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Casual investor with a flair for investing.
  • The Markets - Looking Forward 0 comments
    Apr 26, 2009 4:14 PM

    My best investment decisions are made when I shut CNBC off, ignore the news that carry the hype, the gloom, the doom, death and dyspepsia omnipresent in the newsmedia and make rational decisions in quiet and calm. Great case and point -- during the week the Dow dropped a staggering near 300 points that caused even the staunchest bulls to question the duration of the rally. No matter how I ran my charting programs none of them indicated that this was anything other than a normal market day! CNBC was full of pundits and gurus claiming an end to the rally and a dour goy named Art Cashin showed up and said the markets would correct in a huge way! What is funny is when the markets are doing well they have people showing up talking blue skies and when it is not there are doom and death people getting all the attention. On the home page of I have seen multiple prognostications to the plus or the minus side listed side by side! What do you do? So I shut CNBC off, looked at the charts, and picked up additional stocks for my portfolio. At the end of the week even with the markets being slighlty down week over week I was where I was at the beginning of the week plus a few points.

    I made a couple of big changes to my trading portfolio this week. The primary catalyst for this was I saw charting programs picking up Buy signals in a variety of industries and segments and not just a few isolated areas! This is a very good omen for the broader market. I found that I was far too weighted in the financials and this caused my returns to be very volatile. I balanced it with four major components - Transportation (Airlines), Financials, Industrials and Tech. My timing in transportation was right on with the Airlines staging a big rally during the week. A friend of mine I talked to could not believe that I would invest in the airlines. "Their results stink yet they keep going up!" he said in a disgruntled voice. He was correct. The results were poor but the airline stocks were rallying. Why? My friend was looking in the rearview mirror while the markets were looking ahead. And the charts gave me an advance warnings of this mass movement of money into transportation.

    There are a lot of prognosticators (some very famous names) calling for a huge correction. However, I don't see this in the charts. Here is what a huge correction has to overcome. A huge correction has to tank the NASDAQ and the charts tell me this is very difficult. That is because the leading stocks in NASDAQ have registered multi-week steady buy signals and undoing them would require a huge downward catalyst. Where would that catalyst come from? We have a bunch of bad news including unemployment, inventory numbers, home numbers, etc., thrown at this rally and it still chugs on. Techs are strong because they have real earnings. Many of them are seeing an uptick in their business. Apple and RIM (Maker of Blackberry) blew the door away with their earnings reports. A wave of consolidation is happening in the industry which means better scale and prospects for the leaders. How can you tank the NASDAQ such that the markets can experience the so-called correction?

    On Friday the Feds published the govt stress test methodology for banks. The bears got their behinds kicked because as it turns out the stress tests were tough and not a soft pass and the Feds stated unequivocally that no large bank will be allowed to fail. The bears decided that shorting a financial was a bad idea and rushed to cover their short positions which caused the rally on Friday. In the week ahead the Feds will publish the results of the stress tests. This could be one major market moving catalyst. The whisper is that all the large banks (with exception of one) have handsomely passed the stress test. The bears are going to lose a lot of ammunition if the results exceed market expectations.

    With the situation looking so dour you ask me how can I remain optimistic about the markets? Well for one the charts tell me to remain optimistic about the market. You see, charts don't lie but people do. We all know the famous marketing paradigm/dilemma in that if you tell people about a cool product that isn't there they almost always want to buy it. If you make it no one will show up to buy it! So what people actually do is more important than what people say they will do! The charts tell you what they are doing and not what they are saying they are going to do.

    Let me pontificate a bit about the fear psychosis that is gripping the nation and how the pressure that has built up when released will act as a very positive catalyst to the markets. We all know a sizeable chunk of our GDP is dependent on consumer spending. Consumer spending as we know has taken a huge hit and gone down to abysmal levels. Analysts are expecting a moderate uptick in spending to fuel the economy and markets in the coming months. I happen to think a little differently about this. What has happened is that the 92% people with jobs are spending at almost the same level as those without jobs because they are affraid! This is an unnatural state that can not go on for long. We saw a bit of release of this fear when Best Buy and Bed Bath and Beyond (!) released results that far surpassed expectations. JC Penney even upped their estimates for the remainder of the year! There is still a huge spend from people that have money and jobs that is yet to come into the economy. This huge release may happen much faster than many think if we loosened the fear element even a tiny bit. If people see things stabilizing and the first few greenshots of hiring appear then this additional spend will likely happen giving rocket power boost to the markets. Inventories are running low and companies have cut jobs to the bone so there is a tension developing between spending and expansion. Perhaps Obama's stimulus plan will help release this fear when the first wave of job creations will hit the economy in the next couple of months.

    I am not a big fan of Obama's stimulus plan. I think that he could have accomplished a much bigger bang had he given the same incentives to businesses allowing them to spend as they saw fit which most certainly would have helped our economy much more than massive goverment spending which is likely to be wasteful. But wasteful as it is there is no denying it is a catalyst that will help the economy and I don't believe that the market has fully baked this in yet.

    So in the week ahead the charts tell me to expect a good ride onwards. A march towards Dow 9000 and S&P 950 plus seems likely. Sure, there will be retrenchment somewhere but the moment is not now. The trend is your friend till the bend at the end and I don't see no bend at the present! If my theory of a reverse black swan event is true we could see the market climb back up as fast as they went down which presents some great investment opportunity to us all. I have detailed a few low priced equities (that I call the slumdogs) that have the prospects to be millionaires again in my Blog post and you may find it interesting reading. Happy investing and God bless the United States of America!

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