Principles of the Stock Market : Trends

Trading Ideas In A Bear Market

Richard Schwartz — Fri, 16 Jan 2009 14:45:00 GMT

SECTOR VIEW. Biotech, Small Caps, US Treasuries and the US Dollar. Let’s comment on a couple market sectors and asset classes today. First, two stock market sectors which may prove profitable. Ha, you scoff! Profitable? In a bear market? Before you laugh, at least read my reasoning.

1. BIOTECH. The biotech sector was having a nice run up last year leading the stock market before trouble hit. From July 7th to August 14^th, the NASDAQ Biotech Index of 136 stocks jumped +16.2% as not many sectors were participating while the market, looking back, was building a top just before the October panic. Of course when worries about financial concerns, etc. got too heavy, the market, and the biotech sector, fell sharply until the November 21^st bottom. Since then biotech has regained +16%. What I’m saying is I’m seeing more relative strength in biotech than elsewhere. Even on down or mixed days I’m seeing the medical industry and the biotech niche hold up better than most. For example, just look at yesterday. Even after the reversal upward, not everything worked its way into positive territory by the close. Banks and financials ended lower, computers were up only slightly, utilities and large caps were only modestly higher yet the aforementioned NASDAQ Biotech Index gained +2.32% on the day. Plus I noticed a health care fund manager saying two days back on CNBC saying biotech is the particular niche of health care to be in going forward. Based largely on the fact that large pharma needs to restock its pipeline and that generally means takeovers of smaller companies like promising biotech concerns. Schwartz View: The large pharma companies have financial staying power so it’s likely they can build a fuller new drug pipeline by buying up biotech companies. Net, net I would use biotech as a core position in your modest long exposure, the allocation of both depending on whether we hold down here near the trading range’s bottom or not. Disclaimer! I hope modest long biotech positions in the sector rotation portfolios I manage but can and do change positions without notice.

2. SMALL CAPS. Then I’ve also noted some relative strength in small caps recently as well. In fact when I cut back my market exposure, increased some to participate in the last month and a half of modest rally, earlier this week, a little late, darn, I decided to keep my small cap sector fund and dump my large cap one. Then yesterday I see Mark Hulbert, who tracks stock market newsletters like this one, report the January Effect is underway. That’s when small caps outperform near the end of the year and in the beginning of the following new year. Generally works best when there are a lot of losses to take at the end of any calendar year, you know brokers work the phones to get investors to book losses for tax purposes. Anyway, Mr. Hulbert posits that this relative stronger showing by small caps shows investors are starting to embrace more risk. I don’t know about that but let’s hope he’s right. Myself, I’m looking at this relative strength as small caps NOT being exposed, or as exposed, to and hurt by the now strengthening US dollar and also that many small and mid cap companies hold far less debt than most large caps. Schwartz View: Still, Hulbert says this return to small caps outperforming now means investors can go back to analyzing individual companies again rather than worrying about total systemic risk. That would be a step forward if there are actually some winners and winning groups around once more instead of a sinking ship taking everything down with it. Note the online, vocational schools for working adults, like Apollo (symbol APOL) which jumped some +7.8% yesterday as a bit of proof that something’s working normally again. Disclaimer! As in biotech above, I hold small positions in some small and mid cap sector funds but can and do change quickly.

Ok, after two actual buy ideas for you in this Papa Bear market, not bad, let’s discuss briefly two asset classes which in today’s modern investing world, the individual investor can easily participate in through ETFs (exchange traded funds) and sector and inverse sector funds. One is just an update, the other a buy..

· US TREASURIES. Long term Wall Street economist, but not of the mainstream ilk, Dr. A. Gary Shilling just announced that “The 27-year rally in US Treasury bonds is over.” Wow! I know Gary has been 1000% correct on long dated US Treasury paper for a long time, for many years now, especially over the last year as the global “flight to safety” trade pushed long government bond yields lower and lower and lower. Gary long ago predicted rates would go below 3% eventually and they sure have. The plunged below 3% recently until bottoming, at least for now, on December 18^th at 2.074% for the benchmark 10-year Treasury and at 2.546% on the 30-year “long” US Treasury bond. But I don’t see Gary predicting a move up in yields, not yet. Schwartz View: That’s the key question. When to short long US Treasuries? Deciding whether yields will V-upward or go into a long L formation, remaining down here around a 3% yield. Myself, I’ve predicted that this Papa Bear market will include a ratcheting upward of long Treasury yields somewhere in say the second or third years (hopefully we don’t have a 3^rd year to this bear market!) So I’m just watching now and not betting on higher yields, not quite yet. Not with the Fed & Federal Reserve Chairman Ben Bernanke publicly saying that one next step for the Fed in getting credit flowing once again is for the Fed itself to become a buyer of government debt. Most feel he means shorter term US Treasuries, say up to 5 years in duration rather than longer term Treasuries but who knows for sure. So I wait and suggest patience, monitoring and waiting for just that right time to initiate a short ETF or inverse sector fund position inversing tracking long Treasuries. Jim Rogers, the renowned long term investor, is also licking his lips, getting ready to short US Treasuries as he’s stated more than once but I haven’t heard he pulled the trigger yet. Actually Rogers, like myself, previously shorted long Treasuries last year and then had to step in and cover at a small loss. Net, net for now we have to exhibit ultimate patience, desperately needed during any extended bear market like this one, and wait for our opportunity.

· THE US DOLLAR. The greenback has now been rallying since July 15^th so this long length of time, longer than the normal three month maximum time frame normally associated with intermediate term corrections up or down versus primary trends, likely means that a bull market in the buck is underway. But the jury is out right now on which way the primary direction if one just looks at the charts. The US dollar dropped sharply for three weeks in December and while it’s been working on regaining the large amount of ground lost then, it’s still not above its highs posted in late October. Schwartz View: My best gueestimate is that the buck does regain all lost ground and moves above its late November highs and continues on in a bull market. Again, “Mr. Correct,” Dr. Shilling, predicts the dollar will keep rallying this year. Why? Because he sees the stock market again dropping similar to last year, possibly losing another -35% or so. And thus the dollar is the best of a bad lot of global currencies, all trying to devalue to keep their economies moving, net, net meaning that there will remain a flight to safety in the dollar. Schwartz Recommendation: I don’t hold any long, or short, positions in the US dollar today but am considering putting one on as I see and agree with Gary’s logic and myself feel this big bad bear market isn’t going to be able to wind up in just one year. The breakdown being so severe needs time to heal. And if we do have another bad year in the stock market, the US dollar should hold up at least for the foreseeable future.

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

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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!

"No One Can Time The Stock Market"

Richard Schwartz — Tue, 11 Nov 2008 14:18:00 GMT

TECHNICAL VIEW. The Principle of Technical Analysis. I don’t want to jinx myself but I can’t keep quiet. Not after hearing the usual Wall Street mantra again this morning. That is, that no one can time the stock market so it’s always best to ride out its ups and downs. I mean this type of misleading & confusing information is one big reason why I started this stock market letter back some 18 years ago. Part of my motivation, to quote myself, was to “unveil the mystery surrounding the stock market.” I saw numerous misstatements and unfounded general beliefs which I just thought were plain wrong being foisted on the investing public, not large institutional investors but aimed at individual investors. After working as a stockbroker/financial consultant for 15 years, I realized that Wall Street kept nurturing the stock market’s mystery. Why? For Wall Street’s best interest. Why pay a stockbroker or brokerage firm big bucks if individuals could understood for themselves the market? No, only if individuals felt (and kept feeling) overwhelmed by the market’s workings would there be a need for advisors and a way to charge big fees.

Anyway, I don’t want to get off track. I just want to comment on the one line of reasoning which we’ve all heard repeated so often that most now take it as fact. That is that no one can call the tops or bottoms of bull and bear markets. We hear it from about 50% of the mutual fund managers, market strategists and others every time they come on TV. Many begin with something like: “Since no one can call a bottom, …” Not only does this perpetuate the need for market advisors it also justifies the roller coaster performance of these money managers. Hey, it takes the pressure off them, right? As long as they are doing about as well or as poorly as the overall stock market, then they are doing their jobs well. At least that’s the thinking.

But then what about all the traders out there? Why did hedge funds start then? If no one can time the market what about this whole cadre of people trying to outperform the market? And what about those fabulously successful speculators we hear about? Some do time the market correctly is my answer.

Schwartz View: I’m sure many others did as well so I’m speaking just for myself now. After studying the stock market for 35 years, all facets from timing to investment themes and much, much more, I was able to correctly identify last year’s market collapse as the beginning of a bear market pretty early on. In spite of those who say no one can do such a thing. And I stepped up, following my own reasoning and got Lucy’s 401k or 403b or whatever it is into 100% cash. Right before we went away on our annual Christmas beach vacation last year. And thus kept her retirement account from falling about in half! With my managed accounts, I followed generally the same path, figuring my top priority was protecting our downsides because the market was turning bearish. Since then I’ve been able to keep mostly to the sidelines, watching this bear market unfold, gather steam and keep on rolling. This in spite of hearing the “Trillion Dollar Man,” BlackRock’s Bob Doll, incorrectly call a bottom in March, Mad Man Cramer call a bottom in July and other bullish, skin-in-the-game advisors come on CNBC and say they are buying, that a bottom is near or building a bottom is a process and you’d better get in now “…since no one can call the bottom.” Well, the bear market continues and we keep seeing further and deeper declines. My sense, as I’ve been writing for months now, is that this bear market will last for at least two years or until at least next October simply because what’s hit us is the worst mess since the Great Depression of the 1930s. So why wouldn’t this bear market last at least as long as the last Papa Bear market, the two year long drop in 1973-1974?

Bottom line, while I don’t expect to call the bear market bottom before it arrives or to the day (except in hindsight) I believe with the tools, skill sets and experience I’ve now got, after studying the market’s primary trend, history, psychology, value, technicals, etc. for decades, I should be able to identify the bottom reasonably well. Part of my overall game plan entails trading most possible rallies so when one does prove to be the real thing, I’m in with at least one foot near the start. Then, as I see prices rising, I should be able to get in more heavily. Bottom line, I believe anyone who’s willing to put in the time and effort should be able to quickly identity tops and bottoms in the stock market, totally counter to what we always hear. Oh, one last point. Be careful of the fear that these always 100% invested advisors love to leave you with (just like dentists do). That is the mantra that if you miss the first days of a new bull market, you’re in trouble. Sure the first days up are normally exciting and big. But bottoms generally are retested, providing the sharp-eyed observer more than one reentry point. And bull markets run for years not just for a couple of days. So don’t worry, be happy, if you’re now 50% or more in cash on the sidelines. Just stay tuned here. Because one way to indeed miss the bottom is to lose interest in stocks during a long bear market. Go ahead, lose interest if you’re 100% invested now because you’re already in a bind. But don’t lose interest if you’ve played out this hand fundamentally correct. If you’re saved yourself a bundle by already going against the Wall Street mantra of staying invested “because no one can time the market,” then stay in touch with stocks for your reentry point. One good and easy way to do so is by just reading this letter each day. It’s only a couple pages long, doesn’t take much time to read, you’ll learn something new most of the time AND you’ll be aware pretty quickly, & ready to profit, when this market turns up.

Where Now Inflation?

Richard Schwartz — Fri, 12 Sep 2008 13:39:00 GMT

THE FIRST INFLATION SURGE IN 25 YEARS IS OVER. So, what now?

First, let me give credit when credit is due. Federal Reserve Chairman Ben Bernanke and the Fed finally got one right. They’ve been promising us moderating inflation for a year or more and now with -30% lower crude oil prices and a big general commodity collapse we’re finally we’re seeing it happen. Or, at least, starting to (most things economic happen with a lag). And with the US dollar now surging, that’s going to reverse/diminish rising, problematic imported inflation as well. So now the deflationists out there, those who say deflation is our real problem facing us for some time – Gary Shilling, Robert Prechter, Ron Insana to name just three -- can really have their time in the sun.

Still, there remains some debate whether problematic rising inflation is going quiescent. Mac Courtenay of Seeking Alpha, I guess a boutique research firm, offers up seven reasons why inflation isn’t going away:

1. Inflation is already firmly entrenched. Schwartz View: I agree. I’ve been observing the Fed’s incessant jawboning that inflation expectations remain low is wrong and we all know that the government’s inflation data is terrible skewed to the downside from what inflation really is.

2. Inflation is already here. Schwartz View: The Producer Price Index (PPI) is up +9.8% over last year, and that’s only what the government grudgingly admits to.

3. Inflation is now moving its way through the “food chain” showing up in consumer prices as well. After some hope that because of global competition (globalization) producers would eat the higher inflation. Schwartz View: This rippling through is evidenced by the Consumer Price Index (CPI) rising too, again up the fastest in 17 years.

4. Average weekly earnings fell in July the largest since 1990. Schwartz View: I’d guess Mr. Courtenay’s point is that when earnings drop, we can’t buy as much. ???

5. More and more Federal Reserve governors are talking about raising interest rates next, not lowering them. Especially if we see energy prices stabilize above $100 and bounce. Schwartz View: Of course, these Fed officials, meeting again next Tuesday, can change their views.

6. Global (food?) consumption patterns are heading higher. Schwartz View: I don’t know if author Courtenay is talking about food, metals or just what. But I agree with him on food. As people get a little money, one of the first things they spend it on is more and better food. Thus global food consumption patterns should keep heading higher even if the global economy recesses.

7. The markets will take charge. If the Fed doesn’t raise rates, the marketplace will raise them. Schwartz View: Not sure about this reason he positing for inflation staying problematic. Right now the markets, the long US Treasury market, is still forecasting a slowdown by yields going lower and lower, which to me means more disinflation ahead, not rising inflation.

Schwartz View: He goes on to say part of oil’s recent comeuppance, coming down, is forced hedge fund liquidation because of Congressional pressure (I agree). And that it’s a great time to buy TIPs (Treasury Inflation Protected Securities) and the easiest way is to buy the symbol TIP. And to buy commodities on this correction, recommending also symbols DBC (a basket of commodities) and GDX (gold). Myself, while I believe this commodity pullback is indeed a correction, I think it’s too early to buy them back.

Schwartz BIG PICTURE Inflation View. My belief, garnered from studying stock market history and looking at thousands of charts over the last 20+ years, is that when any new trend begins, many times it begin with a surge in the new direction, then a pullback or at least a pause, sort of to regroup, consolidate gains, make believers out of disbelievers, open the eyes of others who are slow to see and just basically kill enough time to see if the new trend has legs. Then after this pullback correction, which more often than not can be large and long lasting, runs its course, the new trend reasserts itself.

Basically that’s where I see us today with rising inflation, in a pause to refresh. I’ve theorized over the last year than oil and other commodities would stay stronger, longer than most thought this year. I’d say that proved correct with oil going up all the way to about $147 and related sectors like natural gas, energy services, solar, wind and other alternative clean green leading the stock market for the whole first half of 2008. Similar to what happened during the first year of the last severe Papa Bear stock market back in 1973-1874 (oil stayed high the first year). But now, with commodities reversing downward and in major correction, it’s obvious change has occurred, that a pause to refresh is underway. And we can expect this new trend to last longer and correct deeper than many would think I’d venture. Sure, first because commodities are inherently extremely volatile, much more so than stocks and bonds. But also because of the emerging new, macroeconomic backdrop. We seem to be in line for a major, global economic slowdown which will throw a big detour on the road to a new long term trend to rising global inflation. If the global economy really goes blah for the next few years, commodities will take a longer than expected breather. Schwartz View: Still I’m in agreement with former Federal Reserve Chairman Alan Greenspan who predicted in his 2007 book The Age of Turbulence that we live in an inflationary world and that the disinflation trend dominating all during his tenure as Fed chief is coming to an end. And I’m in agreement also with famed, global investor Jim Rogers who says commodities normally correct 50% or more and that’s what we’re seeing now, a correction not the end, to this so far about 9-year commodity bull market.

September 2008 Investment Strategy

Richard Schwartz — Tue, 02 Sep 2008 13:27:00 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

Tuesday, September 2^nd, 2008: Had lovely, blue sky, humidity down weather to wind up the summer and the long Labor Day weekend. Indeed, the weather is supposed to stay gorgeous the early part of this week here as well. But don’t mention the grand weather to Lucy since it’s back to school for her today!

THE BIG PICTURE

Last week I wrote about the necessity of staying positive during a downbeat economy and stock market. Staying upbeat right when there’s near term problems and long term concern that America is losing status in the pecking order of the new, globalized world we live in. Hey, America has long encouraged the rest of the globe to go capitalistic and got a massive, all-encompassing global push in that capitalistic direction after so much economic rot was discovered in the Soviet Union sphere after the Berlin Wall came down. Countries switched and let the marketplace work and, voila, the world started moving forward, growing and getting wealthier. So now, with so much new global competition around and thriving, America has to respond in kind by redoubling our efforts to efficientize, modernize and improve our own financial, economic, social, and especially our dysfunctional political system(s). In other words, take our fundamentally solid, well-working capitalistic system and adjust it to today’s new globalized marketplace. Make some fundamentally sound and foresighted long range decisions about energy, education, health, finance, politics, etc. and then exhibit sacrifice and discipline. Again, all while seeing the glass half full.

Schwartz View: That’s why I’m dismayed by hearing friends, including one back from Iraq duty, tell me it really doesn’t matter who gets elected as the next president of the United States. Their rationale? It doesn’t matter since nothing will change anyway. Maybe my generation and the one coming immediately after us is just too jaded. But, from longtime trafficking in the stock market, the one thing I’ve found we can bet on consistently is change. Change does happen. So, I’d say we have to have hope. We have to believe that our votes will prove meaningful. And the youth of America, not being so long disappointed and denied, frustrated and jaded like their elders, us, have responded to this upcoming presidential election. Grass roots efforts by thousands of inspired youth and the ready adoption of the Internet for fundraising from the masses is how Barack Obama overcame sure bet Hillary Clinton to get the Democrat’s nomination in the first place. So I say re: politics, energy use, etc., just like in the stock market, we need to keep upbeat that positive change is out there just over the horizon. So buck up. The realistic investor can forecast hard times ahead and yet get up each day, plaster a smile on his and her face and still believe that better times are out there, knowing that just like the daily cycle, it’s darkest right before dawn … arrives.

Schwartz Reading Recommendations: For those of you who are interested in Big Picture investing, by that I mean not the nuts and bolts of everyday stock trading, charting, etc. but, say financial planning, etc. I’d like to add former Fed chief Alan Greenspan’s tomb of the 20^th century, The Age of Turbulence, to my recommending reading list. It offers up a wonderful history of America growing wealthy, explains how decisions at the Fed are made and gives forward looking guidance to the world ahead. Also let me add the even newer book, THE POST-AMERICAN WORLD (2008) by Fareed Zakaria, which after I got over my provincial American bias, was wonderful in explaining the world’s likely scenario going forward. a world of shared power with extra kudos to author Zakaria in how he gets into the heads of the Chinese and Indians, explaining how they think, operate and their cultures. Interestingly, India with its long-established democracy, and Indians in their outlook on life, are extremely close to how Americans think. Again these books are for those of you interested in longer range financial planning and the like.

THE ECONOMY

Dell Computer’s report last Friday that the US technology spending slump has spread to Western Europe and some Asian countries just confirms all the other evidence showing up that today’s world, economically and financially is very closely intertwined, not decoupled as the Wall Street argument goes. Of course, this intertwined relationship and what that means isn’t that easy to define, it’s gray, not black or white. But for the near term, negative economic ripples sent streaming outward last year when the US subprime mortgage market imploded are now being sighted and felt in other parts of the globe. How severe these global ripples get, these so-called 3^rd-order effects, as economists like to term them, remains to be seen. Bulls say they will prove minor; bears like me say they will prove more severe; only time will provide the answers.

Still, right now, everywhere one looks negative ripples sent outward from the US tsunami in collateralized asset-backed investments are starting to show up. One major problematic ripple in the US and globally is the effect being felt by banks and their business. It isn’t, can’t be “:business as usual” any more. Banks’ fortunes – with huge paper losses and their opaque, illiquid, very leveraged and still deteriorating loans on the books – are now directly tied to US house prices. As house prices fall, the value of these locked in bank investments keep tumbling as well. Leading to write-offs. It’s all a negative domino effect. The lingering loss of confidence leads to a continuing reluctance to make loans, thus to lower stock prices and thus also to a growing need for banks and other financials to repair their balance sheets by raising more and more capital. Which in turn dilutes earnings and the vicious cycle continues.

Schwartz View: My ongoing view is that this widespread consumer, business and investor loss of confidence, combined with the first bout of problematic inflation and a weakening US and now global economy is not some short term event. That we’re now in a downward spiral that will take much time to bottom out and reverse. We’re, bottom line, in an economic event and economic changes just can’t move along anywhere near as fast as stock market participants would like them to. Thus, we see frustration by strategists, money managers and all the bulls out there to find and call a bear market bottom way too early. I believe investors have to exhibit extreme patience for the foreseeable future.

THE STOCK MARKET

Impatient investors keep fishing for a bottom, thus causing the periodic “flashy-splashy” big rallies we get, like last Thursday’s +2% move up. These big one and two day moves up are actually symptoms and signs of a stock market still on the way down, actually now firmly controlled by the grizzly bear, if you believe a recent report by Merrill Lynch after they studied all the ups and downs of the just completed full stock market cycle, starting with the bear market running from 2000 to 2002 and the following bull market running from 2002 to 2007. Big pops happen in bear markets but then get completely washed away over time. Certainly during these bear markets stocks can also cobble together rallies which last for weeks or even months at a time, such as two-month rally we put in from mid-March to mid-May this year. Or the rally we are now experiencing; so far six weeks long and still alive and kicking although very saw tooth in nature. Obviously, nothing ever goes in just one direction. That’s especially so in the stock market whereby prices normally shoot out to extremes, up or down, and then need to balance themselves off.

Right now that’s where I see us. Stocks balancing off upwards after a downward movement that dropped too far, too fast. Actually that’s normal in any extended, economically-catalyzed bear market, investors losing confidence periodically, then regaining their nerve, then losing it again. Again, deteriorating economic trend(s) causing some major decline in stock prices just can’t cycle through its phases anywhere near fast enough to please myopic, very rapidly moving stock market players. So we get quick moves down, then bounces up or sideways movements to get time & price back in sync. Then it repeats again.

Schwartz View: These bounces are when and where traders try to make their profits during multi-year bear markets. Most traders early on realize it’s a lot easier and more profitable in the long run to always stay bullish, thick or thin, bull or bear market. Thus the extreme bullishness shown by a very experienced NYSE floor trader when interviewed late last week by CNBC. His time frame is so much different than the rest of us, he can be very bullish right now, right in the midst of a firmly entrenched bear market.

PORTFOLIO STRATEGY

Net, net this six-week rally may last for another month or even two but I wouldn’t get too attached to it. In fact today, let’s hope the market goes up a whole heck of a lot. I plan to book some profits. The first trading day after Labor Day is normally a seasonally strong day but then September can go south very fast and has proven to be the worst overall month of the year on average. Plus August was our first monthly advance in four months for many key indices so I’d like to take advantage of this normal “rally in a downtrend” and lighten up on some short term trading positions established back in July or early August. And suggest readers do the same, review everything else you now hold as well to see if any sectors are now timely to get out of. Again, to take advantage of this recent bear market rally. For example, please review the technology sector after Dell’s news last week warning it sees spreading, global tech weakness now.

Schwartz View: With big players coming back to work this week and with oil resuming its steep decline, we may extend this recent rally. Rallies can last upwards of three months in bear markets and since this one started on July 15^th, the best case scenario says it can run through October 15^th. Still, best I can deduce, all we’ve been doing this summer is killing time before the next round of bearish news hits. So I would continue to book trading profits as you go, sort of imitating the always in traders on the NYSE floor.

Have a grand week!

Understanding/Applying "Feedback Loops"

Richard Schwartz — Tue, 12 Aug 2008 17:51:00 GMT

FEEDBACK LOOPS: A VICIOUS CYCLE. I’m slowly yellow-highlighting passages on every page of the little gem of a book I found at the annual New Paltz library sale: THE RETURN OF DEPRESSION ECONOMICS (1999) by Paul Krugman. For those of you who are students of economic history, ala my Principle of Economic & Stock Market History, I’d strongly recommend this book as the well-known author is insightful, a good writer and provides (and clarifies) some great economic history. One section, appropriate to mention today explains “feedback loops.” Briefly this is a circular process of how a loss of confidence, financial crises and falling currencies/rising interest rates/slumping economies all form a negative loop. And when they get started, how they feed on each other. Schwartz View: Today, we’ve experienced the first two. First, a major loss of confidence as shown by consumer confidence plunging here in America and in Europe too. Which fits into Robert Prechter’s view of how economic slumps get started. Second, we also obviously have massive, massive financial losses caused by a financial crisis, “the worst crisis since the Great Depression.” And third, we’re slowly morphing into slumping global economies (which are going to spread greatly if commodities prices continue downward). My big picture view is that the this current feedback loop or vicious circle will eventually lead to connecting the whole loop, we’ll see falling currencies, especially in the US dollar along with rising long term US interest rates. Bottom line is: Don’t get misled by the trees, go up on the mountain top & see what’s really happening.

Potential Rally Remains on Tightrope

Richard Schwartz — Fri, 01 Aug 2008 13:49:00 GMT

TECHNICAL VIEW. Written Friday, August 1st, 2008: 6:30 a.m. EST

With the S&P 500 closing just above it’s week ago Wednesday’s close this past Wednesday and the Nasdaq Composite following suit, we have a series of higher lows and higher highs in both, i.e., an uptrend in place. So I was hoping for some follow through by the Dow and other indices yesterday to confirm such. But no such luck. Turned out the market couldn’t overcome more depressing, recessionary-like economic data and even oil turning down didn’t help that much. Just wonder if Mr. Market has already reached the conclusion that lower oil won’t resolve all our problems. Nah, it’s hard to believe we’ve squeezed all the bullishness and resulting rally out of lower oil just yet. The crude price continuing to drop should continue to help stocks, just looked like a breather to me yesterday. Getting back to the technical view, and Investor’s Business Daily (IBD) putting the “Bull back in the Box” after a bullish “follow-through” day after Tuesday’s big up day on higher volume, IBD always recommends watching closely in the days immediately following. So I pulled out an dog-eared IBD publication because I remember well they have a good explanation of whether a follow-through day is succeeding or not. Yep, here it is, in William O’Neil and Gil Morales’ short 2005 book HOW TO MAKE MONEY SELLING STOCKS SHORT (get yourself a copy): “In a few instances, you may have a strong follow-through day and the market will still fail. When this occurs, it usually happens rather fast and can be figured out in a few days.” [Schwartz: This latest follow through day came very late, past the 4 to 10 day normal limit.] IBD follows with this: “If the market is making very little price progress on decreased volume, or if it abruptly begins to fail badly after a sharp, one-day rally, you are probably at another short selling point, as far as the general market averages are concerned.”

Schwartz View: I was prepared to push a little more money thru the windows yesterday – not too much! -- figuring a rally was started but didn’t when I remembered the first Friday of each month we get the JOBS report. Better to wait one more day. So let’s see what the 8:30 am data brings today (although I don’t trust the data, short term traders do trade it). FLASH! Data not too bad, if one trusts it. And while yesterday wasn’t any bearish “distribution day” because of the reduced trading volume, it still looks like we could get a market failure as IBD warns us to always watch closely for. And in spite of me possibly buying a bit more today, please remember, overall, I believe a recession is here & the market will have to factor that in & move lower over the next year or so.

Updating Energy Saver's Theme

Richard Schwartz — Fri, 01 Aug 2008 13:35:00 GMT

UPDATING MY LATEST INVESTMENT THEME: ENERGY SAVER’S

I realize I should go back and update my various recommendations, especially my investment themes, more often. If you follow and buy into some of these themes you’d certainly want to see some updates.

So this morning let me update my latest theme, that of investing in companies which offer other businesses ways to save on energy use and thereby overhead and money. Last I wrote about buying these energy saving companies was to recommend: “Respecting the Bear But Nibble On Weakness.” Thus, here’s a compiled table of my recommended companies below. Some of which are obviously correcting in price as the price of crude oil moves lower. Certainly most of the below companies are NOT immune to lower oil which makes the need for their services, short term, seemingly diminish. But it gives us, those of us who believe the world, and most companies’ business models, are going to continue to move inexorably towards more efficient energy use, the opportunity to buy on weakness, the ideal way for long term investors to buy. Modeling Warren Buffett, whose key criteria is price, the lower the better, on sale, after a fire even better.

ENERGY SAVERS THEME

June 13^th 2008 Recommendations

Buy July 14^th Current

Price Price Price Chart/Business Update

CPST Capstone Turbine Corp. $3.41 3.50 3.06 Correcting from peak $4.42 on June 23^rd

BCON Beacon Power $1.72 1.30 1.29 Another in a sharp pullback, a buy opportunity

WGOV Woodward Governor $37.78 35.64 45.00 Up, up and away after a good earnings report

MXWL Maxwell Technologies $12.57 11.11 13.47 Up as companies keep buying more product

CHP C&D Tech $8.40 8.74 8.03 Correcting a big move up

June 18^th 2008 Recommendations

COMV Comverge Inc. $12.73 13.95 10.90 Fallen to support on new competition

ENOC EnerNOC, Inc. $15.65 20.74 16.14 Like COMV, pulling back on new competitors

ITRI Itron, Inc. $94.75 88.60 92.33 Earnings good; high price a bit scary

BMI Badger Meter $50.04 52.50 56.33 In uptrend; analysts 1 buy, 3 holds, 1 sell

July 15th Recommendations

July 15th

Price

ALTI Altair Nanotech $1.83 2.68 Stock taking off; earnings/news good

AMSC American Superconductor $32.15 39.49 After sharp correction, uptrend has resumed.

Disclaimer! I own a little of Altair, Beacon, Capstone, Comverge and EnerNOC and am watching the others for “buy on weakness” opportunities although I hesitate buying many/any very high priced stocks during bear markets.

Reasons For a Summer Rally

Richard Schwartz — Wed, 30 Jul 2008 13:22:00 GMT

UPDATE ON THE STOCK MARKET. Written Wednesday, July 30th, 2008: 6:30 am EST.

Another ‘flashy-splashy’ rally yesterday So typical of bear markets, especially those with much further in time and points to go. Grizzly bear markets thrive on investors’ hope and adamant investor reluctance to believe things can get worse. Bear markets end when that hope is gone. Anyway, everyone jumped on board the stock market yesterday, figuring that, once again, the credit crunch is over or at least winding down. I doubt that and really doubt that the nine month bear market is over but one never knows the future for sure so we always have to keep an open mind.

A SCHWARTZ RECAP. Bulls, still fighting this bear market, did a great job of spinning (it’s always easier to spin when there is a germ of truth) that Merrill Lynch’s capital raising move yesterday and more billions in write offs showed we’re in the “end game” of this crisis. That Merrill selling some distressed assets, doing what no one has wanted to do, selling out and thus setting a low market price, about 20 cents on the dollar, for some of their CDO’s, means that everyone else may be forced to follow suit and thus that will call an end to the prevailing uncertainty. But this game doesn’t end with Merrill alone, this may just be the beginning of the end, which, as we all know, can go on seemingly interminably. And subprime write downs are now just one piece of the now larger and still spreading problem, although a big part I admit. And subprime sell offs at whatever price would have been better if done many months ago, following the old Wall Street rule which Wall Street, when pressed, totally disregarded: “The first loss is the best loss.” Not many are noting the awful details either, that Merrill is paying Temasek Holdings, a Singapore-owned SWF (no, not meaning Single White Female!), a sovereign wealth fund to buy more stock. Previously Temasek bought Merrill stock and lost a bundle. Thus in this deal Merrill is now paying Temasek a cool $2.5 billion to offset some of Temasek’s losses on that first buy. Plus Merrill is financing the deal for Temasek and this deal will increase and dilute Merrill’s outstanding shares by 36%. And, ironically, the sale of these CDO’s are at a price lower than Merrill’s just announced mark-to-market quarterly earnings report and stated value. Finally, this whole new deal flies in the face of what John Thain, Merrill’s relatively new boss, has said previously, that Mother Merrill wouldn’t need or be raising any new capital. Schwartz View: Net, net, some say Merrill is a goner, that it will have to be taken over down the road some. I don’t know any details but agree with the concept, that brokers will have to merge.

TECHNICAL VIEW. IBD PUTS THE BULL BACK IN THE BOX!

Yep, yesterday was a bullish “follow-through” day according to Investor’s Business Daily (IBD). On the 11^th day, pretty late, after the recent July 14^th bottom, a number of key market indices followed through yesterday, that is rallied more than +1.7% and on heavier trading volume than the day before. Obviously lower oil has been the underlying linchpin to this rally; oil down stocks up and vice versa. Schwartz View: My stated view is that this drop in oil will help stocks for a time, for the time it takes investors to realize that lower oil isn’t going to be the panacea for this bearish stock market. That at some point lower oil will scare the pants off investors (so to speak) because they will see lower oil as confirmation that a recession is here and spreading globally. But we’ll have to wait on this theory of mine as for now lower oil does means higher stock prices.

IBD goes on to remind us that: “Every bull market in Wall street history started with a follow-through. But not every follow-through launches a new bull market.” I believe their stats but also know IBD has put the bull back in the box and then had to take it out a few days or a week or so later a couple times during the last few months. So, remember, nothing, no particular indicator, is perfect, by any means.

More Reasons For a Rally. But I’ve also been writing that the market is oversold, that the US government has come up with a boat load of temporary fixes and props to support the stock market including the stimulus plan, unprecedented lending to non-banks and barring short selling or at least making it extremely difficult to short the financials (the SEC extended this one week ban to August 12^th yesterday). And that a historical study of the pace of declines during extended bear markets show the market is now ahead of itself on the downside. Plus I must say I am impressed by many European stock markets posting a sequence of five straight up days after an extended, inexorable, grinding-lower decline, i.e. a bullish Trader Vic 4-Day Rule and change of intermediate trend. So we could certainly have a summer rally now.

Schwartz View: Myself I’d like to see and have written that a Dow Industrials and S&P 500 close above last Wednesday’s highs would give us a series of higher highs and higher lows, the definition of an uptrend. Well, we didn’t get quite that high a close yesterday another good day or two could do it. As for “Trader Vic’s” as easy as 1-2-3 change of trend, we have condition #1, a broken downtrend line and condition #2, a market which has stopped going down in place. We don’t have, as of yet, condition #3, that’s the higher high I’m watching for. Still, Trader Vic Sperandeo in his two excellent books from the early 1990s, get them, writes we don’t need all three, we can turn bullish with just one or two conditions met. Just be more cautious in proceeding and realize there’s always the chance for a whipsaw and have a backup plan for what you’ll do if that happens, how fast you’ll backtrack. With those caveats in mind, I put on some longs yesterday, not a lot and not terribly risky ones. Basically my theme is that as crude and other commodities correct, pressure should come off the food companies, off their raw material and input and power costs. And that at the same time these pressures diminish, food companies are successfully pushing through price increases such as mentioned by Kraft yesterday. If this summer rally holds together, say we get a new higher high by the Dow and S&P, I’ll push the envelope for short term trading purposes further.

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).

Stock Market Strategy: 6:30 am EST, Thursday, July 17th, 2008

Richard Schwartz — Thu, 17 Jul 2008 13:55:00 GMT

STRATEGY VIEW. This morning please let me warn a bit further about using inverse vehicles. Appropriate because yesterday’s big rally must have gotten everyone’s attention, longs and shorts alike, but especially those now using these shorting vehicles. And because I’ve been getting increased interest in my hedging strategy of offsetting my longs and this bear market with inverse mutual funds and short ETFs. I’ve been recommending starting small and going slow. Exactly because even during sustained and extended bear markets, as I believe this one will prove to be, a too aggressive investor can get taken and/or shaken by jumping into new territory. Hey, it only is fundamentally correct policy to proceed into new, unexplored territory v-e-r-y s-l-o-w-l-y, right? I mean there’s sayings about such like: “Fools rush in where wise men never go.” And wagon trains sent out just a couple advance scouts to test out unexplored territory (I know from watching all those old cowboy and Indian movies). But I know we’re all impatient and want to resolve gray matters quickly, to get that monkey off our backs, especially so when it comes to investing, so we can get back to sleeping well at nights. But enough of those warnings … for the second.

My advice remains putting one foot slowly ahead of the other. Say if you have a $100,000 account. First, I would be keeping roughly half of it in cash or laddered short term US Treasury notes (for a little more income). Then with the other half I’d have roughly half long and half short, shifting with the tide.

· Longs. Say have the longs spread over the strongest acting market specific sectors, picking the strongest acting sector charts in technology, health care, and maybe chemicals or transports as a continuing cyclical play (likely boosted if oil keeps coming down). So try to play the strongest relative strength sectors you can find in an overall declining stock market.

· Shorts. Then on the short side I’d be short the S&P and or Dow, as both indexes have a diversified mix of industry sectors. Yesterday, for example, while the banks jumped sharply, utilities, energy and precious metals fell. So a diversified mix will benefit you if the whole stock market slumps as I continue to expect (although we could easily see somewhat of a sustained rally here on the hope that the government is going to fix things).

Go Slow! No matter what, (from first hand experience!), I would advise moving slow. Say today, tomorrow or soon take your first step. Again with that $100,000 portfolio, if you are 100% long, I’d lighten up into this rally, again doing so in steps in case this rally proves sustainable, trying to sell a little each step higher. And of the projected goal of putting the remaining 50% or $50,000 to work, $25,000 long, $25,000 short, I’d start off by going short with just 20% of the $25,000. Say buy an inverse fund or a short ETF with $5000 or 20% of the $25,000 you’re now long. Then watch the account’s value for a few trading days. If you’re still seeing your portfolio value fall more than you can stomach, go short another $5000, thus giving you a position of $10,000 short and $25,000 long. And so on, step by step. And, of course, only go short on or after up days. You need to sell most anytime midway through a big bear market, not waiting for rallies, but to go short you have to wait for rallies. You need to build yourself a profit buffer as you go otherwise big up days like yesterday will devastate you mentally and hurt too much financially. And cause you to abandon the whole scheme (scheme used in the best sense of the term).

Schwartz Summing Up. The goal again is to hedge your downside, not make a bundle going short!

Two Technicals: 1. Why No Capitulation; 2. How Inflation Returns

Richard Schwartz — Wed, 16 Jul 2008 16:40:00 GMT

TECHNICAL VIEW. The Principle of History. Two historical technical observations today:

1. Capitulation: Where the Heck is It? CNBC keeps interviewing floor traders and reporting from the New York Stock Exchange that everyone there is anxiously looking for that big bout of capitulation, selling, to end this latest market decline. But their wishes aren’t coming true. Guess they haven’t read my stock market letter as a study of the price action after the Bank Panic of 1907 , the most similar comparison to today’s credit crisis I could find, showed no capitulation back then. The reason and explanation was that since investors were so darn bearish, they shorted any and all rallies and thus stocks never got “quite out of hand” or saw that one day of massive selling or capitulation today’s traders want to see. Schwartz View: Similar to market crashes, we have to get blindsided to get capitulation. Or the problems and pressures have to get extremely severe with no light at the end of the tunnel. Today, we sure aren’t getting blindsided and numerous remedies are being floated and tried left and right, like economic stimulus packages, Fed rate cuts, Treasury announcements, yesterday’s SEC pronouncement about short selling, etc. Again, let me point out, it’s sort of ironic that we all preach free market capitalism when times are good but when times turn bad, we all scream for the government to bail us out.

2. The Return of Inflation. This commodity inflation -- rising prices in metals, oil and now food -- is the first bout of rising inflation we’ve seen since the early 1980s when then Fed chair Paul Volker jacked interest rates up through the roof and led the US into recession but in so doing also broke the back of multi-decade, out of control inflation. As my regular readers know, widely-followed big picture guru Jim Rogers says commodities are going to keep running up in price for approximately the next ten years, that a commodity bull market is in full force. And I don’t disagree. But let me add my alpha to the picture. My studies have shown that many, maybe most times, when any new trend begins it begins with a big burst. Then we get a large pullback in the early states of this new trend (whatever the time frame the new trend is, days, weeks, years, decades). Then after this large pullback, say because there remains many disbelievers who can’t quite believe things have changed, or because these quick gains need to be consolidated, or because the trend is moving too fast and has outrun itself, the new trend becomes more steady and reliable. Check back to the bull market which started in 1982, this pattern applies. Or think a bit about this new bear market. How stocks dropped last year in July and August when the subprime news first broke and then had a big bounce (to slight new highs) before the new down trend reasserted itself. Schwartz View: So it makes sense that inflation and this commodity bull are due for a big correction downward before reasserting themselves for the next few years.

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.

Sample Monday Overview Letter

Richard Schwartz — Mon, 30 Jun 2008 14:55:00 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

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E-mail address: Richardstk@aol.com

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Monday, June 30^th, 2008: Ok, I’m off this afternoon. For a week of revitalizing rest and recreation, I hope. Actually San Jose to Lake Tahoe runs through some of the worst housing bust in America, with one county near there declaring bankruptcy. So I may be back with some first hand knowledge & new insights. Have a great week and a greater 4^th of July. I hope everyone gets to listen to lots of patriotic songs. We all have to believe in this country which has done so many good things, for us, and the rest of the world too.

THE BIG PICTURE

In today’s Big Picture view, let me lay out how big bad bear markets historically have unfolded. Thereby to offer up some guidelines on what to expect over the next year or two. Essentially this model scenario comes from my many years of studying past history and also from my first hand experience of being in this fascinating stock market business for the last 35 years (dating myself). Yep, when I add it up, it’s been that long. Actually that’s also approximately how long its been since we suffered through the last Papa Bear market as I expect this one to prove to be. I had just gotten out of college and started work at “Mother” Merrill Lynch and asked a rep which stock to buy. He said buy Merrill Lynch, which I did and it promptly went down from about $23 to $8. I really didn’t understand what was going on back then.

Bear markets, Papa, Mama or Baby, go through psychological stages or phases. The first psychological phase is when investors deny and thus fight tooth and nail that a bear market has even really begun, after being so locked into bullish expectations for so darn long (in today’s case for five years, longer than normal). The second psychological phase is when the news turns so bad that even firmly entrenched bulls have to admit that something is wrong out there. That maybe the economy is sinking or in recession because the economic data (as inexact and easily manipulated as it is) then coming out is so negative. This phase can go on for quite a long time and is generally the longest of the three phases. Investors still look to find ways to invest and make profits through this phase although that becomes harder and harder as the incoming news goes from bad to worse. And finally the third psychological phase is capitulation.. That’s when even the most adamant bulls lose all hope, give up the ship. And sell. This capitulation phase can be short or long but is epitomized by massive selling all at once, as everyone still invested feels the heat and pressure, can’t sleep and somehow all give in to the pressure at the same time. After this massive selling, the pressure comes off stocks as everyone who wanted to sell has. Still we generally need additional time to heal, thus after a lack-of-sellers bounce, stocks generally retreat once again, but this time on shrinking trading volume, they successfully “retest” their capitulation lows and the stage is set for a new bull market.

Schwartz View: I think we’re in for a similar performance to the above scenario. President Bush probably thinks he did something truly good with his multiple tax cuts following in President Regan’s footsteps but the early 2000 tax cuts just went primarily to the super rich. And Bush’s Iraq invasion and following years of morass just went on our credit card. And our looming long term critical economic and social problems like Medicare & Medicaid, Social Security, energy and health care haven’t been tackled. Thus I see big problems accumulated for the next US president as he is going to have to tackle and come up with some very important solutions. During this period, say the first two years of a new presidential term, most everyone in America is going to have to change our lifestyles, from freewheeling and overspending and living on credit to living a more disciplined, controlled lifestyle. All in all in today’s very competitive global economy and world we live in the sooner America and Americans get our acts together the better. I want to turn bullish on America again asap and thus benefit from America showing the world what we can do when we’re all pull together on the same page and right path. But for now we’ve got a tough period to slug through, so hunker down. Our fortitude, intellect and culture should stand us in good stead.

THE STOCK MARKET

We could see a stock market bounce soon, any time now after stocks have dropped so much, so fast, recently. After the Dow Industrials plunged through its March lows last Thursday and the S&P 500 fast approaching its own March lows now, closing at 1278.38 on Friday, just +0.39% above its March 10^th closing low of 1273.37. Generally institutional, professional investors like to defend old lows and other key prices levels I’ve found. I mean there are sign posts in the stock market and besides low lows another is when a key index drops -20% from its peak, that’s a price level where market observers start calling a decline a bear market and no one wants that. For instance, the Dow hit that -20% point off last October’s high last Friday, CNBC started flashing the news and stocks promptly rallied, a bit. Again, some investors will fight new trends at these key price levels. We’ve seen this play out over the last few years during the bull market, at important correction points, like down -10% whereby mysteriously in came buyers time after time. Maybe it’s a black box phenomenon, some trading strategy hedge funds have and profit by.

Anyway, and on the other hand, we may NOT get such a bounce this time down or at this point. In fact, we’d better not count on it, not with crude oil making new highs every time we turn around, like this morning rising to another record, now about $143 a barrel. Yes, some are calling for oil and commodities to collapse, calling their rise just another bubble. Oil dropping $10 a barrel in a day and $30 in a few days would likely help the stock market but after the knee-jerk upside reaction, investors would probably decide lower commodities also broke the back of any and all remaining stock market strength and leadership. And that resulting sigh-of-despair would then lead to even more selling. Plus, who’s to really know whether the commodity boom isn’t really a sign that all the world wants to lock up vital crude oil, natural gas, foodstuffs and all other needed natural recourses to keep their economics functioning. We do live in a suddenly, very competitive one global marketplace after all. It’s interesting that the two super successful, first mover, hedge fund investors who teamed up way back in the 1970s with the Quantum Fund today have slightly different views of what’s going on in commodities, but pretty much the same. Jim Rogers, the analyst of the pair, says buy commodities, these soaring prices are because the supply-demand equation is way out of whack. Prior to recently soaring global demand there’d been no incentive and thus little search for new supplies in most any commodities going back two decades. And George Soros, the trader of the pair, says yes there is a bubble in place today in oil and commodities but it’s superimposed on an credible long term uptrend. In other words, both can see a big decline in demand during the next global slowdown, a major glitch, but both can see further commodity price rises over time ahead. All combining with past US history, there for anyone to look at, that oil and oil stocks did very well during the first year of the last major market, in 1973-1974, thus supporting my theory that oil will hang in there longer than most expect. And my recommendation to keep one toe in the energy patch; I’m recommending the oil service sector.

Schwartz View: Looks to me like a second leg down in stock prices (as contrasted to a second psychological phase which seems also to have started) in this bear market has begun and thus that this summer could offer up much lower stock prices rather than more sideways, complacent trading of the last three months. I would play your cards close to the vest. Please see PORTFOLIO STRATEGY below.

PORTFOLIO STRATEGY

With the stock market now down substantially -- and hopefully everyone reading my letter having already following my consistent and persistent advice over the last seven months of cutting back stock market exposure -- I still have to recommend “getting smaller” like well-known trader Dennis Gartman likes to say. I mean it’s so easy to just be complacent here, figuring stocks are already down -20% so most of the risk is over. But history shows the opposite, that stocks drop more like -50% or more during big bad bear markets. Just seems logical to cut back even more as a second leg of price trouble begins. And there’s no guarantee that these bear market legs will just number three, following along with the psychological phases of bear markets, as www.Comstockfunds.com calls them, denial, concern and capitulation. In the 1929 to 1932 bear market, I remember reading there were like seven legs down in stock prices. Thus, as I jet off on a quick vacation, be back writing next Monday, I’m reviewing my own managed portfolios to find the best places to cut back my exposure even while only being 40% exposed in one portfolio, only 30% in another and pretty well hedged with inverse sector funds in the other three more actively traded accounts. Please, yourselves, attempt to take a look out six months or a year ahead, over the horizon yourself, a necessary step when managing other people’s monies, and consider the Big Picture. Just say things unfold poorly. What would you do next summer if the economy is finally post terrible stats and corporate profits have plunged? And if your portfolios are then down -50% or more? Are you going to sell then? No. Today we still have time to sell and looking back selling would have been correct strategy if that likely scenario unfolds, wouldn’t you agree. Bottom line, in big bad bear markets it’s better to be safe than sorry. Wait until the next bull market comes along before you starting going for the gold. Oops, hold a little gold here.

Have a great week and a terrific 4^th of July!

* Please also, go ahead and overdose on America’s heritage this week, listen to a lot of wonderful July 4^th songs and let them infuse you with a renewed sense of patriotism.

Charts Reinforce Latest Downtrend

Richard Schwartz — Wed, 25 Jun 2008 13:03:00 GMT

TECHNICAL VIEW. Charts Say Down, Again! Yesterday, the Dow Transports, S&P 400 Midcap & S&P 600 Smallcap joined the bear market party, err, pardon my loose use of the word party. Whatever, first it was the Dow Industrials closing below their June 11^th lows last Wednesday. Then the S&P 500 closed below its June 11^th low last Friday. Then this Monday, the Nasdaq Composite closed below its previous June 11^th low. And yesterday, capitulation. The Dow Transports, S&P Midcap and S&P Smallcap all closed below their June 11^th lows. Thus what we now have in place is a series of lower highs & lower lows since the two-month bounce from the lows of mid-March to the highs of mid-May ended.

Bulls, that includes most all professionals with only one job to do, invest in the stock market through good times and bad, a.k.a relative return investors, still disagree. In fact one such bullish guest on CNBC yesterday, resurrected the argument that “a bottom is a process not a one day event.” This is the argument that the Trillion Dollar Man, Bob Doll of BlackRock, Inc., the influential institutional money manager, proffered after the Fed backstopped the whole financial system at the bottom in March. She, yesterday’s CNBC guest, when asked why she thinks the stock market has bottomed, pulled out Mr. Doll’s mantra, that a bottom is an event not an event. And added that’s the way the stock market bottomed in 2002, 2003, three bottoms in relatively the same price range over nine months. Guess that strategy works for money managers with seemingly unlimited funds, they just keep buying, scaling in near what they figure is good value and a bottom. But other times that doesn’t work if the stock market confounds and breaks decisively below what the pros think, and have focused in on as a long term solid bottom. Then the relative return investors fall back on, “Hey, we’re all going down together.” So no one looks particularly bad. That’s what happened in the subprime mortgage, securitization implosion last year, they all went down together.

Schwartz View: Anyhow, the Dow Industrials is the first important index to come close to it’s mid-March, first leg down, bear market lows. After losing a modest 35 points or -0.3% yesterday it starts off today at Dow 11,807.43 only 67.20 points or +0.57% above its March 10^th closing low of 11,740.20. As I’ve written for some time now, I expect a rocky summer ahead. We could retest successfully here and if so, get stuck in an extended trading range. But I’d venture more likely we slowly, just like we’ve been doing since mid-May work our way lower and lower. First, one key index breaking below its previous bear market lows set in March. Then a bounce. Then another key index breaking lower. And so on and so on. Just what’s happened over the last two weeks in breaking this latest declines lows. That’s the way economically-spawned bear markets operate. Sorry Mr. Market, I know you just want this decline over right away, hey, we all do, but that’s just not how recession-stylized bear markets unfold. Economic trends take lots of time to work their ways through the marketplace and stock markets are mirrors of this, only operating in advance with their discounting feature. So it still looks like a rough and rocky summer ahead, a good time to take a close-to-home vacation (with minimal driving).