Like you, I'm amazed at the daily mega-swings in the stock market indices. Some are calling this a "bungee cord" market, which may be a good metaphor.
One analyst from a money management firm I'm personally familiar with summed this metaphor up quite nicely, as he often does. On Thursday he was quoted by Reuters:
"It's a bungee cord market. We've fallen off of a small bridge, the bungee cord bounced us up, and oscillations will diminish, but we're still bouncing around," said Fred Dickson, chief market strategist at D.A. Davidson & Co., in Lake Oswego, Oregon.
Let's be candid and very frank. The "bears" appear to be in charge, and investor confidence is getting grated like cheese in a blender. But don't despair. Instead, be very, very aware, and remember what this all may be leading to.
The three-month chart of the S&P 500 along with the 200-day moving average reminds me of a cliff-diver who's standing on a green diving board (the 200-day moving average) and leaps hundreds of feet to the clear, blue Pacific Ocean below.
Our "diver" is trying to climb back up, but he slips on the "rocks" while climbing and "falls" head first again. He's "down" but not "out." Soon the "rescuers" will be "there" to help him back up to the "cliff."
Setting the Stage for the Right Mood: A Lesson in Investor Psychology
I'm here to tell you that this is not an "accident," and it is the "Market Masters" way of making two very important outcomes a reality:
It is causing many to succumb to their own fears and emotional uncertainty so that they'll do anything to "get out of harm's way" and sell at low, low prices. That's a set-up for the "Smart Money" to buy low, very low, just in time for a nice rally.
It also helps the cause of those who control the monetary policies of the federal government; yes, the Federal Reserve (and former N.Y. Fed Governor and current Treasury Secretary Tim Geithner) wants voters, investors and politicians to yell, "Do whatever you need to save us from the dreaded 'Great Recession' monster, and while you're doing something, by all means stimulate the economy!"
Investors are notorious for fainting and not paying attention at times like these. The "shock and awe" of violent market swings and a huge increase in volatility is telling me that we are going into "crisis mode" that will be followed by drastic, market-saving actions by the financial "masters of the universe."
What Are the "Excuses" This Time for This Massive Panic?
No, "they're" really not saying "the sky's falling." Yes, "they're" actually implying that Europe is in dire straits and that "the euro is falling and tumbling down." "They" are the Main Street, Wall Street media spokespeople and the "pundits" who are conveniently "paraded" before the masses on the most-watched channels. They have a list of "doom and gloom" items longer than an elephant's trunk, and it sounds bad.
Personally, I respect the way such independent internet media sites like Seeking Alpha and others like Wall Street Unlocked keep us looking at the bigger picture without trying to manipulate our thinking. Speaking of Wall Street Unlocked, the editorial on its home page reminded us of what this all may be leading up to.
This may proceed or coincide with the annual "Big Money Mavens" retreat in Jackson Hole, Wyoming that happens the last week in August. Remember last year's pow-wow? That's when Dr. Bernanke and the Federal Reserve announced their concerted effort to become big buyers of short-term treasuries and mortgage-backed securities -- and the rumor mill and the media mill called it "Quantitative Easing 2."
Not long ago, Bernanke told the National Press Club and all of Wall Street that they were trying to force investors to buy "stocks and other alternative investments" by keeping short-term rates close to zero. The Federal Open Market Committee statement after the August 9 meeting reminds us again that they haven't changed their game plan, so that bodes very well for investors and the stock market.
What's a Trader or an Investor to Do During Turbulence and "High Anxiety"?
The first thing to do is remember who has the money and power to make the stock market go higher just in the nick of time. The answer: The central banks of North America, Europe and Asia. They can flood the "system" with temporary, cheap credit and lots of "buying power." So you can begin by buying more gold and some silver producing companies on pullbacks like we saw in the precious metals markets on Thursday.
If you don't feel confident buying a true-gold bellwether like Goldcorp (GG) above $50 a share, then nibble on a gold-mining ETF like the Market Vectors Gold Miners (GDX),more so when it's below $58 a share, or the Global X Silver Miners ETF (SIL), especially below $24 a share.
Low P/E, dividend-paying energy stocks can be bought on the down days. Take Royal Dutch Shell PLC (RDS.A), which has a PE ratio currently of around 7 and a dividend that is higher (and perhaps more credit-worthy) then the 10-year U.S. Treasury bond.
Why not pick up a cash-rich, 69% return-on-equity (trailing-12-months), dividend-paying technology giant like IBM (IBM) when it's at $162 or below, and make some "spending money" collecting its nearly 2% dividend while you wait for it to go higher?
It can't be repeated too often that the best technology cash-cow is the one and only Apple (AAPL), which has been dipping close to $360 on those nasty sell-off days. And for crying out loud, if you can buy Cisco Systems (CSCO) below $15, with a forward PE of around 9 and a 1.7% dividend, you may be able to make a quick 10 to 15% gain if it trades above $16 in the near future.
One last "stress-relieving" investment idea while you're waiting for the "bulls" to wrest "control" of the stock market is to buy some medical products "cash cows" like Medtronic Inc. (MDT) when it trades below $30.30. And it pays a 3% dividend for your patience to boot.
Good News That May Trigger a More Sustained Market Rally
Don't forget that The New York Times reported on Thursday that four European nations are going to curtail short-selling. The Times report stated:
A European market regulator announced on Thursday night that short-selling of financial stocks in several countries would be temporarily banned in an effort to stop the tailspin in the markets.
The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, said in a statement that these negative bets on stocks would be curtailed effective on Friday in France, Belgium, Italy and Spain. They are already banned in Greece and Turkey.
Today some authorities have decided to impose or extend existing short-selling bans in their respective countries,” the authority said. “They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some E.U. Markets."
This could have a huge stabilizing effect on the stock market's schizophrenia, and it may imply that the U.S. exchanges as well as the major Asian exchanges may do something similar, and what may that produce? A mammoth "short-covering" rally.
As I've recently written in a Seeking Alpha article about what to buy after a market bloodbath, there is a wide array of investment choices and bargains that may benefit greatly from some kind of "Emergency Quantitative Easing" ("EQE") or massive market interventions like temporarily banning short-selling. Whether it's "EQE" or some other unexpected good news that may arise from the super-powerful at the upcoming meetings in Jackson Hole, Wyoming, it may pay off to be a little "early to the party" after the sell-off we've experienced over the past three months.
If gold margin buying is curtailed a little more or precious metals pull-back a bit, why not start buying some of the better yet lesser known physical precious metals ETFs like the ETFS Physical Swiss Gold Shares (SGOL) and the ETFS Physical Silver Shares (SIVR)? I've been telling readers to do this since last summer, and it wouldn't surprise me that gold may be heading for $3,000 an ounce by the end of 2012, and silver may triple from current levels up to $120 during the same period. Or how about The Central Fund of Canada (CEF) when it's selling at a premium below 10%? You'll be owning real gold and silver with each share, and it claims that it's insured.
If you're buying gold now at $1,700 and silver at $40-or-less, you're going feel quite encouraged if gold keeps acting like a real currency (which in fact it is) and the Mayan calendar isn't really predicting the end of the world in 2012.
During times of international financial turmoil and a collapse of confidence in political governments around the globe, gold and to a lesser degree silver may be the biggest winners in the long-term. It's not a sure thing, but history says it's smart.