Principles of the Stock Market: Sample

RichardSchwartz — Tue, 06 Jan 2009 14:56:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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

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Tuesday, January 6^th, 2009: OK, back to the rat race. The weather remains ugly. Yesterday am it was all ice. Tonight it seems like snow, then severe ice again tomorrow morning. This is the time of year I wish I lived in southern California or other warmer clime. Still, tiny New Paltz is a college, mountain town with open space, a walk around lifestyle so Lucy & I are there for the duration. Of course with beach vacations.

UPDATE ON THE STOCK MARKET. The latest gigundo $800 billion economic stimulus plan, now called the Obama Recovery Plan or some such, as he puts his fingerprints on it, may cause a bigger stock market rally than I previously thought, I realized last night as I watched the Nightly Business Report (before I got in the bathtub with reams of printed research to read). The Nightly Business Report (NBR) showed very wide differences in economic growth rates. Much stronger economic growth with the plan. Or rather much less economic weakness with next year showing positive Gross Domestic Product (GDP) with the plan and negative GDP without. Now I know the National Bureau of Economic Research (NBER) just said we’ve been in recession since December 2007, sort of bypassing the outdated GDP stat altogether but not every investor realizes this yet. CNBC and other financial media still take the easy way out, constantly stating a recession is two consecutive quarters of negative GDP, but as Peter Schiff writes in his latest book, THE LITTLE BOOK of BULL MOVES in BEAR MARKETS, most government stats are really skewed, biased toward what government wants to say, today. Also please remember, a stronger GDP really measures mostly spending … and overspending which is what we’re trying, what we need for the sake of America’s future, to get away from. More investing our money, not spending (blowing) it on unneeded gadgets, etc. But that’s a story for another day. Yes, what a mess!

THIS RALLY. Right now I can visualize stocks rising right into Senator Obama’s inauguration on January 20^th as the 44^th US president. (Obama as US president? Amazing!) Stocks rise as the plan comes into clearer focus, and as it becomes -- hopefully, cross fingers! -- a non-ideological, non-partisan bill. Hey, many Republicans should be very happy to come on board as surprise tax cuts are included and surprises also about the large size of the tax cuts, importantly including tax cuts and larger depreciation write offs for business! (We have to encourage, not discourage, business to invest, just the opposite of what FDR did during the 1930s.) Schwartz: Myself, I love what I’m seeing from our president-elect. Press conferences actually focused on improving America, not arguing among parties, open and honest talk and also a proposed web site so Americans can see where each of our dollars is going. “Go America Go!”

RALLY ENDS WHEN? Then maybe it’s all over, this bear market rally ends on inauguration day or shortly thereafter, say when the bill gets passed. But if those GDP interpretations I saw on NBR last night are reasonably correct ( it will take much time to discredit and change how we figure GDP to make it more relevant again) then maybe the US economy gets a sizable lift which lasts for some longer period of time before our still emerging problems pull us back down again. If that happens I can see a mini bull market or cyclical (short term) bull market unfolding this year, say starting back at the November 21^st intraday lows.

Schwartz View: Bottom line, my best recommendation this morning is that traders and many slightly longer term investors too get further reinvested back into the stock market. Not 100% for sure yet but higher exposure than in a long while. When? Say right now or very soon. Many key market indices and averages confirmed this new rally once again, on the first trading day of the year, last Friday. That’s the exact point – when we have a “Trader Vic” identified change-of-trend in place, we do, along with a higher low followed by a higher high, we do, and then we get another breakout move up and above that higher high (like occurred last Friday) – where correct strategy is to invest more.

ECONOMIC VIEW. Like I noted yesterday, I’m seeing more and more record statistical drops, like yesterday’s drop-off-the-cliff report from the auto industry; Chrysler leading the way down with a year over year drop of a mere 53%! My point is that just like the phenomenon in stocks when the economy drops fast it may also have a tendency to bounce back rapidly. I note some are now saying the same for oil, using history of something called the forward curve of futures prices. Of course this almost automatic, stock rally back likely doesn’t go all that far. Just like when a car crashes into a wall, bounces back, but still in drive, comes on again. Depends on how bad the crash was on how long the engine keeps running fueling the bounce back. Schwartz View: I have to think this financial crash of ours was extremely bad. Still I can see another big stimulus plan, if pointed at and framed correctly, using our brains and learning from past mistakes, doing a lot to produce some positive stats for a time after implementation.

TECHNICAL VIEW. Many Individual Stock Charts Looking Good! I drew up charts of almost all 100 companies on the latest IBD 100 weekly computerized list of leading stocks, stocks with good fundamentals and generally leading the market upward, yesterday afternoon. And I must say most now look good. A few of them are even already back above their highs set BEFORE the October panic sell off. That’s one of my parameters for possible buying as per my Principle of Relative Strength telling us what to buy. As to what other technical screens I used as I reviewed their charts on two charting services I get, Bloomberg, and for FREE on www.Marketwatch.com, I used RSI and DMI primarily. Briefly RSI stands for Relative Strength Index, it’s an oscillator, and measures market consensus psychology. While DMI stands for Directional Movement Indicator and is a trend-following indicator showing how fast a trend is moving and thus when a trend is worth jumping on board. Traders of all sorts should be familiar with both indicators I’d say. I would recommend Alexander Elder’s 1993 book TRADING FOR A LIVING as the best reference I’m aware of to bone up on these and other indicators.

Here’s a listing of a few companies and their underlying industry sectors which look ripe for trading this latest rally. Remember Investor’s Business Daily turned bullish, put the bull back in the box, back on December 3^rd and hasn’t been forced, by stocks hitting lower lows, to take it out since. This is a major difference for months prior to that. A bullish change. So let me post some stocks which look good to me.

Disclaimer! I own none of these stocks today but am considering buying a package of about three to five today or soon. Please remember my positions can and do change without notice.

IBD 100 STOCKS LOOKING TEMPTING

Market Industry

Price Cap Ranking Business

SXCI SXC Health Solutions 19.03 455m 2 Pharmacy Services

LPHI Life Partners 42.27 502m 3 Insurance Brokers

ESI ITT Educational 92.28 3570m 5 Schools

TWGP Tower Group 28.74 700m 8 Property/Casualty Insurance

HOME Home Federal Bancorp 10.65 184m 11 S&L/Thrifts-Western US

VSEC VSE Corp 42.34 215m 18 Engineering/R&D Services

SXE Stanley, Inc. 35.74 839m 18 Engineering/R&D Services

SYKE Sykes Enterprises 19.65 810m 18 Computer Services

AVAV Aerovironment Inc. 39.38 831m 23 Aerospace/Defense

TDG TransDigm Group 35.00 1703m 44 Aerospace/Defense

NPK National Presto Inds. 77.88 533m 63 Aerospace/Defense

NCIT NCI, Inc. 30.66 410m 70 Computers-Integrated Systems

SXL Sunoco Logistics 48.80 1398m 90 Energy Pipelines

CMP Compass Minerals 63.12 2046m 117 Quarrying

Schwartz View: It’s been some time since I posted stocks off IBD 100 weekly list. Because of this bear market. But this rally looks like it may just have some legs and my market philosophy is to play all decent looking rallies, modestly. I would thus suggest a three to five stock trading portfolio chosen from the stocks above. Some points to keep in mind. Don’t overdue it! We’re still in a bear market after all and one which looks to have more downside, even if it doesn’t come immediately. Also remember IBD recommends investors always focus on the top 40 or so industry groups. Finally, look for a quick +10% profit but cut your losses, individually or whole port6folio-wise, quickly. Remember we just might be starting some type of cyclical (short) bull market now but, on the other hand, the odds still favor much lower prices over time. So participate but always concentrate on your downside, how much you could lose.

Good trading! Have a great day!

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Principles of the Stock Market: Sample