We switched to "Red Flag Flying" mode, expecting lower prices ahead.

Mid-week we entered inverse positions in both the standard and leveraged portfolios and have unrealized gains/losses ranging from -0.8% to +5.3%.

Marking the one-year anniversary of the Lehman Brothers demise, risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum, resulted in many global stock markets scaling fresh peaks for the year.

Ben Bernanke, Federal Reserve chairman, on Tuesday said the U.S. recession “is very likely over”. However, he remained cautious about the shape of the recovery and said he expected a “moderate” recovery in 2010 with growth “not much faster than the underlying potential growth rate of the economy”, i.e. approximately 3%.

Risky assets last week again marched higher to the tune of economic data supporting the argument of a global economic recovery. A realization among investors that the economic transition from recession to recovery was gaining momentum resulted in many global stock markets and commodities scaling fresh peaks for the year.

The S&P 500 Index closed the week above the psychological 1,000 level, marking its highest level since November and capping four consecutive weeks of gains. And more upside lies ahead, said Abby Joseph Cohen, Goldman Sachs’ market strategist, who expects the Index to reach the 1,100 point by year end. (Is this a contrary indicator coming from a permabull?)

For some reason the lyrics of Electric Light Orchestra’s classic, Livin’ Thing, keep resounding in my head: “You took me, ooh, woah, higher and higher, baby. It’s a livin’ thing … ” Followed by: “It’s a terrible thing to lose … ” But let me get on to the review of the financial markets …

Investors (or should I say “Johnny-come-latelies”?) last week again favored the reflation trade on the back of better-than-expected U.S. earnings announcements and economic data, indicating that the trough of the recession might be behind us, or at least be stabilizing at depressed levels.

We had a difficult week as our inverse positions were squeezed by the market moving higher towards the top band of its trading range and then stalling right below the June 11th highs.

We remain in the "Red Flag Flying" mode, expecting lower prices ahead.

Today’s Wall Street Journal reports, “According to a new survey, 52% of companies expect to employ fewer people in three to five years than they did before the recession began.” They are saying that long after the recession ends they are still going to hire fewer people, a tacit admission that they may have been something less than lean during the good times.

Of course, what companies “say today” they are going to do 3-5 years hence may only be slightly more worthwhile than “consumer confidence.” When gasoline prices are down, the rent is covered this month, the stock market is up, and dad got a new grill for Father’s Day, consumer confidence rises. It is such a short-term phenomenon that the number will be different at 2 p.m. on Thursday than it will be at 5 p.m. on Friday.

As posted previously in my blog, ETFs are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETFs is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately (gives you some downside protection), however if the stock takes off you cap your upside.

The buy/write option strategy seems ideal when purchasing diversified ETFs. This is because diversified ETFs are less volatile than purchasing specific stocks (however leveraged ETFs are extremely volatile and click here to see why I don't believe they are investment vehicles).

In the secretive world of hedge funds, coddled by a cozy lack of transparency and regulation, it’s impossible to know what their exact numbers are. According to the “April 2009 Asset Flow Highlights”, however, the best estimates are that since Q3 2008, there have been net investor redemption requests of $815.3 billion from the hedge fund industry.

During that time, poor performance reduced assets by an additional $425 billion. (And that includes the fabulous rally of March and April.) Industry assets have fallen an estimated 45% or so from the peak in Q2 2008 of near $2 trillion, sliding to somewhere nearer $1.1 trillion today.

Chaos Theory proposes that any action anywhere in the world can influence phenomena elsewhere. The common example is that a butterfly that alters its usual pattern of pollen collection can create a different enough wind flow as to ultimately, along with his brethren and a thousand other seemingly disparate events and actions that cross numerous disciplines, will create, increase, or mitigate the effects of a tropical cyclone.

This, in turn, will affect the amount of precipitation coming from the Pacific which in turn affects farming in the San Joaquin Valley of California, the amount of snowpack at ski resorts like Squaw Valley and Diamond Peak in the Sierras, and whether the West’s fire season will be severe or benign. Chaos theory describes events that seem to be disorderly, but it’s all about finding the underlying order in apparently random data.

I am not a chartist. I use geopolitical, fundamental, and behavioral analysis that has worked well for me for 40 years or so. To these I add a dollop of common sense when reviewing the managed news bites coming out of Washington and Wall Street to draw my own conclusions.

There are many roads to success in investing. After all these years I have a number of peers and colleagues whom I highly respect, who reach similar conclusions to mine based upon their technical analysis of the market. They may think I’m a little nuts to spend all the time I do tearing into balance sheets and reading obscure journals; I can’t fathom why they would want to draw all those squiggles and lines and pennants and saucers when they could be sitting on the terrace in their backyard reading the footnotes of annual reports while listening to the birds and looking at the lake.

“Lies, damned lies, and statistics” is attributed to lots of famous people, but it was probably first spoken by the brilliant British statesman Benjamin Disraeli and later popularized in this country by Mark Twain.

I say we give the just-made-up Stanford Wealth Management Lies, Damned Lies, and Statistics Award this month to the U.S. Bureau of Labor Statistics (BLS). Them boys shore can twist a number into the shape of any number they like.

I posted an article on my Instablog on May 8th (The April Unemployment Report -- Lies, Damned Lies, and Statistics) in which, after I described the implausible methodology the Bureau of Labor Statistics uses to contrive unemployment numbers, I cautioned about an upcoming train wreck. That train wreck arrives in less than 30 days.

The National Center for Education Statistics reports that in “academic year 2008-2009, the U.S. is projected to experience a peak of approximately 3.2 million students graduating from public and private high schools.” You can see state-by-state projections here if you are interested. Now, the BLS may decide these are all “seasonal” workers, or assume they are all going on to college, or not add them until after the summer ends, but how they report won’t change the facts: Most of these kids will need a job.

One of the definitions of “stress” offered by the Merriam-Webster dictionary is “bodily or mental tension resulting from factors that tend to alter an existent equilibrium”. Well, any bodily or mental tension investors might have been suffering from as a result of financial factors were shrugged off on Thursday with the announcement by US regulators that ten of the nation’s largest banks had to add a total of “only” $74.6 billion in equity following the completion of stress tests. However, whether this will indeed restore the equilibrium remains to be seen.

From the sublime (March 3rd) to the ridiculous (May 7th)…

On March 3rd, I wrote an article for SA titled Can You Hear the Bell Signaling a Bottom? It was my contention that, as usual, things had been overdone on the downside. I had a client call that day to ask why I was buying when “everyone knew” (or at least the talking heads on TV claimed to know) that the market was going to 3,000.

Here are the ten ETFs with the largest volume spikes for the week ending April 24, 2009. We calculate this by looking at the five-day average volume versus the 50-day average volume.

We exclude ETFs and ETNs that did not have an Average Daily Value Traded (ADVT) of at least $1 million for the past 21 market days. We look only at those products in the upper ETF Liquidity Tiers, which represents approximately 45% of the universe of US-listed ETFs and ETNs. This step eliminates many of the peculiarities associated with low volume securities.

We remain in the "Yellow Flag Flying " mode because although the market has rallied sharply off its March lows, it remains to be seen if this rally is sustainable; this week will be pivotal in the course of recent market activity.

Spring is in the air – at least in the Northern Hemisphere and on global bourses. Last week marked the sixth consecutive up-week for stock markets as investors’ risk appetite returned amid signs of global economies and the financial sector embarking on the road to recovery.

Last week's impressive market action took all of our major market trend indicators into positive territory for the first time since mid-January and triggered our "Green Flag Flying" status, indicating the expectation of higher prices ahead.

Of course, this comes with the caveat that volatility will continue and there is likely to be some back filling before prices make a sustained attempt at going higher.

“Down, down, deeper and down”. So goes the chorus of a Status Quo song, but it is eerily starting to sound like the stock markets’ anthem.

Another week and another plunge of equities on fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector. And, yet again, flight-to-safety trades such as the US dollar (at a three-year high) and government bonds took center stage.