RF's Financial News

RF's Financial News

Sunday, September 19, 2010

This week in Barrons - 9-19-10

This Week in Barons – 9-19-10:

Ripley’s Believe IT no NOT?
Each and every day, we have really bad news hitting the wire:
- The Empire State Manufacturing Index fell by 40% - from 7.2 last month – to 4.1 this month (which was less than predicted)
- Industrial production and Utilization fell once again,
- Personal investing is down 5% in the past month, 16% year over year,
- New orders fell by a whopping 21 points,
- Initial jobless claims came in at 450,000 again,
- Realty trac says foreclosures spiked yet again and home sales were off,
- AND CNBC is still telling us about buying the housing dip – and consumer discretionary stocks!

My first question is: “What ‘discretionary’ income?” The part that the 8 million people on 99 weeks of unemployment are getting, or the part where demand has fallen off of a cliff for most products and services?

But yet – and here’s the “Believe IT or NOT?” portion - the market fearlessly holds up on lower volumes, less participation, and lousy economic news. With Obama’s popularity ratings hitting the equivalent of people's attraction to bed bugs, with the Democrats in a full blown panic mode, and with the Tea Party movement gaining in popularity – I guess they’re saying: “We must keep the market up, so it doesn't look like it crashed on our watch".

There’s no question that tons of people have just given up. Last week – when reviewing the New York pension plan – they found that it was insolvent and that their un-funded pension liabilities are just too large. Most states and insurance pensions are in the same boat, and without the ability to get ‘free money’ from the government they would be forced to completely fail and shut down. You see – from 1980 to 2000 the market experienced 8 to 10% returns, and all the pension and insurance fund managers have set up their projections and assumptions on the fact that they were going to take in 8% a year in stock returns. Well, since 2000, not only have companies lost more contributing workers (via the 8 million lay offs), they saw major recessions and major stock market declines as well. So, there's literally "thousands" of pensions that simply would not exist if not for regulators allowing “funny”.

To win in this market – you need to think like a computer algorithm – because that is what is causing all the volume. What I look for are stocks right at resistance. If the market is falling, you can short it but only for a very short time, as the FED will step in to reverse the fall. So, really fast short sales, and stocks leap-frogging over a resistance level will put money in your account. This week we recommended RIG and CTXS. These recommendations were not based upon fundamentals, sales or their P/E – but rather - by looking at the put/call ratio and resistance levels. With the market was moving sideways, and both were against their resistance – they broke thru and ran for nice gains.

Now one element to review is the VIX. The VIX is a volatility index – and when it moves higher - it that means that people are going to be more fearful, and that the market is going to be going lower (people would be more fearful as they saw the market decline). A quick review: The CBOE Volatility Index, also known as the "fear gauge" and commonly known as the VIX, (VXX) is best used to find market bottoms. It's more effective at telling traders when fear is so high that they need to sober up and become one of the few buyers of cheap stocks that nobody wants. Basically, the VIX reflects how over-priced or under-priced options are. When traders become more fearful, they buy options. When they are scared out of their minds, they are willing to overpay for options, just like a person who thinks they have a high risk of health problems or death would be willing to pay high insurance rates -- and the VIX goes up – which is why the VIX is currently around 20 (calm), and was approaching 100 during the 2008 crash. The VIX is better used to call market bottoms than tops because complacency and fear are more gradual, while extreme fear tends to be short-lived, creating an opportunity that you can trade. When the VIX spikes too high and reverses, that's a "market buy signal", but sometimes, we are able to use the VIX as a signal that investors are way too complacent. There is a VIX "buy signal" (stock market "sell signal") that happened last week – and typically, the market takes a week or two to begin to correct. Now the last time the VIX-BB signaled over-complacency was in January, 2010 (right before the sovereign debt fears surfaced again). Then once again in April, when investors realized the sovereign debt issue wasn't just going to go away. We recently started hearing about the sovereign debt issue again, and we got the same signal.

Due to this VIX signal – I’m not sure if the market declines from here or breaks out. But my feeling is that, if we get a breakout, it will be short lived (maybe a couple months -- MAX), followed by another sharp move down. If the market breaks down from here, however, taking out the 1,040 lows on the S&P 500, my feeling is it will a sustained move lower.


Now onto the market..
A famous trader recently summed up the market as thus: "the market has become self-referential, an algorithm playing itself out, almost the way you would run a self-recursive equation on a computer. You end up getting very unpredictable results from very simple equations. I’m afraid the market has degenerated into a joke."

Bottom line? "someone, somewhere" is pushing this thing up. Why do I think this? Well:
- The market is going up on lower and lower volume
- The market is going up when 38 billion in mutual fund money is leaving,
- The market is going up despite an undeniable slowdown in economic activity, and this can really only mean a couple things: 1) it is being propped up, or there’s a real possibility that Bernanke's going to launch Quantitative Easying – Part 2 – which will be another $2.5 to $5 Trillion in monetary injection. Wall Street simply loves free money, so they could be buying it up, knowing that more of it is coming.

Currently we are oversold – from being up "too many" days in a row. Even if we were in the depths of the greatest bull market of all time, it cannot go up every day. I stick by my feeling that we are awful close to at least a quick 400+ point sell off if not more. So we might have to start looking for a quick short side sale or two.

Oh by the way, lot's of people are really getting interested in gold and silver now. Understand that's the way it always happens. Something runs for years and years, yet it gets no attention. Then it busts free of historical highs and all of a sudden "everyone" wants in. We've been in gold and silver for over 10 years, and it's been the single best investment of our entire lives. If you look at an ounce of gold like a "share of stock" the stuff we bought in 2001, is now up 1000 dollars per share. There's a good chance it will pull back a bit, make the newcomers sweat and sell back out and then push forward again. I see 1500 dollar gold, probably by February.

For those of you looking for a gold play, and have none of the miners or aggregators, consider taking a look at NG. We took on a position a while back at 6.80 and it's now 8.72. If it can get up and over it's May highs at about 9.20 it could hit ten in really rapid fashion.

But what you need to really ask is - What happens the day after the elections? Honestly, I’m still in a couple of stocks – but getting more and more ready to sell them and "see what's next'.

Tips:
Let’s review our holdings:
GDXJ – a basket of gold miners
GG – IAG – NG – individual gold miners
GLD – PHYS – pegged to the price of Gold itself
SLW – SSRI – silver miners and indexes
All are up nicely from our original purchase – in fact NG has truly exceeded our expectations – and if it can get over $9+ it could run to $10 fairly quickly.

We’re out of RIG now – sold for a nice profit.
We’re in VXX for the long haul.
We’re in and out of TZA, DXD and SDOW on a daily basis (these are ETF’s that allow you to invest directly in the market going ‘down’ – for those that do not like to ‘short’).

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a 4 months or so ago now:

Remember the Blog:
Until next week – be safe.

R.F. Culbertson

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