil stocks had declined, the March contract for Light Sweet Crude jumped $4.86 to close at $39.48. April, which will be the front month after today, closed at $40.18. Anecdotal reports indicate supply is drying up, but you will not see any coverage of this in the American press, other than in relationship to OPEC. For those who are unaware of it (and this presumably includes all reporters on energy topics), every oil and gas lease in the United States contains a term that the producer can stop pumping if the prices aren't high enough. Based on the behavior of the oil futures, which have jumped back to the $40 level over and over again, the market is telling us a price under $40 a barrel just isn't sustainable.

Nevertheless, the coverage in the media today is once again the same old (off-key) song. You will see quotes like, "It was a significant move last night, but there's not much out there that can create a bullish story" . And the reason for this is, "The demand outlook is very weak, and there's nothing to suggest that it will improve in the near term." There is no analysis of the supply side of the equation, despite the news out of Cushing, Oklahoma yesterday. Supply dropping faster than demand is indeed a bullish story. The same reporters who know nothing about how the oil industry functions, also seem to have forgotten to take high school economics. The current coverage of oil is an excellent example of why the average investor who gets his or her (mis)information from the mass media can't make money in the markets.

While oil had a big pop up yesterday, financials hit their lows in many cases and remained at those levels. Citigroup fell to 2.50, Wells Fargo to 11.94 and Amex to 12.74. Bank of America dropped as low as 3.86, only a tinge above its low of 3.77. Collapsing financials led the market down and helped the Dow close at a six-year low. The possibility of a Swedish style bailout of the big banks is becoming more of a reality. This would wipe out the equity holders completely (which include every major pension fund in the United States as well as Wall Street insiders) and has been resisted for that reason. While there is a risk of losing everything if you buy financial stocks, no such risk exists with oil. All commodities have a minimal price which is the cost of production. The minimal price for a troubled stock however is zero.

NEXT: Stocks/Oil Trying to Bottom, Gold at Resistance

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.