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Yoni Jacobs, CMT, is Executive Director and Chief Investment Strategist for Chart Prophet LLC. As a money manager and financial advisor, he develops and implements targeted investment strategies for individuals, family offices, and institutions. As a fund manager, he builds highly-diversified... More
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  • Investing In Zombies

    Many stocks and companies may be at the end of an uptrend and are becoming "dead money", but investing in the "living dead" and the strengthening popularity of the Zombie theme could be a profitable opportunity.

    With The Walking Dead as this fall's most popular television series, and with AMC Networks (NASDAQ:AMCX) reporting earnings this Thursday November 7th, is it a good investment? Moreover, with Viacom (NASDAQ:VIA) behind a potential blockbuster hit zombie movie coming out in 2013, and with Activision (NASDAQ:ATVI) soon releasing two hugely profitable zombie games, is now the time to buy?

    Below, I will make the case for (1) Why zombies are the new craze, (2) How they are replacing vampires as the more popular theme, and (3) What companies you can invest in to profit from the growing trend.

    Why Zombies?

    Zombies represent how the world economy has been behaving and how a lot of people currently feel about the future. Zombies are slow, mindless, physically-decaying, and brutal beings with no long-term goals, no productivity, no sign of recovery, and no desires other than eating human flesh. Unfortunately, the economy and stock markets have behaved very similarly over the past 10+ years, or "Lost Decade": We've seen huge ups and downs, instability, massive turmoil, increasing risks and dangers, unfathomable events, and the collapse of much of life as we once knew it. In fact, the similarities have been so staggering that we've seen the emergence of some very popular nicknames: "zombie economy", "zombie banks", and "zombie debt" among others.

    Obviously many things have greatly improved over the years, but all the volatility and chaos of multiple recessions and never-ending uncertainty have truly eaten away at people's confidence. Most investors just can't understand what's happening. Even the top business executives, politicians, fund managers, and experts have no clue what to do!

    In a zombie economy, there is a self-perpetuating sense of doom - the feeling that there is no solution; that the sickness is unstoppable and the predator unkillable; the fear that even those in command have little idea how to fix things.

    CNBC - Why_Zombies_Are_Taking_Over_the_Economy

    So why zombies? Because all of the fear, dread, and impending doom that people are feeling about the economy or personal safety. The solutions seem to escape us, the situation doesn't appear to be improving, and it feels as if everyone is either fighting to survive or preying on the weak. To many, the world feels like a harsh, dangerous place with a bleak future; it is precisely when people feel this fearful or discouraged that zombies have the most appeal.

    Zombies vs. Vampires: The Triumph of the Zombie

    Unlike the decaying, numb, and senseless zombie, the vampire stands for beauty, immortality, and conscious pursuit of power (though it still uses evil methods to get there). The positive characteristics of a vampire are therefore a lot more appealing when people are feeling more positively about themselves or their situation.

    It is no surprise then that the two most popular vampire television shows (Buffy The Vampire Slayer and HBO's True Blood) and the most popular vampire novels and movies (Twilight) of the past 20 years were started during very positive periods for the economy. Buffy came out in 1997, as the US was at the height of its most impressive bull market ever; True Blood was developed in late 2005, near the height of the housing bubble (it made its television premiere during the recession in September 2008, but only months after the all-time peak in stocks); and the Twilight novel was released in 2005, also near the height of the housing bubble (the massively successful movies were released in 2008-2011, but well after the novels had already become best-sellers).

    According to a Google books (NASDAQ:GOOG) search comparing the frequency of the words "zombies" and "vampires" in books, "vampires" have been the clear winner by far from 1940 to 2008, with an increasingly sharper rise since around 1987:

    But I am happy say that vampire popularity has finally peaked. With the most successful books, shows, and movies now behind us, vampires can no longer outdo themselves. Yes, they will one day come back in a huge way, but the cycle is on its way down. When 13-year-old girls become completely obsessed with vampires (as they have with Twilight), the trend is over. It is now time for zombies to take control.

    A simple indication of the soaring triumph of zombies over vampires is visible in a Google Trends search:

    When we plot all of the search volume for the terms "zombies" and "vampires" since 2004, we can see how zombies have completely dominated since late 2008. While "vampires" was the more popular term for most of 2004-2008, "zombies" has skyrocketed upward since late 2008 and has massively led "vampires" since early 2009. We can see the big increase in "vampires" due to the Twilight success in 2010, but "zombies" is the runaway winner.

    Rising Zombie Popularity

    The growing popularity and success of the zombie theme is evident in best-selling comics and books, a top-rated television show, an upcoming blockbuster movie, zombie video games, a 5k "zombie race", and even a warning from the CDC (Center for Disease Control and Prevention - a governmental organization) about a "zombie apocalypse".

    Perhaps the clearest sign of the growing zombie popularity is the hugely successful television show, The Walking Dead. The show, already into its third season, is so popular that its premiere in October 2012 was the highest-rated entertainment series this fall. It was already the most successful cable drama of all-time, but the Walking Dead premiere was even more popular than all of the big broadcast entertainment shows including ABC's Modern Family. Only football and live sports are more popular than zombies right now.

    The Walking Dead television series is based on the bestselling comics written by Robert Kirkman. The books have been selling so well that (as of November 6, 2012) Kirkman is #26 in Amazon's (NASDAQ:AMZN) top 100 authors! He has probably been even higher up.

    Moreover, he currently has two books in Amazon's top 100 bestseller list:

    Before The Walking Dead, author Max Brooks published two bestselling books about zombies - The Zombie Survival Guide (2003) and World War Z (2006).

    Brooks' books have been so popular that Brad Pitt's production company, Plan B Entertainment, secured the movie rights in 2007. Brad Pitt will star in World War Z (set to release on June 21, 2013), with The Zombie Survival Guide set for a 2014 release.

    We are yet to find out if the movies are even good, but with superstar actor Brad Pitt starring in an upcoming zombie movie, we can safely say that the zombie theme is going strong and may have much more room to go.

    In fact, the number of zombie movies released each year has soared since 2000:

    And in comparison to the stock market:

    Source: Wired Magazine

    Such rapid growth in popularity is a bit disconcerting, but aside from The Walking Dead we are yet to see true blockbusters in the zombie category in this cycle. We've seen big success in zombie-like movies such as Resident Evil (2002), 28 Days Later (2002), and I Am Legend (2007), but I think we are still not at the peak-level vampire equivalents like Twilight and True Blood.

    Running away from zombies has even become a fun 5k race, as participants run and scale an obstacle course while avoiding the zombies that attempt to take their life, or in this case the flags on their belts:

    runforyourlives.com

    Even the Centers for Disease Control and Prevention (NASDAQ:CDC) warned about a "zombie apocalypse". In a shocking public campaign by a governmental organization, the CDC urged people to be prepared for zombies. Why?

    "If you are generally well equipped to deal with a zombie apocalypse you will be prepared for a hurricane, pandemic, earthquake, or terrorist attack." So please log on, get a kit, make a plan, and be prepared!

    -Dr. Ali Khan, CDC Director

    CDC.gov

    How To Invest

    Zombies have been estimated to be worth over $5 billion to the economy. Between movies, video games, television, comics, books, novels, Halloween costumes, merchandise, and other items, the zombie category is both far-reaching and very lucrative. So with zombies probably getting even more popular in the next few years, here is how you can cash in:

    1. Zombie TV: The Walking Dead. Perhaps the most popular within the zombie theme is the #1 show The Walking Dead. Already the top-rated entertainment series on TV this fall, the air-time for commercials during the show have been fetching between $200,000 and $375,000 - more than the top primetime shows. The biggest winner from this is AMC Networks , the network that owns the AMC, IFC, and Sundance channels. AMC goes well beyond zombies, with IFC and Sundance being the top independent film channels. Even more, AMC also features top shows Mad Men and Breaking Bad.

    Those who would like to profit from The Walking Dead can look at AMC Networks as a potential investment. However, while its shows have been hugely successful and its ads have been selling for a lot of money, AMC Networks is not necessarily a strong buy. The company has a $3.5 billion market cap, decent growth numbers, and very strong future catalysts; but its PE ratio is relatively high at 22.5, it has a lot of debt ($2.28 billion), and its stock has already seen a nice run in the past four months.

    AMC is reporting earnings on Thursday November 8th, which could send the stock price up even more. AMC could benefit from the $700 million settlement that it won together with Cablevision (NYSE:CVC) against Dish Network (NASDAQ:DISH), when Dish removed AMC's channels from its service. However, because the stock price is already at the top of the upward sloping "channel" seen in the chart above, together with minor divergence in the Relative Strength (RSI), I'd rather be more cautious here and see what comes of earnings. A small position would be smarter here, but waiting for a pullback could prove to be safer and more profitable.

    2. Zombie Movies: World War Z. With Brad Pitt starring in the upcoming movie World War Z, betting on the potential blockbuster hit could be a very smart move in anticipation. Unlike The Walking Dead which is already a big hit and may already be factored into AMC's stock price, betting on World War Z now will make you one of the first to do so.

    So how do you do it? World War Z will be distributed by Paramount Pictures, a subsidiary of Viacom . Investing in Viacom, then, could be the best way to profit from a potential future zombie hit - especially when it stars Brad Pitt. Viacom is a powerhouse, and runs MTV, VH1, Nickelodeon, CMT, BET, and Comedy Central. There are obviously a lot of good things going for it, then.

    On a weekly chart, Viacom looks a bit dangerous. It has sharply reversed down from a recent peak, it is far above its 200-day moving average at $40.64, and its relative strength (RSI) and momentum (MACD) indicators are still pointing down:

    On a daily chart, however, Viacom looks like it is approaching a pretty good buying opportunity after sharply falling from over $57 to $50 in just a month. The relative strength and momentum indicators are still negative, but for those looking to buy, $50 and $47-48 are pretty good low-risk buying opportunities at support. Viacom also pays a 2% dividend.

    3. Zombie Video Games: Call of Duty and The Walking Dead. The best way to profit from the zombie genre is probably through the gaming industry. Luckily, there is one company that is far and beyond the number one force behind the zombie games.

    Activision Blizzard is THE player here. Not only is Activision Blizzard behind the bestselling games World of Warcraft, The James Bond series, The Amazing Spiderman, and the upcoming Diablo and Starcraft, but ATVI is the company behind the Call of Duty series and the upcoming The Walking Dead video game.

    Call of Duty has been one of the top video game series of all-time, and since 2009 has included a "zombie feature". Black Ops II will be coming out on November 13, 2012 and is expected to be a top-seller. Even more, Activision is expecting the release of The Walking Dead: Survival Instinct in 2013. Both of these games combined spell major profits for Activision .

    Activision looks pretty good financially, with a $12.32 billion market cap, a 15.8 trailing PE, $3.19 billion in cash ($2.87 per share), zero debt, and a 1.6% dividend.

    When it comes to the charts, there is both some opportunity and some risk. In the long-term chart, we can clearly see ATVI's massive run since 2000. In 2008 it took a very big hit, losing over 50 percent of its value. Since then, it's been in a sideways trend and appears to be in the midst of choosing a direction. It may have broken below its long-term uptrend, but $10 and then $8 should be decent support levels.

    The daily chart looks a bit better. Though we are still below the 50 and 200-day moving averages, it appears that ATVI could have bottomed for now near $10.80 and may begin a new uptrend. The momentum is diverging and signaling more positive price movement ahead. If prices can break above the 200-day moving average and the downward-sloping trendline near $12, ATVI looks very good.

    Conclusion

    With the massively growing popularity of zombies, and their increasing success over the vampire theme in recent months, investing in zombie-related companies could be highly profitable.

    I personally have been a huge fan of zombies and apocalyptic movies almost my entire life. Is it not fun and exciting to imagine worst-case scenarios and how you would find a way to escape or survive? Maybe it's just me, but I think that playing out multiple situations, and mentally planning what you would do, applies to much more than just escaping zombies or avoiding a worldwide pandemic. In reality, the ability to be well-prepared for all kinds of scenarios could help improve your relationships, protect your investments, and even save your life!

    At Chart Prophet Capital, we invest in companies and commodities which we expect will highly outperform the majority of the market. However, while we are very confident in our abilities to pick winners and find overlooked investments set to soar - we always protect our portfolio in preparation for worst-case scenarios. It is not enough to simply make money when the market is rising; you must be shielded and ready if and when the market falls. Just like the measures taken to prevent life-threatening illness or damage-causing accidents, we must take precaution when it comes to our money and investments. Perhaps avoiding zombies and worldwide disease is only in movies, but we definitely need to watch out for zombie economies and contagious investments that could wipe out our portfolios and put our financial lives at risk. This is where strategies for many worst-case scenarios are so crucial, yet more than 99% of investors and fund managers are completely unprepared.

    Source: Dr. Jean-Paul Rodrigue

    Watch your back, protect your investments, and buy companies that benefit from the zombie craze. I think we're only in the early to middle stage of the Mania Phase in zombies.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMCX, VIA, ATVI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Nov 13 4:44 PM | Link | Comment!
  • How Social Mood Affects Stocks, Sports, Elections, And War
    "Events do not shape the forces of the market; it is the forces behind the market that shape events."

    -Prechter, The Elliott Wave Theorist, 1979

    The negative social mood that accompanies recessions may help us predict accounting fraud, anti-trust activity, social upheaval, major wars, the popularity of sports, and even the outcome of presidential elections.

    Investors, economists, and the majority of the world believe that specific events trigger a rise or fall in stocks. Most believe that the stock market reacts to events that take place. The Socionomic perspective, however, is based on the principle that specific events such as revolution, war, recession, and success are the result of a social mood that has already been established for some time. In other words, things only happen if the people's mood matches the mood of the events. In essence, the stock market does not react to events; it enables them.

    Stock prices obviously don't control the world. Other outside forces and factors are in play throughout the course of history - from economic conditions to religious movements to international relations, etc. But since the stock market is a very strong measurement of the health or fragility of economies and social mood (since it is a widely-watched representation of businesses and investor optimism or pessimism), we can most accurately gauge and predict future conditions by monitoring trends in stock prices and social mood. In other words, if we can evaluate changes in how people feel, we can predict how they will soon act.

    Since the bursting of the technology bubble at the turn of the century, the world has been on a rollercoaster ride. Technology stocks, housing, and oil have soared and then collapsed on investors; economies have transitioned back and forth between sustainable growth and disastrous risks; and the future is more uncertain than ever, as global markets are moving at incredible speeds and are more interconnected than ever before. There is no doubt, then, that the massive volatility in stock markets over the past 10+ years has transferred over and affected the mindset of people all over the world. And it is the mindset and expectations of the people that will determine our future.

    We are currently at a major turning point in history. We stand at a crossroads between an economic "recovery" and potential for a double-dip recession. It seems as if the risks are constantly growing - huge government debt, threat of war, slowing growth, unsustainable price increases in many assets, and tremendous macro issues threatening Europe and the Middle East. The world is either largely ignoring these major risks, or too fearful of the consequences. If we are ignoring the potential devastating impact, we set ourselves up for major upheaval and economic disaster; but if we over-emphasize the risks, we could be approaching great economic times as our fears subside.

    The key here is figuring out what the world is expecting. If investors, institutions, and businesses are too optimistic, they will likely meet a disturbing reality in the near future. On the other hand, if they are too pessimistic, they will likely be positively surprised. It is my view currently that we have not yet recovered from the devastating shock of the Great Recession of 2007-2009; the stock market is still below the 2007 peak, investors are wary but somehow still overly optimistic about emerging markets and technology stocks, and it appears we have just "kicked the can down the road" and failed to deal with the massive issues that plague our economies. In short, the stock market has seen such a huge bounce since the 2009 lows while the risks have escalated tremendously - these are horrible ingredients for a sustainable economic recovery.

    Our goal here, then, is to present you with the potential outcomes and events that may transpire over the next few years - and how they will affect companies, economies, countries, and your personal wealth.

    What Social Mood Predicts, and Proof That It Has Already Begun

    Other than a big downturn in stocks, a negative social mood is also accompanied by political changes, social discontent, monopoly-busting, the exposure of fraud, popularity shifts in sports, and even war.

    Presidential Election

    Strong and persistent trends in the stock market determine whether an incumbent president will be re-elected in a landslide or defeated in one. In all cases where an incumbent remained in office in a landslide, the stock market's trend was up. In all cases where an incumbent was rejected by a landslide, the stock market's trend was down.

    - Prechter, The Elliott Wave Theorist, November 1999

    With the Republican Party deep into its process of determining the next presidential candidate, many are wondering who will challenge President Obama in the election and whether that candidate will be able to take over and win. Politicians, scholars, investors, and the media are all wondering how each candidate's policies and worldview will affect the outcome of the race and the potential time in office. However, few people are looking at the stock market in determining the likely winner of the upcoming presidential election.

    One recurring theme seems to be crucial in elections: the trend of the stock market. If stocks consistently rise, voters tend to stick with the President who they see as responsible for the good times; on the other hand, if stocks consistently fall, voters are fed up with the leadership and tend to look for a change by ousting the current President and voting for someone new.

    The socionomic conclusion is this: When social mood waxes positive, as reflected by persistently rising stock prices, voters desire to retain the leader who symbolizes their upbeat feelings and who they presume helped cause the conditions attending them. When the social mood becomes more negative, as reflected by persistently falling stock prices, voters decide to throw out the incumbent who symbolizes their downbeat feelings and who they presume helped cause the conditions attending them.

    - Prechter, The Elliott Wave Theorist, November 1999

    Knowing that stock prices have a measurable effect on election outcomes, we now have a better understanding and higher probability of predicting the next President. The stock market was remarkable from the 2009 bottom until early 2011, but has since been highly volatile and on the verge of a sharp drop. Huge government debt, the Flash Crash, the collapse of MF Global, and what appears to be government manipulation of the markets are all big threats to future stock prices. If these are signs of a growing negative social mood, perhaps President Obama may have a tough time getting reelected. However, in order for a decisive win in the upcoming election to take place, the stock market must make a decisive move from now until then. Obama has the huge 2009-2011 run-up in stocks as support for his campaign, but if the market can't sustain the gains over the next few months, we may see a new president next year.

    Actionable strategy: We are currently right at a major pivot point of 1270-1340 on the S&P 500 and 12,200-12,800 on the Dow Jones Industrial Average. The massive drop in stocks from May to September 2011 may have been the confirmation of a shift to a negative social mood. The test now stands at this turning point we find ourselves in: if stocks fail at these levels and begin the next leg down, Obama could have a hard time getting re-elected; if stocks continue up, however, the negative social mood may not be fully intact and Obama has a strong chance of re-election.

    For those looking to use this as an investment or trading strategy, a good move would be to watch this level closely and take one of two actions. For those who are bearish or would like to speculate on falling stock prices, shorting the broader markets or specific over-valued stocks may be a great way to take advantage of this low-risk pivot point. Broad markets can be shorted through short positions on US markets (SPY or IWM), emerging markets (EEM) including China (FXI) and Brazil (EWZ), or through short inverse ETFs that rise when the underlying asset falls - such as short S&P 500 (SDS), Russell 2000 (TZA), China (FXP), or emerging markets (EDZ). Specific stocks worth shorting should be based on an already-established downtrend, more favorably if they are highly over-valued in terms of P/E ratios or unsustainable growth forecasts [like Netflix (NFLX), Green Mountain (GMCR), or Opentable (OPEN) were in 2011]. The short strategy is a great low-risk trade at these levels, with the stop-loss and getting out of the trade if the stock market rises and breaks above the top of our overhead resistance area (approximately 1340 on the S&P 500). For those who want to avoid shorting stocks and prefer to go long at a low-risk point, we recommend waiting to see if the stock market can break above our overhead resistance area; if stocks break above that level, investors can enter right above the resistance area (which now becomes support) and sell out of the stocks if the newly-established floor doesn't hold.

    War

    Global conflict is a product of a downturn in social mood.

    - Prechter, The Elliott Wave Theorist, June 2001

    As US troops pull out of Iraq, our involvement in wars is still not over. The US has a long history of getting involved in global conflicts, helping the needy, and meddling in other countries' business. We can't blame the US government, since that seems to be what the world-leading country tends to do throughout history. The US is, in effect, the world regulatory agent and also a protector against terrorism and human rights violations. Whether or not the US has fulfilled its role correctly is up for debate, but the view that the US is likely to be involved in the next global conflict is almost inevitable.
    The Mideast's record as an early register of negative social mood suggests that a major bear market and thus the trend toward global hostility has only just begun.

    - Prechter, The Elliott Wave Theorist, June 2001

    The world seems to be in the midst of a sweeping negative social mood, as the violent tensions initiated on September 11, 2001 have led to US occupation of Iraq and Afghanistan, and are further exacerbated by the tremendous upheaval in the Middle East. Violence is rampant in the region now, with social discontent and revolutions disrupting the order that seems to always be on the verge of collapsing. Now, aside from the ongoing problems in Iraq, Afghanistan, and Pakistan, the threat of war and severe global violence has skyrocketed with Iran's growing militarization and conflict. Iran has been developing nuclear weapons, displaying its navy and army as a scare tactic, and even threatening to destroy other countries. The US knows Iran may be the center of future conflict, and is attempting to curb growing tensions. But it may be too difficult or too late to do so, as Iran seems to be preparing for violence. Add to that the death of North Korea's leader Kim Jong-il, a long-time nuclear threat, and tensions could easily rise.
    A persistently rising stock market, reflecting feelings of increasing goodwill and social harmony, should consistently produce peace, and a persistently falling stock market, reflecting feelings of increasing ill will and social conflict, should consistently produce war.

    - Prechter, The Elliott Wave Theorist, November 1999

    As social mood becomes more negative, people become more fearful, distrusting and angry. They are impelled to prepare to defend themselves or attack an enemy.

    - Prechter, The Elliott Wave Theorist, November 1999

    Wars tend to break out in times of negative social mood, as anger, hostility, and hatred are more likely to surface and escalate. Considering the economic troubles we have seen over the past few years as well as the potential for entering a renewed global recession, it is not unlikely that the increasing negative social mood will lead to continued wars or renewed global conflict.

    If the claim that a negative social mood consistently produces wars sounds like mere theory, take a look at the following chart dating back to the 1700s that shows how history's biggest wars have uncannily coincided with bear markets. If this multi-century-old pattern continues, we may be approaching a similar fate.

    Source: Robert Prechter

    Actionable strategy: If social mood has been in a negative cycle since the peak of the dot-com bubble in 2000, our extraordinary bounce in stocks from 2009 until May 2011 may have been just a temporary pause before the next leg down. If stocks begin the next leg down from these levels, a negative social mood would be confirmed and a war would potentially be on the horizon.

    Sports

    Basketball is the ultimate bull market game.

    - Prechter, The Elliott Wave Theorist, December 1996

    As Prechter, ElliottWave International, and the Socionomics Institute point out, social mood and wave analysis can be applied to the popularity or rejection of various sports. Using social mood, they have predicted decreasing popularity for baseball and baseball cards, decreasing player salaries, and emergence of more violent contact sports that embody the pervading negative mood. So far, they seem to be remarkably accurate - baseball card values have dropped precipitously, Alex Rodriguez marked the record salary ever by a baseball player (a record that he has held for over 10 years), and UFC's ultimate fighting mixed-martial-arts has seen an exponential rise to fame as it is nears peak popularity and is now broadcasted on Fox TV. The "good guy" sports like baseball and basketball are not as popular as they were in their prime; the "tough guy" sports, like football and ultimate-fighting, are growing as negative mood brings with it a more aggressive mindset.

    One of the most recent signs that negative social mood is upon us - the cancellation of 20 percent of the 2011-2012 NBA season. If Prechter is correct that "basketball is the ultimate bull market game", the significant conflict and lockout that almost led to the cancellation of the NBA season may be a sign that we are no longer in a bull market.

    Actionable strategy: Being able to predict the growing or declining popularity of certain sports would be very beneficial to companies like Nike (NKE), Lululemon (LULU), and Under Armour (AU), as they could improve sales and efficiency by targeting the right market. Though basketball-related merchandise is still expected to sell, for example, these companies could better prepare themselves by increasing their efforts in the more "bear-market-friendly" sports. For investors, this could mean that a profitable opportunity may be approaching for those who short basketball-related companies.

    Anti-Trust Activity

    Major antitrust suits coincide remarkably consistently with the passing of major stock market tops.

    -Prechter, The Elliott Wave Theorist, May 2000

    Negative social mood allows bad news to surface. When times are good and the stock market is doing well, people do not tend to complain as much. But when stock prices are falling and the negative social mood takes firm hold, the domino effect amplifies pessimistic behavior. In other words, though people have reason to complain and governments have reason to take strong action during good times, they tend to do so only after bad times are well underway.

    One consistent example of how social mood affects government intervention and investor discontent is the bi-polar occurrence of anti-trust activity and bailouts. During good times, monopoly-like companies are allowed their power even if competition is at a major disadvantage. On the other hand, during bad times, anti-trust activity picks up and the government and regulators scrutinize dominant companies and can even over-punish them. Case in point - the attack on Microsoft (MSFT) as a monopoly at the peak of the technology bubble in 2000 was both a sign that negative social mood was picking up and that strict regulation and "fair play" were being enforced. During good times, Microsoft and other dominant companies are left alone; but when bad times emerge, the negative social mood makes people and governments much more vigilant in correcting what was overdone during the bull market.

    At tops, the government initiates force to stifle free competition and success; at bottoms, it removes force that has stifled free competition and success.

    -Prechter, The Elliott Wave Theorist, May 2000

    After the financial carnage of 2007-2008 on banks and businesses, the government bailed out failing institutions in order to "save" the system. In this case, the damage was so great that the approaching "bottom" in stocks enabled the government to help the institutions rather than punish them. The proper action is still debatable - whether failing institutions should be allowed to simply fail or whether they require saving; but one thing is clear: when negative social mood takes its toll and the market nears a bottom, regulation and trust-busting is greatly reduced and allows for bailouts.

    We are currently at the opposite side of this phenomenon: the passing of market tops coincide with anti-monopoly activity and punishment of the strongest companies. Just as Microsoft was the target of regulation and trust-busting as social mood turned negative in 2000, so too will some of the largest companies today be targets of regulation and scrutiny as the negative social mood takes firm hold. If that is the case, we can expect companies like Apple (AAPL), Google (GOOG), Amazon (AMZN), and Facebook to be the focus of much outrage over the next months or years as the excesses of the bull market are cleaned up.

    Apple of today is strikingly similar to Microsoft of 2000: it dominates the sector it does business in, it is a consumer favorite, and it has the largest market cap in the US. It is not far-fetched to think that Apple may face similar hurdles in the future as negative social mood brings with it a critical and disapproving inquiry into the company. Additionally, it is plausible that regulators and others will take a harsher view at Google for its questionable data-mining or near-monopoly on search, at Amazon for its near-monopoly on books and e-commerce, and at Facebook for its questionable privacy, data-mining on users, and doubtful valuations. Once governments, regulators, and investors start to truly take a closer look, they may find many things to nit-pick at and potentially challenge.

    There is proof that anti-trust activity and scrutiny is already taking place. Firstly, the AT&T (T) takeover of T-Mobile for $39 billion was met with strong opposition by the Obama administration and ultimately failed as AT&T withdrew the bid after much resistance (see: http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/). Such a large merger/takeover failing to take place is a sign that anti-trust activity is growing and that this may be just the beginning of similar action in the future. Secondly, Senator Jay Rockefeller announced that he will conduct a hearing to determine Facebook's tracking of users after they log out of their accounts. Facebook's tracking of user history and information has been known for a few years now, but perhaps it takes the negative social mood to actually bring some action and regulation. Finally, Google is now under scrutiny by the FTC as Google+ is accused of violating consumer privacy and making Google+ user information available in search results. Whether or not these investigations materialize into bigger problems is one thing, but these examples prove that the environment of greater scrutiny and a "watchful eye" is expanding and that a time of trouble for the powerful companies may be at hand. The onset of the negative social mood bodes poorly for some of the most dominant companies.

    Ironically, the regulation and scrutiny that has been appearing may be too little too late:

    Reform and regulation are one step to regaining the public's confidence. But that often happens well after much of the damage is done to investors' trust. "The government takes steps after the horses have left the barn."

    -Prechter and Kendall, The Elliott Wave Theorist, June 2002

    Actionable strategy: If the market continues another leg down as it did from its May 2011 peak, the growing environment of regulation, scrutiny, and anti-trust activity may be ineffective, as it comes well after investors get clobbered. Moreover, if falling stock prices and increasing scrutiny are at hand, investors could profit by shorting broad markets (as discussed above), shorting the broad technology sector (QQQ or XLK) since many of the largest companies to be scrutinized may be technology companies, or shorting individual companies that could be anti-trust targets [such as Apple , Amazon , or Google ] - though must be done carefully.

    Occupy Wall Street

    The social mood shift that occurs at the transition from bull market to bear includes a change in general attitudes toward the financial success of others. Society moves from a feeling of support toward one of resentment.

    -Prechter, The Elliott Wave Theorist, May 2000

    The onset of negative social mood brings with it strong feelings of resentment and discontent. It is no surprise then, that movements around the globe have sprung up to decry the inequality between incomes and ill-treatment of certain social groups. If negative social mood makes people upset about the difficulty of getting jobs or living a financially stable life while the rich prosper at their expense, the emergence of protesting groups such as Occupy Wall Street should not be so much of a shock. Occupy Wall Street may have faced much resistance due to the protestors' poorly organized or inadequately-focused campaign, but the concerns and outrage of the movement are fair in my opinion - the protestors' are complaining about the income inequality in the US (1% vs the 99%). While income inequality has been a problem throughout history, the negative social mood has enabled the protests to gather steam and gain enough momentum to attract mass-media attention. The Occupy Wall Street protests may be just the beginning of a series of movements aimed at creating a balance between the wealth in this country; and if the negative social mood continues, more violent campaigns are definitely not out of the question.

    Actionable strategy: If Occupy Wall Street is a sign of growing negative social mood, we can expect stronger, perhaps more violent movements to spring up in the future. If that is the case, the downtrend in stocks is far from over. As mood continues to deteriorate, the stock market should register the decline in mood by falling as well. Shorting stocks in this case would therefore be a profitable strategy.

    Fraud

    As the bear market unfolds, many more "scandalous" cases will be revealed.

    -Kendall, The Elliott Wave Theorist, September 1998

    Just like anti-trust activity almost disappears during good times and picks up during bad times, so too does the exposing of fraud remain almost invisible during times of positive social mood and rampant as the negative social mood picks up. The reason for this is as we have explained above - that during boom times, investors and regulators tend to look the other way or simply fail to notice the fraud going on around them.

    Bull markets tend to hide "creative accounting":

    The mass psychology of the stock mania, which was unskeptical to an extreme, invited and even rewarded companies for "creative accounting." It was the psychological environment of the bull market that led companies to dare to mislead investors in the first place.

    -Prechter, The Elliott Wave Theorist, June 2002

    However, when the negative social mood picks up, investors and regulators start to notice and even search for the fraud and manipulation that they missed during the bull market:

    Corporate misbehavior persisted for a decade, but there was no scandal until well after the trend changed. While the trend was up, people ignored the phony accounting; when the trend turned down, they began to investigate it.

    -Prechter, The Elliott Wave Theorist, June 2002

    The "questionable bull market accounting standards (Prechter)" that sometimes run rampant during the good times come to an end when the negative social mood causes regulators and invewspaper and media headlines and may even go bankrupt as their scandals flare up. Other companies, who may not even be involved in scandals, may be hurt as well, as the deeply negative mood takes its toll on any company that investors or regulators may consider to be linked to the fraudulent companies.

    A number of fraudulent companies have already been exposed (a handful in China), and more may soon be uncovered. What companies will potentially suffer from closer scrutiny? Other than emerging market companies in which US investors have blindly poured their money into without truly verifying the accuracy of their financials [think China or Brazil ], companies like Netflix , Groupon (GRPN), LinkedIn (LNKD), Zynga (ZNGA), and other hot IPOs and unproven companies may also be exposed as frauds.

    As I mentioned a number of times regarding Netflix , the company may have been involved in questionable accounting practices and potential fraud which, if uncovered, could lead it to severe legal action and possible bankruptcy:

    • By overstating its earnings and hiding much of its liabilities off the balance sheet, Netflix may have been involved in accounting manipulation and fraud, which could bankrupt the company if surfaced.
    • Management has been increasingly shady and potentially fraudulent, with a mysterious resignation by the CFO at the end of last year as well as massive insider selling of shares by CEO Reed Hastings and other officers. The CEO has essentially been selling millions of dollars-worth of shares to the latecoming small investors who trusted in Netflix.

    Source: Yoni Jacobs, Will Netflix Disappear?

    Additionally, the extremely popular technology startups of the past few years have caused such euphoria and mania among investors that they too may be the subjects of much scrutiny in the future, since their financials have yet to be proven. These companies have attracted billions of dollars of investment and such lofty valuations, yet they still do not earn even a fraction of their valuations in revenues. Investors are expecting massive profits over the next few years, but their failure to truly scrutinize these flimsy companies may come to bite them in the end as the unproven financials never materialize. Even worse, the tremendous euphoria on the part of investors may have caused them to turn a blind eye to some misleading or fraudulent accounting. If negative social mood is taking hold, expect investors and regulators to begin to take a tougher stance and even investigate (See: Is IPO Mania Warning of a Tech Bubble 2.0?).

    Actionable strategy: If negative social mood causes investors and regulators to investigate further into financials and search into potentially fraudulent or unproven companies, investors and speculators may profit from short positions in the tech-bubble-like IPO stocks [Groupon , LinkedIn , Zynga ], potentially-fraudulent Chinese companies, Netflix , or some of the financials (think banks or life-insurance companies). The safest move would be to simply avoid companies with shaky financials or unproven track records. Perhaps no company embodies this group more than Facebook.

    Conclusion

    As the negative social mood picks up (and is visible in the falling stock prices), we can use Socionomics and the study of how social mood affects stock prices to assess our position within the boom-bust cycle and to even predict the outcome of elections, the onset of wars, the uncovering of fraud, the popularity of sports, the emergence of anti-trust activity, and the growth of social discontent. Being able to determine the social mood makes us much more accurate in evaluating our economic position and predicting the future direction of stock prices. If the signs we are seeing are reliable, it appears we are in the midst of a negative social mood, which bodes poorly for stock markets, warns of upcoming wars, and indicates a period of increased regulatory scrutiny. Yet while negative social mood brings with it some serious consequences and calamitous circumstances, it also helps clean up the unsustainable excesses that coincided with the bull market. Moreover, being able to spot the onset of a negative social mood could put us in a much better position to avoid big investment losses and even profit as certain stocks or markets fall.

    Disclosure: I am short NFLX.

    Additional disclosure: Short NFLX through put options

    Jan 23 10:21 AM | Link | Comment!
  • Charts Point to a Precious Metals Bubble
    With Gold's massive run, investors have flocked to silver, copper, palladium, rare earth elements, and other precious metals for the "next big thing." What many fail to realize, however, is that if we are currently in a gold bubble, many of the precious metals will also collapse as the gold bubble deflates.

    There are numerous reasons both to justify the high gold prices and to warn of an impending bubble collapse (see "Gold Bubble: Final Warning?"). When an investment theme, such as gold and precious metals, involves so many conflicting fundamental arguments - as our case can be argued either way - it may help to use some visuals to gauge where we're coming from, where we are are, and where we may be going. Charts display both the price changes over time as well as the investor psychology that accompanies the shifting supply and demand levels of the market. By looking at the prices which gold and the precious metals have reached, and by pointing out important psychological support and resistance levels that are currently in investors' minds, we can better predict their future direction. And based on the charts, we may be setting up for a considerable fall.


    Let’s take a look at the Charts:

    GOLD (NYSEARCA:GLD)
    1995-Present
    As you can see above, Gold has been on an almost parabolic rise since 2000. It has climbed from near $250 to over $1400 (nearly a 500% gain). For one of the oldest measures of wealth and forms of currency to spike up so rapidly and at such a steep angle, either gold is 5 times more important today than it was 10 years ago, or we may be in store for a serious correction as we snap back to reality.
     
    2009-Present
    Gold (GLD) has been in a very well-defined upward-sloping channel since the beginning of 2009. Every time the price hit the top or bottom of the channel, it bounced off in the opposite direction. Since the channel has worked so well for two years already, it is a very reliable gauge for future price action. And since we’ve neared the top of the channel in the past few months, now may be the proper time to sell before the price makes its way back down toward the bottom trendline. Not only are we expecting the price to drop to the lower trendline, but after such a long and considerable rise in gold prices, the channel may begin to break down. In other words, though the channel has worked magnificently in the past, does not mean it will work in the future; if gold prices start falling, they may quickly fall right through the bottom trendline. And if that happens, we will be entering a much deeper correction.
     
     GOLD MINERS (NYSEARCA:GDX)
    The gold miners ETF (GDX) has also been in a very well-defined uptrend for the past two years. As opposed to the GLD ETF, however, the miners are showing increased weakness. While Gold (GLD) itself is still near the upper trendline within the channel, the GDX is about to meet the lower trendline. Not only is the GDX about to meet – and maybe even break down through – the lower trendline, it is showing considerable weakness by failing to hit the upper trendline in November and December 2010 and with increasingly slowing momentum as evident by the MACD crossover and negative RSI and Stochastics divergences. In other words, while the prices of the gold miners were making new highs, the momentum and relative strength were falling behind. As momentum continues to weaken and the price challenges the lower trendline, keep your eye out for building momentum on the downside – this could be the beginning of a rapid collapse.
     
    Let’s take a look at the big mining companies for any further clues:

    Barrick Gold (NYSE:ABX)

    Making up over 16 percent of the Gold Miners ETF (GDX), ABX has tremendous influence on the direction of the GDX and on the gold play in general. And though it wasn’t obvious in the charts of GLD or GDX, the chart of ABX is showing an almost-deadly pattern – the Head and Shoulders. The Head and Shoulders is a reversal pattern that shows up at the end of big price moves; and, if completed, the head and shoulders pattern signals a major turning point. In the case of ABX, not only do we have a perfect example of a head and shoulders pattern, but the heavy selling volume that has accompanied the breakdown is almost guaranteeing a swift and severe upcoming drop. Unless ABX holds the $45 level, the Gold bubble may be nearing collapse.
     
    Newmont Mining (NYSE:NEM)

    The third largest holding in the GDX, Newmont Mining (NEM) makes up 11 percent of the ETF. Like most of the other gold plays, NEM has also been in an up-channel and may also be in the midst of a collapse. Unlike the GLD, GDX, or other gold plays, however, NEM hasn’t made a new high since September 2010. While Gold (GLD) and others have made new highs in December, NEM has failed to follow. It hit the peak and the top trendline in September, and has since fallen. Like ABX, it too may have formed a Head and Shoulders, and may be headed for a fall as well.
     
    Goldcorp (NYSE:GG)

    The second largest holding in the GDX (11.47%), and perhaps the most-rapidly falling gold stock, Goldcorp (GG) is a severe warning signal of an impending gold collapse. Goldcorp formed a double-top in November and December 2010 and has since fallen over 15 percent! It’s been falling fast and on high volume, and is right at the lower trendline. If it breaks through, expect a much bigger correction.
     
    SILVER (NYSEARCA:SLV)

    Like gold, silver has also seen a meteoric rise in price over the past ten years, rising from under $5 in 2003 to over $30 in December 2010. Yet while gold’s rise has been fairly steady, silver has almost doubled in price since August in an almost-vertical price move. Not only is such a rapid rise in price extremely dangerous, but the uptrend that has been in place since late August 2010 has been broken:


    Silver Wheaton (NYSE:SLW)


    Many investors’ favorite silver play – Silver Wheaton (SLW) – has more than tripled in the past year! But with a peak in December 2010, SLW may have also formed a Head and Shoulders pattern. It has strong support at $30; but if it fails to hold these levels, expect a massive correction.
     
    PLATINUM

    Platinum has skyrocketed since late 1998 from under $400 to over $2100 in 2008 and to $1800 now. It is worth noting, however, that while huge gains were made, a dramatic and devastating drop in prices is not out of the picture – after peaking at over $2100 in early 2008, prices plummeted to $800 by the end of the same year! This is absolutely possible again.
     
    Let’s see how the Platinum ETFs are performing:
    Platinum (NYSEARCA:PTM)

    After doubling since the October 2008 low, PTM is struggling to break through and hold above the $21-22 level. Watch for the direction in which it breaks out.
     
    Physical Platinum (NYSEARCA:PPLT)

    Only a year-old ETF, the PPLT has ranged between $145 and $180. With a rising resistance line, however, it’s important to see if it can break through, or if it will break down. With two very bearish candle patterns in the last two trading days – an “Evening Cloud” and a “Bearish Harami” – this could also be setting up for a fall.
     
    PALLADIUM

    After rising 1000% from 1992 to early 2001, Palladium dropped over 80 percent from 2001 to early 2003, and has yet to set a new all-time high. Palladium prices have, however, more than quadrupled (from $200 to $800) since late 2008.
     
    North American Palladium (NYSEMKT:PAL)

    After forming a very strong base at $3 from May to August 2010, PAL is up nearly 150 percent in under five months! With a very bearish reversal candle (“Shooting Star”) on January 13, 2011, we’ll see if PAL can make new highs, or if it begins to fall with the rest of the metals.
     
    Palladium ETF (NYSEARCA:PALL)

    After nearly doubling since July 2010, the Palladium ETF (PALL) is also showing potential signs of weakness. It has formed a potential ending-diagonal, in which a breakdown below $75 will trigger a much bigger drop.
     
    COPPER

    Copper has nearly quadrupled in the past two years, and has broken above its previous 2008 highs.
    Investors’ favorite way to play copper has been through Freeport-McMoran (NYSE:FCX).
     
    Freeport-McMoran (FCX)

    After setting an all-time high of $122 in May 2008, FCX dropped to $15 by late December. It has since risen by 700%, but has reached the May 2008 highs of $122 – a VERY strong resistance level. Unless FCX can break through the $122 level and hold, it will see a considerable correction as well.
     
    RARE EARTH
    As I mentioned above, investors have been clamoring over and rushing into any investment or company that has any relation to gold and precious metals. Looking for outperformance, investors have moved from gold to silver to copper, platinum, palladium, and now Rare Earth metals and elements. With companies like Rare Earth Elements (NYSEMKT:REE) and Molycorp (NYSE:MCP) up over 500 percent since July, and with the CEOs of the companies even calling the price moves risky and potentially overdone, these investments could plummet in value if gold and the precious metals space continues to slip.
    Rare Earth Elements (REE)


    Molycorp (MCP)


    After the massive runs in most of the precious metals market, many of the metals - such as gold, silver, palladium, platinum, and rare earth elements - are showing considerable weakness. Many of the gold miners have shown reversal patterns that may be signaling the beginning of a top, while other precious metals plays are nearing strong upper resistance levels. After such huge runs, and right at resistance levels, a safe investor would be very smart in at least locking in profits or buying some protection through options. With great reasons to believe that a gold bubble is in place and about to collapse, however, it may even be a great time to start betting against it.
     


    Disclosure: I am short GDX, ABX, FCX, REE, AGQ.
    Jan 18 12:16 PM | Link | 7 Comments
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