Principles of the Stock Market : Trades, The Principle of Primary Trend

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

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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!

Monday Weekly Overview Sample Letter

Richard Schwartz — Mon, 28 Jul 2008 13:19:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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

Seventeenth 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, July 28^th, 2008: Your New Paltz, NY SUNFLOWER update: A few sunflowers have popped but I noticed the farmer’s market has alternated its plantings so any time you visit you should see some. Just spectacular!

THE BIG PICTURE

Looks like one potential US and global leader gets it. Presumptive Democratic nominee Barack Obama, to shore up his lack of experience on the global stage, embarked on a global tour last week. And was again able to put his finger on the pulse of the world and his audience, exhibiting his knowledge of history and this particular critical point in time speaking at the historic Brandenburg Gate in Berlin. While he didn’t rock star the crowd, fine with me, it was good to see he continues his role as alienate no one, moderator showing again he understands all sides of issues and is committed to leading by example. While not denigrating any political party, say our Republicans, or country, say Old Europe. Thus there is hope that America will soon embark on a new direction, one of getting things done by bringing all parties together and then making logical and effective, not ideological, decisions, forgoing our previous path of fostering divisiveness in the world, between our two political parties and among the American people ourselves.

Schwartz View: Enough said. I always get negative feedback when treading in political waters. I do like presumptive Republican presidential nominee and American hero John McCain quite a lot but just feel we have to drastically change policies going forward, not follow a similar path. America needs to get it’s act together quickly as all long range forecasters have reached consensus, saying we’re on a downward slide, financially, politically, economically, socially. We just need to start cohesively tackling our problems.

THE ECONOMY

Numerous economists last week admitted that the US economy is weakening. Among them Brian Bethune of Global Insight, James O’Sullivan at UBS and Moody’s John Lonski. So, in spite of the US not posting two straight quarters of negative GDP growth, the old and easy definition of a recession, and one not used any longer by the National Bureau of Economic Research which calls and dates recessions but problematically many months late -- remember in today’s new globalized world we need to learn new economic relationships! -- it looks like a recession is here. And in my view is going to stay with us for quite some time. That’s because America has been moneying-over all near term problems for many, many years, thus postponing the always needed recessionary cleansing and efficientizing of the US economy, while we’ve also avoiding developing and implementing solutions to our long term ills, like our increasing oil dependency, our underfunded government pension plans, Social Security and former Fed head Alan Greenspan’s #1 concern, Medicare. America does have a bad habit of avoiding problems until they reach crisis state. Maybe that’s because our representative democracy has become so dysfunctional here in the US. I would suggest we start fixing things right there in Washington by first getting rid of lobbying which skews everything toward those with the money to get their voices heard. Even corporate America, who now realizes it’s entrapped by this self-perpetuating system, would like nothing better than to see lobbying go away as big business now has to carry and fund a large and increasingly onerous lobbying budget.

Schwartz View: All I’ve read recently has been about how there are so many inefficiencies corrupting our inherently great economic and social framework that it’s a wonder anything can get done. Such as the US having 600,000 lawyers while Japan has 15,000 (those figures were about 10 years back but obviously haven’t changed for the better). And all the broken marriages and unwed mothers costing America a fortune as well. It’s almost funny, after encouraging the rest of the world to move to free markets for decades, when the Soviet Union collapsed and showed the economic rot hidden there, the world finally started followed our recommendations. And economic success followed suit but that led to tremendous and widespread global competition, so it’s vital we get our own act together as soon as possible, to just keep up. Thus the silver lining to this current economic slowdown, a slowdown that isn’t responding to our normal response of throwing money at it, is that crisis is when change really does occur in America

THE STOCK MARKET

Stocks have again gotten ahead of themselves on the downside although not as much out of whack as at the first bottom back in mid-March. Figuring the Dow Industrials and S&P 500’s previous bull market tops were set back last October, after nine months of a bear market or at the recent July 15^th lows, we are down on average about 2.5% per month versus the historic average bear market monthly decline of 2%. So we could easily see a backing and filling trading range here and now or even a modest rally, the two normal ways bear markets correct themselves. Much government intervention has come together to force down the price of oil and thus commodities in general, prop up housing and consumer spending, keep the financial system from breaking down completely and holding interest rates way below the rate of inflation. So all this government stimulus has to go somewhere just as previous stimulus found places to bubble up. Plus new government props and controls historically have been able to put a temporary fix in place.

Still, over a period of time the stock market reflects the economy and things aren’t really getting any better there, despite Q2 GDP growth out this Thursday going to again be positive. In point of fact, the economy is continuing to get worse if one looks under the surface at signals like credit spreads, a rough definition being the difference in yield between US government bonds and non-US government guaranteed bonds, which remain wide. Or if we factor in historic trends which show that economic downturns tend to surface hidden problems which end up feeding on themselves. Today’s continuing wide credit spreads mean at some point MBIA & Ambac and Fannie & Freddie, the other 17 big financials which have also been taken off the allowed short selling list & all the other financials who’ve lost billions of dollars aren’t going to be able to hide things any longer and are going to have to really own up. So stocks remain iffy for now. And with the rug pulled out from under the remaining stock leadership in the stock market over the last two weeks, out from under energy, the energy complex and other commodities, any market rallies are going to be just technically based, say from an oversold position or short sellers being forced to cover. Sure, a rally may then feed on itself and last longer than bears think, but should ultimately roll over as data worsens.

Schwartz View: Technically then, we could be embarking on a summer rally and if so sharp traders with the courage to risk their monies in the propped up financials may be able to scalp the stock market. And other pockets of strength should or may show up (hopefully in the health sector as that is now my focus with my few longs) normally searched out and propelled along by momentum players.

PORTFOLIO STRATEGY

LONG TERM PORTFOLIO STRATEGY continues to be hunkering down until this big storm passes. I expect that to be longer than most government and Wall Street economists and market strategists believe or at least publicly state. Publicly state because we all know that bearish Wal Street analysts and economists ultimately get fired and that in the aftermath of the dot.com bubble bursting, we got some theretofore hidden insight into what analysts really think. I see widely-followed, economist Nouriel Roubini, formerly holding various high level economic advisory positions in government, believes the US and European economies are now sinking as last Friday he said Wall Street was in spin mode and that financial institutions are “… manipulating at will their earnings, and analysts [are] falling for this supreme baloney.”

NEAR TERM PORTFOLIO STRATEGY depends more on whether this two-week, fledgling rally proves it has legs or not. I’m using as a key gauge whether the Dow and S&P are able to close above their last Wednesday’s closing highs, Dow 11,632.40 and S&P 1282.19. If these key indices close higher, then we will have the definition of a new up trend in place, a series of higher lows and higher highs. Strategy then will be to favor the long side but with say with no more than 50% at most market exposure. Planning on a modest summer rally for a month or two, with strategy being trying to scalp some short term profits.

AS FOR INCOME INVESTORS, we’ve all gotten used to our income fixes after 25 years of income investing being easy during a bull market in bonds, meaning just riding the trend toward lower and lower long term rates, I know it’s a struggle for you all today. My best suggestion is to watch for weakness in income sectors, say in utilities, royalty trusts and even REITs, then strike. Only move in and in a small manner AFTER a sector has just been blasted. This gives you some profit buffer as primary extended downtrends many times have sharp sell offs after disillusioned investors finally give up hope and sell, right before they rally. This can get you in at unusually good prices, at least for the near and intermediate term.

INCOME IDEAS. Thus I would currently search through the utility sector as the Dow Utility Index has just fallen a sharp -8% over the last two weeks. Or take another look at my previous July 11^th, 2008 two energy income recommendation Cross Timber Royalty Trust (CRT) and San Juan Basin Royalty Trust (SJT), both haven tumbled hard with crude. Both go ex-dividend tomorrow, meaning today’s the last day to get in to collect the substantial August dividend (both pay monthly). Or finally, revisit my other income recommendation, back on July 10^th, 2008, of two large European pharmas, GlaxoSmithKline PLC (GSK) AstraZeneca PLC (AZN) paying moderate dividend yields of 4.4% and 5.8% respectively. You need to buy GSK today to be entitled to this quarter’s dividend and buy AZN soon before it goes ex-dividend (not declared yet but last year it went ex on August 8^th). Good income investing!

Have a great 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).

Portfolio Strategy: Monday, July 14th, 2008

Richard Schwartz — Mon, 14 Jul 2008 13:34:00 GMT

PORTFOLIO STRATEGY

This year’s mid-March to mid-May bear market rally was the first rally versus the new primary bear market downtrend. Usually the first rally is the best rally (just like the first loss is the best loss) because many investors believe the bull market still lives and thus it’s eminently playable as bears still have buyers to sell to. But this second time up, if we do get a rally going, the odds are higher it may not last as long and thus not be playable. It may be just a quick, sharp bounce – futures are way up today -- but then after a few days dissipate quickly. Comparing today to the last Papa Bear market (of 1973-1974) we did get a three-month playable rally seven months into the first year of that two-year decline. But I have to equate that to our just completed (in mid-May) two-month rally (which began five months into this bear market).

Generally this middle phase of a bear market is pretty consistently down, except for short, sharp rallies caused by events like the government stepping in. Thus, for aggressive market participants, correct strategy may be just to cover one’s shorts, temporarily. Taking advantage of this morning’s excitement that the long suffering financials may be bottoming. Remember that’s the consensus view on Wall Street, that when the financials finally bottom out, that will signal the bottom in the overall stock market. And for others who are still too long this bearish stock market, which is down -20% but over time looks destined to go as much again lower, any strength here on the latest Fed moves may be to just sell into strength. That’s sort of my strategy as I watch the market this morning. To watch this rally unfold and then to use it for our best interests, keeping in mind that its very likely only a “flashy-splashy” normal bear market rally.

1973-1974 Redux

Richard Schwartz — Thu, 22 May 2008 14:09:00 GMT

The Principle of History. Knowing one’s history gives us guidelines and a basis to work from. So yesterday I began to compare the last Papa Bear market we lived through, 1973-1974, which encompassed the first really oil crisis, to today’s ongoing bear market and oil shock. I said I was printing research off the (wonderful!) Internet & get back to you. Well, I’m baaack.

1973-1974 OIL CRISIS COMPARED TO TODAY

Studying the 1972 through 1974 period in more depth yesterday, please let me note that:

There were three separate legs down in the two-year Papa Bear bear market of 1973-1974:
The first leg down was sharp and came in January 1973. From a peak on January 11^th, 1973, the Dow fell -10% over the next 30 trading days. Then kept sawtoothing lower until late August when it completed a seven-month loss of over -18%. This first leg down can be compared to what the Dow has recently gone through, since its peak on October 9^th last year. From Dow 14,164.50 to the Dow low of 11,740.20 the Dow lost -17.12%. Schwartz View: So about comparable in time, seven months versus five months, and extent, -19% to -17% to the first leg down in the Papa Bear market of 1973-1974.
The stock market in 1973 then rallied +15% from its lows over the following two months. That brought us back to within about -6% of its old January 1973 high and peak. Schwartz View: This time around the Dow has rallied +11% from the March 10^th lows to the May 2^nd highs, so for just under two months. And has brought the Dow within -7.8% of its old highs. So a weaker, shorter rally, which may be bad, IF it’s indeed over.
Going forward from that bear market ally high in August 1973, the two-month rally where some investors “were likely lulled into believing that a new leg up was occurring” the market began its second leg down, which brings us up to date and to today.
Looking back again to what happened in 1973, and projecting forward to what unfolds today, the 1973 second leg down began in August and ran until December and the Dow dropped an additional and even more severe -20%. The leadership of that era, the “Nifty Fifty,” resolved its previous divergence, holding up while the smaller cap stocks got hurt during the first leg down, and caught up on the downside as shown by the -20% Dow drop. This drop took roughly three to four months. Schwartz View: Thus I have to project a second and more severe leg down starting now or soon. Probably including the remaining leading energy and commodity sector taking a hit.

Other similarities and/or dissimilarities from the oil shock and crisis back in 1973-1974 to today’s oil shock which I unearthed in my research yesterday are:

1. Rising inflation was a big issue in both periods.

2. The Vietnam War ended during that past bear market, something similar to what I expect to happen during this bear, us getting out of Iraq.

3. The US dollar was under pressure back then even in the early stages of the bear market, in February 1973, it was devalued by 10%. It’s losing value again, now.

4. Oil jumped from $3 a barrel to $5.11 a barrel, beginning with the October 1973 OPEC oil embargo, a quick jump of 70%. We all know oil has soared the last couple of years as well.

5. We had massive layoffs of 142,000 in the auto industry in 1974; yesterday American Airlines announced “large layoffs” ahead.

6. We had Franklin National Bank be declared insolvent in 1974; this year Bear Stearns effectively was declared insolvent by the Fed. Other banks, investment and money center remain under great pressure.

7. BARRON’s Roundtable was unanimously bullish starting off 1973; same thing from Barron’s Roundtable kicking off last year.

8. The US economy from 1972 to 1974 dropped from a growth rate of +7.2% to -2.1%. And the UK economy dropped from +5.1% to -1.1%. This time around both the US and UK economies are also dropping quickly.

9. Stocks priced in gold were priced very low back then. Same low valuation in terms of gold today with gold at 900$+.

10. We had a new Fed chairman, Arthur Burns, arrive in 1970, who encouraged inflation. We have a new Fed Chairman, Ben Bernanke, who is also encouraging inflation today.

SCHWARTZ SUMMING UP. No use looking out too far, looking at the third leg down in 1974 for instance, which came after another always-to-be-expected stock market rally and multi-month trading range. Let’s hope this time around isn’t so bad although I must say things do look pretty bad to me.