Source: An Update On Copper

In an interview on Fox Business News last Monday, I pointed out the same three levels of resistance to Fox viewers that I pointed out to IDE readers earlier that morning (it pays to subscribe).  One thing I did on Fox that I didn’t do in IDE was make a recommendation, so I feel like I owe readers something.  My recommendation on Fox was to buy the ProShares UltraShort S&P 500 ETF (NYSE:SDS).  I still think this is a good pick and I think it could jump 30-40% over the coming weeks.  As a bonus pick, I think you can make every bit as much with the QID, which is the ProShares UltraShort QQQ ETF (NYSE:QID).

After looking even closer at the charts, I noticed what appears to be a very well defined inverse head and shoulders pattern.  Look at the weekly chart below to see the different parts of the formation.

One thing that strikes me about this chart so far is the symmetry of the move from the neckline to the head and from the head back to the neckline.  Each of these moves lasted nine weeks.  It doesn’t have to be that well defined to fit as an inverse head and shoulders pattern, but it struck me as interesting.

So where does this leave us?  It looks to me like the S&P will decline over the next 7-8 weeks and then should start to find support near the 750 level.  If the 750 level holds as support and we start heading higher again, you could play the up move for about six weeks or so and then see what happens after it reaches the 950 level again.

If all of this pans out the way I think it will, the end of this year could see an explosive move to the upside as it breaks above the neckline.

The thing about head and shoulders patterns is that you typically want to wait and play the break above (on an inverse) or below (on a regular H&S).  The big move comes after the pattern is complete.

In the interim, you can play the short side as I think the three resistance levels I talked about last week will be too much to overcome when the S&P is as overbought as it is on the daily and weekly charts.  We move down again, the moving averages have time to catch up, and we won’t be as far below the 52-week (360-day) moving average as we are now.

We saw a similar pattern develop in the 2000-2002 bear market.  It wasn’t as clearly defined as the one we are seeing develop now, but it was there never the less.

Be patient, the biggest gains are yet to come.  The rally from the March low was very enticing, but there is even more money to be made if this plays out as I think it will.

Good luck and good trading,

Rick

Source: Classic Chart Pattern Predicts Bad News Followed By Good News

In fact, the rally appears to be overdone.  We have jumped too much, too fast.  Looking at the chart of the S&P 500, the daily stochastics have reached their highest level in two years thanks to this rally.

A closer look shows three significant hurdles for the S&P to overcome in the immediate future:

• The 200-day moving average is in the 958 range
• The downward-sloped trendline is sitting just above the 200-day
• The high from January- 943.85

Combining the three levels of resistance and the overbought state (both on the daily chart and the weekly chart), there is little chance of the S&P breaking through the resistance in the immediate future.

While I still think 2009 will be a positive year, a decent pullback will be healthy for the market.  The monthly chart shows that we are barely out of oversold territory.  We are still 100 points below the 12-month moving average that I have talked about using to time your asset allocations.

If you are a short-term trader and have reaped the benefits of this massive rally, I suggest you take some money off the table.  If you are a long-term investor, I suggest you wait before committing any additional funds to equities.

A move back down to the 800 level and some sideways movement for a month or two would give the 12-month moving average time to catch up and then we could potentially see the 6-month moving average cross back above the 12-month.  And that is when you will know for certain that the bear market is over.

Source: Proceed With Caution

In fact, on Saturday April 4, I spoke at a conference in Orlando and the crux of my presentation was why buy and hold isn’t the way to go anymore.

After my presentation, one of the attendees asked me why I felt buy and hold was dead.  What has happened in the market that caused the long-held belief that buying and holding a stock or the market forever is not the way to invest?

Where do I start?

With the help of my colleague Christian Hill, we went back to 1950 and looked at the S&P 500 over the last six decades.  Here are the returns per decade.

As I looked at these results, I started thinking about how different the market is now compared to the 1950s.  How many people do you think were actively investing in the market in the ‘50s and ‘60s?  Not too many I would guess.  Maybe four or five million at best.  People may have had money in pension plans and the like, but the funds were being managed by a professional investment manager.

In the ‘70s and ‘80s we saw tremendous growth in Individual Retirement Accounts and mutual funds.  This made it easier for the average Joe to get involved in the market.  In the ‘90s, we saw two things greatly impact investment growth- 401(k)s and the internet.

Look at how the ‘90s were the biggest growth decade for the S&P 500.  Do you think that is a coincidence?

By 2005, there were 436,207 plans, 44.4 million participants and $2.4 trillion in assets in 401k plans.  Do you think the growth in participants and growth in assets had anything to do with the tremendous growth in the market during the ‘90s?  You bet it did.

Take a look at the 20-year periods.

Look at the tremendous growth in the last 20-year periods.  I also decided to break it down into two periods, the first 30 years without 401(k) plans and the 20 years since 401(k) plans were introduced.  From 1955-1985, the S&P went up 350%.  This is an impressive number, but from 1985-2005, the S&P jumped 632%.

The second thing that happened in the ‘90s was the onslaught of the internet and internet brokerage firms.  Instead of having to have an account with Merrill Lynch, Shearson or Paine Webber, individual investors could open an account with any number of online brokerages and pay one-tenth the commissions charged by the mainstream brokers.

I am not saying whether I think 401(k)s and online brokerage firms have been good for the overall market.  But what I do know is that these two creations have had a profound impact on how you have to view the market.

They have created easier access to the market and created more involvement from more people.  Unfortunately, they did not come with more education about the markets.  This is why I think traditional views on investing have been changed forever.

God help us if the plan to allow self-directed Social Security ever comes to fruition.

Source:  How Has The Market Changed Over The Last 60 Years?

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets

But that is old news.  You are here because you want a forward outlook, not a rehashing of what happened last week.  But I bring up the major earnings from the past week to make a point.  The expectations for Alcoa (NYSE:AA) were still relatively high and they dropped sharply.  Expectations for J.P. Morgan were pretty low and they beat, but got taken down by the industry (guilt by association).  Intel warned, came in at expectations and jumped three percent the next morning.

The point is that earnings reports boil down to one thing: EXPECTATIONS.  Looking at the expectations for this season, due to the current economic crisis, overall expectations are much lower than in recent quarters.

This week we have a number of big tech stocks reporting and the expectations are definitely coming down.  Just to put it into perspective, I made the following table that shows the companies reporting and the current consensus estimate for earnings this quarter.  I have also included the estimates from 30 days ago as well as the estimates from 90 days ago.

As you can see, the expectations have declined sharply in the last 90 days.  Have they come down enough?  That remains to be seen and it will likely be case dependent.

If you look at the analysts rankings on these five stocks, the analysts love Google (NASDAQ:GOOG), Apple and IBM.  They hate AMD and EBay.

So the two of the five that stand the best chance of beating estimates are AMD and EBay.  This doesn’t mean you should rush out and buy them before earnings are announced, but should these two beat estimates, they have the best chance to move sharply higher.  Thanks to the negative sentiment toward them.

Earnings are a tough thing to play, but if you do your homework—looking at analysts’ rankings, short interest ratios, put/call ratios—you can tilt the odds in your favor.  I recommend to most people that they wait until after the earnings are announced, but if you insist on getting in ahead of the report, do it with options (lower cost of entry) and make small allocations to the trades.

I don’t make earnings plays in my K.I.S.S. Service, but I do occasionally have a trade on when earnings come out.  I almost always take profits off the table before the earnings report comes out and leave a little exposure so that if the stock goes my way, I can really juice my gains.  Meanwhile, if the stock goes against me, the pain is negligible because of taking profits off the table on a portion of the trade.

Good luck and good trading,

Rick

Source: Earnings Season Ramps Up This Week; Expectations Are Considerably Lower

But there is a lesson to be learned from every rough patch. One of the lessons I learned from the crazy market of the fourth quarter has to do with the elasticity of indicators.

What I mean by “elasticity” is that a number of indicators are calculated based off the most recent trading activity, including most of the overbought/ oversold indicators. In the fourth quarter, these indicators were stretched out like an elastic waistband thanks to big moves in both directions.

For example, if you use the Relative Strength Index as one of your indicators, the RSI uses volume and price change in its calculations. Whena stock goes up four or five percent two days in a row and then drops four or five percent the next day, the RSI is getting stretched out. When the market calms down and that same stock is moving less than one percent per day, the overbought and oversold levels are harder to reach because the RSI is stretched out from the four and five percent moves. These changes to the RSI lead to fewer trading signals.

I know personally that I cut back on my trading because I wasn’t getting as many signals as I was a few months ago. With my mini futures trading for the Velocity Strategy, I went from getting six or seven trade signals per month to only three or four. Now that the market is settling down, the indicators are starting to tighten back up, and the signals are becoming more frequent again.

I have said it numerous times in IDE, but it is worth repeating. You don’t want to be trading for the sake of trading. You want quality trades, not quantity. When the indicators get stretched out like they were in the fourth quarter, you have to have the discipline to step back and wait. Sometimes the waiting is the hardest part of being a disciplined trader, but it is also one of the most important traits.

Discipline and patience are always important traits, but they are even more important in a market like the one we have seen for the past year.

Source: How Elastic Are Your Trade Indicators?

I think about this action and how New Castle doesn’t have any auto plants anymore, but there are so many retired Chrysler workers here that it will certainly affect the local economy. Many of the residents rely on the pension program of Chrysler to maintain their lifestyles and had Chrysler gone under, New Castle would have taken several steps back.

The town has grown in the past 10 years and as we drove in from Indianapolis last night, I couldn’t help but notice the new stores and restaurants. There are three hotels now instead on the one that we used to have. There is a new Steak N Shake and a new White Castle. These may not be the highest paying jobs in the world, but it shows that the town is growing and attracting new business.

As I look forward to 2009 and what I would like to see, I guess my Christmas wish list would be for the economy to improve. In an appearance on CNBC’s Closing Bell the other night, I predicted that 2009 would be a good year for stocks. Maria Bartiromo was shocked when I said the market could be 20-30 percent higher next year.

The bailout of the automakers will help stem the tide to some degree. Unlike the financial bailout, this one is a more direct bailout of the middle-class. Hopefully we will see the labor market start to stabilize.

I have mentioned before in IDE that the market tends to improve before the economy and the economy improves before the labor market.

I have been looking at historical charts of the Dow and I found out something interesting the other day. I didn’t realize that from 1932 to 1935, in the heart of the Great Depression, the Dow moved from around 44 to up over 170. Did anyone else know this? This just goes to show how the market and the economy are not always in sync.

The job losses will likely continue through the first quarter at the very least. The recession will likely continue through the first quarter as well. But that doesn’t mean that the stock market will be lower for the first quarter.

As I was preparing for the interview on CNBC, I had a thought about how much fear there was towards the stock market. How telling is it that people are pouring money into treasuries when the yield on the 10-year note is right at 2.0 percent?

The old saying that “the market likes to climb a wall of worry” doesn’t begin to capture the pessimism we have right now. It is more like a mountain of fear than a wall of worry.

I would like to wish all of you a happy holiday season and may 2009 bring all of you massive profits in your investments.

Source: An Early Christmas Present For Detroit

This from Investor’s Daily Edge:

What is my top pick for 2009? It is a new Exchange Traded Fund from a group called Direxion Funds. The people at Direxion have taken ETFs to a new level they are offering funds that have triple the leverage of the underlying index.

What does this mean? It means that if you have one of these ETFs and the index goes up one percent in a day, this ETF will go up three percent. If the index goes down one percent the ETF goes down three percent. This is great leverage like you might get with long-term options, only these ETFs don’t have an expiration date.

There are only four bullish funds and four bearish funds. The funds are bullish or bearish on the Russell 1000, the Russell 2000, the Russell 1000 Energy Index and the Russell 1000 Financial Services Index.

Here is a table with the eight funds offered:

I like the Large Cap Bull 3x Shares ETF (NYSE:BGU) for my top pick in 2009. As I laid out in last week’s IDE article, “If History Repeats Itself, You Will Want to Be In The Market For The Next Six Months”. I look for the markets to improve dramatically over the next 12 months and I look for the big cap names to be the biggest beneficiary of the market improving.

I don’t necessarily think we will see a 42 percent gain over the next six months like we saw in 1974, but even if it goes up 25 percent over the next year, the BGU will gain 75 percent. After the performance of 2008, I think anyone would be happy with a 75 percent gain in 2009.

I am going to take minute to toot my horn. I have done fairly well with my long-term predictions over the last couple of years. In 2007, I predicted that copper would move higher and I gave IDE readers Southern Copper as a pick. The stock went up exactly 100 percent over the course of the year.

In September 2007, I predicted that retailers would suffer dramatically because of the credit crisis. The S&P Retail Index has declined from 500 in September ‘06 to a low of 207 last month.

This past April, I put out a special report called “The Sun Sets On Oil”. I was a little early on this one as oil continued to climb up until July, but after peaking at 146 in July, oil has fallen over 70 percent in the last five months.

I don’t make these predictions based on making readers feel better. I make my predictions based on how the markets have behaved in the past and the overall sentiment toward that particular market. I believe that the only way you can see huge shifts in the market is when almost all investors are thinking alike and you have to go against that crowd mentality. All of the previously mentioned predictions were made based on being a contrarian.

Source: Think Big In 2009

This from Investors Daily Edge:

I don’t remember much about 1974, I turned 7-years old that year. I remember that my dad lost his job with Firestone that year and that my family almost moved to Georgia in order for my dad to stay with the company.We ended up not moving from New Castle, but ‘74 and ‘75 were tough years for my family.

So why is 1974 so important 34 years later? The last time the employment picture was this bad was in 1974.

The November employment report showed 533,000 jobs vanished from the U.S. economy for the month. This, along with a revision to October’s numbers, brings the total number of jobs lost this year to 1.8 million. This is the worst employment report since December 1974 and the fourth worst since 1939.

In December ‘74, the economy showed job losses of 602,000. That December is historical for another reason too. It marked the end of the bear market that gripped the U.S. for two years. But what happened next is the astounding part.

From December ‘74 through June ‘75, the Dow rose an incredible 42 percent. Could this be a replay? Is this a case where things look the bleakest right before a turnaround?

The market is certainly due for a bounce and the oversold levels are where they were in ‘74, so the similarities go farther than just the employment numbers. In fact, it gets downright eerie. The low in 1974 came on Friday, December 6. I don’t know whether or not the employment reports always came out on the first Friday of the following month or not, but it certainly is spooky how things are setting up almost identically.

If the next six months play out just like things did in ‘74-’75, where would it take the market? The Dow would jump from the 8300 level to approximately 11,800. From December 6, 1974 to May 9, 1975, there were only four down weeks out of 22. The market soared very quickly.

The similarities continue. From the peak in January ‘73 to the low in December ‘74, the Dow lost 46.58 percent. From the October ‘07 peak to the November low, the Dow dropped 47.53 percent.

So looking beyond June, what can we expect for 2009? Everyone seems to think the market will remain troubled for the first half of the year and then things will get better in the second half of the year. I actually think the first half of the year may be better than the second half. Should the market soar higher over the next six months, sentiment will likely get overly optimistic and then we will see a choppy second half. I look for the Dow to move back above 10,000 by the end of the summer and then move sideways through the end of the year.

I look for oil to stabilize down here in the $40-$45 range, and then it will start climbing as the economic picture starts improving. I look for interest rates to continue their downward path over the first half of the year and then they will start rising again towards the end of the year.

I think the best place to be for the first half of 2009 is in stocks. As we reach the summer months, you will need to step back and reevaluate whether it still makes sense or not.

Source: If History Repeats Itself, You Will Want To Be In The Market For The Next Six Months