Principles of the Stock Market : Stock Market Weekly

Weekly Monday Overview

Richard Schwartz — Mon, 06 Apr 2009 13:17:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Eighteenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

Monday, April 6^th, 2009: It’s Master’s week so I’m pumped up. It’s golf’s 1^st major of the year, tradition packed, for you non-golfers. Should be great with Tiger back, Phil Mickelson saying he’s playing the best golf of his life, Paddy Harrington going for his 3^rd major in a row and lots of up & comers. All I can say is wow! Even just watching this old southern flower nursery turned into a golf course in the spring, lavished with money for decades, may be worth the watching for any non-golfers out there. For me, it’s just heaven.

THE KEY QUESTION

Instead of discussing The Big Picture today, let’s focus on The Key Question. Since that’s what I keep pondering. Plus it has to be on every investor’s mind as well. “Could this rally be the start of a new bull market?” To intelligently answer -- as during every bear market rally -- necessitates rehashing all the available evidence. I can make a solid case for a cyclical bull market having just started and I can make an even more solid case that this is just a normal bounce in a Papa Bear market. Consider:

MINI BULL MARKET HAS STARTED

·        The economic stimulus is now starting to kick in which will stabilize and bounce the economy.

·        The monetary stimulus, lower interest rates, is also now kicking in and housing sales are increasing.

·        Inventories have been drawn down and need to be restocked which will pump up GDP growth near term.

·        The US and other governments have done everything possible to mitigate this downturn.

·        We now have more coordinated and get along global leadership than in many years.

·        The US economy has proven itself wonderfully resilient to shocks in recent decades.

·        Markets can counter-swing at any time for long periods, posting mini bull markets, versus primary trends.

·        Almost two years has passed since the beginning of the credit implosion back in July 2007.

·        Many independent market gurus think the March 2009 lows will last for a good while, months or longer.

·        The latest government bailout plan has more enthusiasts and support for it than previous plans.

·        Oil stopped falling back in December and is now on the rise possibility indicating growth rebounding.

·        We have recently had a number of better economic data reports from both retail and housing.

JUST A BEAR MARKET BOUNCE

·        The bear market hasn’t lasted long enough to discount all the problems that have come to light.

·        More problems, coming as bearish ripple effects and because of long lag times, are due to show up.

·        The bear market hasn’t fallen deeply enough to factor in the sudden massive shock to the global economy.

·        There hasn’t been enough overall selling or liquidation for a solid bottom. Stock and mutual fund liquidation haven’t reached previous classic big bear market bottom levels.

·        No solid bottom appears on the charts. We need a climatic sell off or a long low volume erosion to bottom.

·        Interest rates have to go up at some point, soon – either with and because of an economic rebound or from panic selling -- which normally depresses stock prices because of this new competitiveness from bonds.

·        The American consumer has suddenly stopped spending. This has slowed down business all over the world and finally exposed the global imbalances problems. Too much manufacturing in China and Asia and too much spending coming from America. Now those imbalances are being forced to readjust. Takes time.

·        The stock market is ignoring soaring unemployment. Yes, employment is a lagging indicator but continuing jobless claims isn’t. A new report just out says that in coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits. Finally, 600,000 new job losses each month is going to add to weaker consumer spending, problems for local communities and cause negative ripple effects.

SCHWARTZ CONCLUSION: In review, we started this big bad bear market back in the year 2000. That was the peak of the last big bull market and thus the beginning of this big bear market. This is evidenced by the benchmark S&P 500 Double Topping in March 2000 and October 2007 and then subsequently and decisively breaking below October 2002’s previous decade-long lows by over 10% in March 2009. Showing that since 2000 and the ending of the Internet boom we’ve really been living on lower interest rates and big tax cuts, a false, “pump me up,” house of cards. Really not any wealth building going on, just paper shuffling to make things look great fueled by easy money credit creation. But now reality has set in. Thus, looking around, we see we’re almost nine years into a bear market which has been interspersed with one bull market, running for five years. So stocks were down almost two & a half years, up five years, now down about another one & a half years, sort of repeating The Visit of the Three Bears. In that infamous and extended bear market run of nine years, netting a -50% loss, there were two cyclical bull markets sprinkled in and surrounded and book-ended by the three bears, Baby, Mama and Papa.

My conclusion remains that this bear market is not over. But that the form and shape of it may get tricky going forward. Because the market has a history of posting cyclical or short term or mini bull markets on the way down when the bear gets ahead of itself. Which is why the stock market remains so fascinating!

THE ECONOMY

Well, the BUZZ has died down about how the economy is slowing its prior quick rate of descent. Guess because we’ve started seeing more bad economic data pop up or because the conversation has moved on. But some investors have decided an end to the economic collapse is out there, just over the horizon, so they are shifting into cyclical stocks now as a result. One can see this money rotating out of defensive sectors such as medical care, consumer staples and even gold. You know the concept, buying in advance of a recession’s end since history shows stocks rise roughly six months before the economy turns up. But if we indeed are stuck with a very mild even “anemic” economic recovery, as many figure, then stocks could also soon level off to mirror that trend as well. That is if the economic and earnings data don’t start sinking fast once again showing the economy is still sinking. For example, last Friday it was reported that the ISM Non-Manufacturing Index which now measures almost 90% of America’s economy - America now being a service oriented economy instead of a manufacturing economy - fell faster in March than in February somewhat debunking the idea that the economy has stabilized. Schwartz View: Yes, there is the possibility that economy-wise we are going to V- back up because sharp moves, in whatever areas of endeavor, are generally followed by responding sharp moves back up. We’re seeing that now in the stock market but after this bounce is over, I agree with the camp forecasting an anemic slow economic recovery.

THE STOCK MARKET

The stock market extended its rally to four straight weeks last week. We did see the first crack in this rally a week ago when the market fell sharply for two days. But then we quickly rebounded to new rally highs. That’s normal, the first crack being overcome but it does show this rally may be starting to struggle. We are getting closer to my minimum upside targets of Dow 8303 and S&P 1627, closing Friday at Dow 8017 and S&P 1621. And one can note trading volume has been slowing some, another sign of sluggishness. Or maybe cautiousness. Makes sense as we’re now moving into another corporate earnings reporting season starting tomorrow, the 1^st quarter January-March 2009 report kicking off after the close with Alcoa (AA), traditionally the first of the 30 Dow stocks to report. With the fall-off-the-cliff economy occurring early in last year’s fourth quarter, it only stands to reason that investors have to be wary of forthcoming earnings and thus wary of this rally as well. Schwartz View: It looks like the stock market has some more strength left in it so with stocks already having rallied beyond the 50% retracement level from their latest leg down, the early January peak, the teeter-totter phenomenon comes into play. Getting halfway up means it’s very likely to go all the way back up. Thus we kick off this week at roughly another key Fibonacci 61.8% price in both the Dow and S&P 500. That’s about 8088 and 838 respectively. If we break through those levels, then the next target is those January highs, Dow 9088 & S&P 944. Not guaranteed but increasingly likely.

PORTFOLIO STRATEGY

2009 may indeed prove to be the year to trade. If stocks fluctuate but go nowhere net, up or down, for many months ahead then it’s going to prove very frustrating for investors. In these times and they do happen, more often than the uninformed investor may realize, the best way to make profits is to: (1) trade individual stocks and (2) discipline yourself to continuously fade the market, buying on dips and selling on strength. Toward that end I’ve started incorporating the Commodity Channel Index (CCI) technical indicator into my work. Comes on most charting services like Bloomberg. Basically it shows deviations from the moving average, when stocks get too far overbought or oversold. Naturally you buy when a stock or index gets oversold. For more on the CCI I suggest getting Oliver Perez’s Swing Trading Tactics DVD or Alexander Elder’s book TRADING FOR A LIVING. Over the last month of rally for instance certain stocks have far outperformed the averages. And numerous tradable asset classes or market sectors like the US dollar and oil have been both up and down offering trading profits but no net profits for buy & holders.

Otherwise than scalping profits what should we do? For now favor the long side and the cyclicals. I like technology, renewable energy and natural resources. Move up a notch in your market exposure to about 30% if you haven’t already but continue to hedge your bets and don’t get out on a limb by going too long. Just subdue your ego, don’t think you know more than Mr. Market does and just go with the flow, modestly. Bottom line take what the market gives you, right now there are some trading opportunities but don’t get carried away. There’s lots more trouble to come but the path ahead is likely to get more tricky as well. So don’t fall into the camp that says “fool me once, shame on you, fool me twice shame on me.”

Have a good week!

Go Tiger Go!

Patience: Outlast This Bear Market

Richard Schwartz — Mon, 01 Dec 2008 14:19:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Eighteenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

Monday, December 1^st, 2008: Since Lucy’s birthday was a Round Number & fell on Thanksgiving, everyone surprised her & came back Friday for tea. At the Tea House in the village, a reconverted barn on a hill with a great view of the mountain, a view I hadn’t seen before. Almost everywhere in town has a mountain view which makes me feel like I live in Lake Placid, another charming mountain town. Love it!

PS. I caught a bug which I’m working through today but possibly no letter tomorrow if I feel worse.

THE BIG PICTURE

I spent Thanksgiving evening discussing the past, present and future with my son Brian. In essence he asked me for a simple explanation of what caused the stock market to drop so much, what terms like deregulation, re-regulation, privatization, etc. mean & what the big picture looks like. Here’s my answer:

Let’s start with the two classical economic theories of thought. One, let free markets operate on their own, the old Austrian school of economics as promulgated in the early and mid 1900s by Friedrich Hayek versus two, getting government involved in the economy as advocated during the same time period by John Maynard Keynes. Both gentlemen lived through both world wars, the Great Depression and for decades beyond and their influence ebbed and flowed. Both economic theories had their time to shine, alternating roughly 30 year periods. The last totally free market cycle began its ascendancy when President Ronald Regan was elected to office in 1980. Since then union’s power has declined dramatically, corporate statesmen who shared equitably corporate wealth have became obsolete and bottom line profit became the only goal which caused stock price to rule business actions. During this long run in a totally free market direction whereby prosperity grew larger and larger spreading out to millions worldwide, normal prudence, probity and recognition of investment risk ultimately got lost. Greed took over completely when Wall Street came up with its latest round of newfangled, supposedly sophisticated investments, especially those incorporating securitization. Securitization just meaning turning all types of debt into securities which could be sold while spinning off huge commission style profits to everyone involved in the process or food chain. This, along with the 30-year trend to more and more deregulation, allowed commercial banks into previously banned investment areas, using heretofore unheard of leverage which caused capitalism to finally go off the deep end. By this I mean a 20% correction in our overheated, overdone, overblown US residential housing boom led to a bust after one bank woke up one day last summer to huge paper losses which soon showed everyone else was stuck with similar losses. This blow off following by an implosion and meltdown are the types of culminating events which cause these 30-year cycles to start swinging in the other direction. I now believe we’re just started a new long term swing away from free market economics as advocated by Mr. Hayek and towards a government role in economics as advocated by Mr. Keynes.

Summing up, we’ve just gone through that part of the long cycle which allows capitalism to run unfettered and thus grows the pie for everyone. The downside is that the gap between the rich and poor grows ever larger when we practice laissez-faire capitalism, essentially letting the marketplace alone which leads to the strongest doing best. But cycles are cycles and all eventually go to extremes and then swing the other way. Again, as I see it, we’ve just gone to one extreme and are now just beginning to cycle the other way, down the path whereby government steps in and applies regulations to the latest, most egregious ways of gaming the system. Which interferes with the magic of letting the free marketplace find its own proper price levels between consumers and producer providers and thus drags down the overall efficiency of the market. The rationale is that something has to be done to avoid another rare but normal breakdown by capitalism. Net, net our free market capitalistic system normally goes from one extreme to another, that deregulation goes so far it causes problems, then re-regulation sets in. With privatization or the selling off of previously government run businesses or business sectors being one form or aspect of deregulation. Thus, the last year’s breakdown and implosion in our financial system didn’t really show free market capitalism doesn’t work anymore, it just shows we’ve come to the end of the normal continuing pendulum swing out to one extreme and are now starting the long journey back to a middle ground and then out to the other extreme.

THE ECONOMY

Not much to comment about on the economy today.. We’re in that middle time period of this bear market and at the start of an economic downturn. Thus I expect the economic data, corporate earning reports and most other news to be pretty consistently bad for some time to come yet. One rule we do know about how the stock market operates and how it relates to the economy is that stocks turn up a few months before the economy does (with exceptions). So finding a bear market bottom will incorporate more than just watching the data. Waiting for the economic data to turn positive will make most investors months late in reentering the stock market. Schwartz View: Thus, myself, I watch the charts and believe in what I’ve espoused for many years, that charts tell you when to buy and then the fundamentals confirm down the road.

THE STOCK MARKET

Mr. Stock Market keeps trying its best to rally now. Last week the economic data was just plain awful and stocks rallied anyway. I wrote previously that stocks refusing to go down on bad news would be a good clue that the market has gone down enough, at least for the moment. Still, some remaining problems are: (1) I don’t see a proper base to support a big rally, unless I’m getting tricked by the undercutting of that possible base built from October 10^th through November 19^th, (2) I don’t see any improved fundamentals and still expect lots more bad news to become known next year and (3) history shows after financial glitches and consumer confidence losses of this magnitude bear markets and recessions following lead to once-in-a-generation market declines which don’t get over in just one year, roughly the time period we’ve seen this bear market last for so far. Yes, big bad bear markets generally last at least a year and a half to two years to even three years. Also this bounce reminds me very much of numerous temporary previous V-bottoms and short lasting rallies we’ve seen over the last few months. But a rally is a rally is a rally. And we have to play them. Eventually one rally will morph into the next bull market. Thus the key is to always keep sight of the Big Picture. Today the big picture perspective shows we’re firmly entrenched in a big bad bear market. So, in general strategy should be to sell and sell short rallies instead of buying dips. But when rallies periodically begin, we should modestly go along with them,, go with the flow, one toe in the water. That way if any rally proves to have legs we’ll start profiting immediately and know about it right away. But not to jump in with both feet because primary bear markets, just like primary bull markets, do reassert themselves, and until proven differently, it’s a whole lot easier to profit swimming with any tide or trend than swimming into it. Schwartz View: I’m trying to find a technical reason, say a good looking chart pattern at least, to buy a particular sector, but so far no luck. The one bullish trend which I see today is in the US dollar. Strength began back in mid-July and thus when strength continued past the three month normal max time frame identifying a bear market rally, or past mid-October in this case, and kept on going, I termed the strength as a new bull market. Otherwise everything else looks like iffy trends.

PORTFOLIO STRATEGY

Strategy remains one of outlasting this bear market. Of proving you have more patience than Mr. Bear Market does. This is a difficult job which will test your discipline again and again if the past is any guide (which I believe it is). Over time you’ll be tempted to buy back in again and again whether you see a believable bear market bottom or not. Especially if you’re one who really watch stocks, the whole Wall Street show, daily. So continue to do any irresistible buying and or investing in a much smaller, subdued manner. Keep just enough money in the stock market to keep you interested and not so much that future declines can put you out of the game and out of business. And stay tuned here to find the real bottom.

Have a good week!

Summer Rally Ahead?

Richard Schwartz — Fri, 25 Jul 2008 13:44:00 GMT

TECHNICAL VIEW. Summer Rally Ahead Or Not?

Now is the time for all good men and women to watch the key stock market indices very closely!

We have a possible bottom in place (if it is a bottom I have to believe it’s a temporary one). Yep, after basically falling out of bed for two months, from mid-May to mid-July, the stock market stopped going down a week and a half ago now. We then rallied sharply based on an accumulation of propping up moves by all parts of the US government. Then yesterday, we had the normal fall back, after any sharp move up. Now things get interesting and critical. Do we fall back and successfully retest and firm up those July 15^th lows, setting the stage for further gains and a lasting late summer rally? Or lapse into a sideways trading range, the other normal way for bear markets to correct themselves? Or do we take out those lows and thus continue the stock market slump for, say, the rest of the summer? Last I heard, #1 market guru of the past Joe Granville says that’s what’s ahead, more declines for the rest of the year.

If we do lapse back into what I’ve predicted as a “rough and rocky summer” and thus suggested it’s time to get your vacations in, then thus those of you following my advice and reading this advisory from your summer beach place or mountain vacation, please just settle in for more swimming, golfing and fly fishing for trout. Or whatever you like to do in the summer time (“when the living is easy”). My son Brian, by the by, is certainly getting to know Iowa and the heat in the summer time as he’s stationed in Iowa as a field organizer preparing for the November general election. He emails me: “Meeting lots of Iowans. Rural is rural. There is definitely a different way of life here from the city. Lots of cultural mix, county fairs.” I say “Go Brian Go! Live the dream! Hey, wonder if you’ll come home to Boston with an Iowan girl on your arm; wouldn’t doubt it.

Schwartz View: Back to point, if we do hold above the July 15^th lows and then rise above Wednesday’s closing highs, say of Dow 11,632.40 and S&P 500 1282.19, I’d suggest trading this rally. We would then have in place a successful retest of the old lows, a lower low in place. And also a higher high and thus enough technical evidence to buy (for a summer rally anyway).

Top of Bear Market Rally? Protect Yourselves!

Richard Schwartz — Wed, 28 May 2008 15:15:00 GMT

Written Tuesday, May 27th, 2008

THE STOCK MARKET

Briefly, the stock market pulled back sharply last week. Obviously this pullback may be about over and may be just a normal “shake out” on the way to higher prices. While that could be true, it usually is during bull markets, another alternative is it also could be the top of a bear market rally. And selling near the tops of any/all rallies has always a good thing in the past, right? So I would listen to the market -- it does communicate with investors who monitor it closely enough – and bow down to its judgment. Today, that means protecting ourselves. And if this doesn’t prove to be any big top, just a shake out, short and intermediate term players can jump back in. Remember my first guesstimate was we were just running out of buying power and thus could fall back to where this last run up began, about Dow 12,325, S&P 1330, Nasdaq 2275 and the mid April lows in the other indices. Now, though, after watching all the bad technicals show up last week and some reemerging economic worries, like more inflation and less growth, I’d say the odds have risen that we’ve just seen an important bear market rally top. Schwartz View: Bottom line, it’s much more important today to protect our portfolios than continue to take on unnecessary risk right when we could be headed into a second and possibly even worse leg down than we’ve just been through. If we do go down and break to lower lows, there won’t be any disagreement left that we’re just in a normal bull market correction. And that could feed on itself and lead to a more extended market decline. We don’t want to be complacently caught up in the early days of that move down. So better to be safe than sorry. Maybe we’re going to miss a market “melt up” such as the most bullish advisors think is ahead but even most of the bulls feel it’s going to be a tough slug ahead. So let’s protect ourselves here.

PORTFOLIO STRATEGY

The always-to-be-expected bounce back rally after the July/October declines to the March lows may be over. The technicals pronounced such last week. Four day or more sequences, distribution days, poor breadth, narrowed-down leadership and weak trading volume all said the two-month rally is kaput. Investor complacency, built after the Fed backstopped Bear Stearns and thus implicitly, the whole financial system, just adds to the likelihood that this decline may be a resumption of the big bad bear market. Thus my recommendation last week which read: ‘We’ve played this “sigh of relief” market bounce since the mid-March lows back up. But now’s the time to cut back exposure to about where we stood back at the lows, to again hunker down to the point where we can ride out any retreat back to test those lows or even go lower.’

Schwartz View: I’ll stick with that market advice kicking off a new week. If you increased your stock market exposure back near the January lows and then maybe again near the March lower lows, which I suggested, and thus made yourself some paper profits since, cut back now, get rid of that extra exposure, and lock in those profits now. I followed my own advice last week and now have added some bets on the market dropping again, going back into inverse funds. I want to be back in my hunkered-down position going into summer. FYI, I’m still nervous about what July will bring since about six months earlier, in January this year, stocks fell so sharply. Mr. Market discounts about six months in advance. And July’s can be awful as I remember back on vacation in Hawaii in July of 2002 seeing the stock market open down and sink lower day after day after day.

Odds Still Favor Deep Recession

Richard Schwartz — Mon, 12 May 2008 13:59:00 GMT

THE BIG PICTURE & THE ECONOMY Today’s Big Picture view comes down to whether the US economy is going into a severe, long lasting recession or not. My belief remains that we are, that’s where today’s slow-motion economic slowdown...(read more)

Official Recession? Does it Matter?

Richard Schwartz — Thu, 08 May 2008 14:30:00 GMT

Official Recession Or Not? And Does it Matter? Written Thursday, May 1st, 2008: Yesterday our first look at the US ’s Growth Domestic Product or GDP for short, showed a gain of +0.6%, a little above the consensus view. But the US consumer, who accounts...(read more)

Forget Scapegoating! Look Forward

Richard Schwartz — Wed, 09 Apr 2008 14:40:00 GMT

SCAPEGOAT BLAMING . Boy, am I’m getting tired of the carping! Day after day, article after article. All these writers seem to think there’s something to gain in blaming former Federal Reserve Chairman Alan Greenspan for the US housing bubble, the credit...(read more)

Monday Weekly Letter: Full Sample

Richard Schwartz — Mon, 03 Mar 2008 14:20:00 GMT

PRINCIPLES OF THE STOCK MARKET A learning, teaching, always evolving stock market letter and advisory service Seventeenth Consecutive Year of Publication ; Letter #1; Sept 18, 1990 Mon day, March 3 rd , 2008: Three people yesterday told me they were sick...(read more)

Stock Market Weekly

Richard Schwartz — Wed, 27 Feb 2008 14:30:00 GMT

Monday, February 25th, 2008: Although the important Dow Industrials and S&P 500 haven’t dropped -20% off their October bull market peaks -- they’ve dropped -18.1% and -19.4% respectively, intraday peak to trough -- I continue to call the last four...(read more)