Principles of the Stock Market : Day to Day Action

Weekly Monday Overview

Richard Schwartz — Mon, 06 Apr 2009 13:17:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

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

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

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Monday, April 6^th, 2009: It’s Master’s week so I’m pumped up. It’s golf’s 1^st major of the year, tradition packed, for you non-golfers. Should be great with Tiger back, Phil Mickelson saying he’s playing the best golf of his life, Paddy Harrington going for his 3^rd major in a row and lots of up & comers. All I can say is wow! Even just watching this old southern flower nursery turned into a golf course in the spring, lavished with money for decades, may be worth the watching for any non-golfers out there. For me, it’s just heaven.

THE KEY QUESTION

Instead of discussing The Big Picture today, let’s focus on The Key Question. Since that’s what I keep pondering. Plus it has to be on every investor’s mind as well. “Could this rally be the start of a new bull market?” To intelligently answer -- as during every bear market rally -- necessitates rehashing all the available evidence. I can make a solid case for a cyclical bull market having just started and I can make an even more solid case that this is just a normal bounce in a Papa Bear market. Consider:

MINI BULL MARKET HAS STARTED

·        The economic stimulus is now starting to kick in which will stabilize and bounce the economy.

·        The monetary stimulus, lower interest rates, is also now kicking in and housing sales are increasing.

·        Inventories have been drawn down and need to be restocked which will pump up GDP growth near term.

·        The US and other governments have done everything possible to mitigate this downturn.

·        We now have more coordinated and get along global leadership than in many years.

·        The US economy has proven itself wonderfully resilient to shocks in recent decades.

·        Markets can counter-swing at any time for long periods, posting mini bull markets, versus primary trends.

·        Almost two years has passed since the beginning of the credit implosion back in July 2007.

·        Many independent market gurus think the March 2009 lows will last for a good while, months or longer.

·        The latest government bailout plan has more enthusiasts and support for it than previous plans.

·        Oil stopped falling back in December and is now on the rise possibility indicating growth rebounding.

·        We have recently had a number of better economic data reports from both retail and housing.

JUST A BEAR MARKET BOUNCE

·        The bear market hasn’t lasted long enough to discount all the problems that have come to light.

·        More problems, coming as bearish ripple effects and because of long lag times, are due to show up.

·        The bear market hasn’t fallen deeply enough to factor in the sudden massive shock to the global economy.

·        There hasn’t been enough overall selling or liquidation for a solid bottom. Stock and mutual fund liquidation haven’t reached previous classic big bear market bottom levels.

·        No solid bottom appears on the charts. We need a climatic sell off or a long low volume erosion to bottom.

·        Interest rates have to go up at some point, soon – either with and because of an economic rebound or from panic selling -- which normally depresses stock prices because of this new competitiveness from bonds.

·        The American consumer has suddenly stopped spending. This has slowed down business all over the world and finally exposed the global imbalances problems. Too much manufacturing in China and Asia and too much spending coming from America. Now those imbalances are being forced to readjust. Takes time.

·        The stock market is ignoring soaring unemployment. Yes, employment is a lagging indicator but continuing jobless claims isn’t. A new report just out says that in coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits. Finally, 600,000 new job losses each month is going to add to weaker consumer spending, problems for local communities and cause negative ripple effects.

SCHWARTZ CONCLUSION: In review, we started this big bad bear market back in the year 2000. That was the peak of the last big bull market and thus the beginning of this big bear market. This is evidenced by the benchmark S&P 500 Double Topping in March 2000 and October 2007 and then subsequently and decisively breaking below October 2002’s previous decade-long lows by over 10% in March 2009. Showing that since 2000 and the ending of the Internet boom we’ve really been living on lower interest rates and big tax cuts, a false, “pump me up,” house of cards. Really not any wealth building going on, just paper shuffling to make things look great fueled by easy money credit creation. But now reality has set in. Thus, looking around, we see we’re almost nine years into a bear market which has been interspersed with one bull market, running for five years. So stocks were down almost two & a half years, up five years, now down about another one & a half years, sort of repeating The Visit of the Three Bears. In that infamous and extended bear market run of nine years, netting a -50% loss, there were two cyclical bull markets sprinkled in and surrounded and book-ended by the three bears, Baby, Mama and Papa.

My conclusion remains that this bear market is not over. But that the form and shape of it may get tricky going forward. Because the market has a history of posting cyclical or short term or mini bull markets on the way down when the bear gets ahead of itself. Which is why the stock market remains so fascinating!

THE ECONOMY

Well, the BUZZ has died down about how the economy is slowing its prior quick rate of descent. Guess because we’ve started seeing more bad economic data pop up or because the conversation has moved on. But some investors have decided an end to the economic collapse is out there, just over the horizon, so they are shifting into cyclical stocks now as a result. One can see this money rotating out of defensive sectors such as medical care, consumer staples and even gold. You know the concept, buying in advance of a recession’s end since history shows stocks rise roughly six months before the economy turns up. But if we indeed are stuck with a very mild even “anemic” economic recovery, as many figure, then stocks could also soon level off to mirror that trend as well. That is if the economic and earnings data don’t start sinking fast once again showing the economy is still sinking. For example, last Friday it was reported that the ISM Non-Manufacturing Index which now measures almost 90% of America’s economy - America now being a service oriented economy instead of a manufacturing economy - fell faster in March than in February somewhat debunking the idea that the economy has stabilized. Schwartz View: Yes, there is the possibility that economy-wise we are going to V- back up because sharp moves, in whatever areas of endeavor, are generally followed by responding sharp moves back up. We’re seeing that now in the stock market but after this bounce is over, I agree with the camp forecasting an anemic slow economic recovery.

THE STOCK MARKET

The stock market extended its rally to four straight weeks last week. We did see the first crack in this rally a week ago when the market fell sharply for two days. But then we quickly rebounded to new rally highs. That’s normal, the first crack being overcome but it does show this rally may be starting to struggle. We are getting closer to my minimum upside targets of Dow 8303 and S&P 1627, closing Friday at Dow 8017 and S&P 1621. And one can note trading volume has been slowing some, another sign of sluggishness. Or maybe cautiousness. Makes sense as we’re now moving into another corporate earnings reporting season starting tomorrow, the 1^st quarter January-March 2009 report kicking off after the close with Alcoa (AA), traditionally the first of the 30 Dow stocks to report. With the fall-off-the-cliff economy occurring early in last year’s fourth quarter, it only stands to reason that investors have to be wary of forthcoming earnings and thus wary of this rally as well. Schwartz View: It looks like the stock market has some more strength left in it so with stocks already having rallied beyond the 50% retracement level from their latest leg down, the early January peak, the teeter-totter phenomenon comes into play. Getting halfway up means it’s very likely to go all the way back up. Thus we kick off this week at roughly another key Fibonacci 61.8% price in both the Dow and S&P 500. That’s about 8088 and 838 respectively. If we break through those levels, then the next target is those January highs, Dow 9088 & S&P 944. Not guaranteed but increasingly likely.

PORTFOLIO STRATEGY

2009 may indeed prove to be the year to trade. If stocks fluctuate but go nowhere net, up or down, for many months ahead then it’s going to prove very frustrating for investors. In these times and they do happen, more often than the uninformed investor may realize, the best way to make profits is to: (1) trade individual stocks and (2) discipline yourself to continuously fade the market, buying on dips and selling on strength. Toward that end I’ve started incorporating the Commodity Channel Index (CCI) technical indicator into my work. Comes on most charting services like Bloomberg. Basically it shows deviations from the moving average, when stocks get too far overbought or oversold. Naturally you buy when a stock or index gets oversold. For more on the CCI I suggest getting Oliver Perez’s Swing Trading Tactics DVD or Alexander Elder’s book TRADING FOR A LIVING. Over the last month of rally for instance certain stocks have far outperformed the averages. And numerous tradable asset classes or market sectors like the US dollar and oil have been both up and down offering trading profits but no net profits for buy & holders.

Otherwise than scalping profits what should we do? For now favor the long side and the cyclicals. I like technology, renewable energy and natural resources. Move up a notch in your market exposure to about 30% if you haven’t already but continue to hedge your bets and don’t get out on a limb by going too long. Just subdue your ego, don’t think you know more than Mr. Market does and just go with the flow, modestly. Bottom line take what the market gives you, right now there are some trading opportunities but don’t get carried away. There’s lots more trouble to come but the path ahead is likely to get more tricky as well. So don’t fall into the camp that says “fool me once, shame on you, fool me twice shame on me.”

Have a good week!

Go Tiger Go!

Principles of the Stock Market: Sample

Richard Schwartz — Tue, 06 Jan 2009 14:56:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

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

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

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!

One Way To Handle This Bear Market

Richard Schwartz — Thu, 11 Dec 2008 14:53:00 GMT

SCHWARTZ STRATEGY DETAILED. The Principle of Proper Money Managment. Especially important during a bear market. I know many readers aren’t prepared to keep jumping in and out of the stock market, trading in other words, each time the stock market begins some type of rally. As I suggest. Many of you just want to make some long range investments and stay put thus it’s terribly hard to follow my in and out advice. But that’s also pretty hard to do – buy and hold right now -- since the near and intermediate term outlook is still so iffy. Sorry about that but I can’t do anything about it. Either you operate like Warren Buffett, buying down here with plans you can outwait any trouble ahead, holding for years if necessary. Or you fashion some type of middle ground, somewhere between buy and hold and trading around daily. So here’s one suggestion, along the lines of what I do every day.

Schwartz Daily. First, as I’ve long recommended, you hedge your portfolio. Starting with taking a Big Picture view. If you agree with me about the big picture, that since today’s economic and stock market predicament is the worse most everyone has ever seen, that this bear market will have to last at least another year, roughly two years minimum in total, then you add a couple bear market index plays to you overall portfolio with plans to hold them for some time, say throughout 2009. Obviously if you don’t hold any inverse ETFs or inverse mutual funds right now, you want to initiate them on some strength like possibly this year end rally occurring now. As soon as you can’t wait any longer or if you read here that this rally is nearing its end, you put on these inverse plays. Or hedges as I call them since I’m not trying to make a ton on this bear just avoid getting clawed up really badly. Again, or second, once that’s done you check each position each morning and see how they’ve done over the pervious trading day. You check after big up days, big down days and after modestly moving market days like yesterday. What you’re looking for is how your overall portfolio did versus the general stock market and how each individual long and short did. For example, yesterday my two inverse or short hedges both fell, obviously, because it was an overall up stock market day. My Short NASDAQ 100 ProFund (symbol SOPIX) fell -2.19% and my ProFunds Bear ProFund (symbol BRPIX) lost -1.15%. On the other hand my longs, ProFunds Consumer Goods Ultra (symbol CNPIX) rose +0.76% yesterday. Similarly my ProFunds Utilities Ultra (symbol UTPIX) rose +3.09%, my ProFunds Biotech Ultra(symbol BIPIX) rose +1.13%, while my ProFunds Telecom Ultra (TCPIX), disappointing, fell -3.68% yesterday. So third, you check out why any discrepancies show up and decide if you want to change the mixture or positions. Disclaimer! I hold small positions in the investments above but can and do change my positions anytime.

Two other obvious major factors are (1) your overall percentage invested versus your sidelined cash. I’ve been running most of this year about 20% invested, including my longs, shorts and non-corollary positions like whether I’m long or short the dollar, Treasuries and gold and 80% cash or cash equivalents. And (2) what percentages of each position you hold, for example my two shorts mow total about 5% versus my four longs totaling about 10.75%. So as you can easily note, I’m mostly in cash, about 84% now and what I’ve got in I’m positioned for a rally. But when I see no signs of a rally, I shift to leaning more short than long. What I would love to see are my longs doing well between now and the end of the year while my shorts don’t hurt me. Then a chance to take profits in my longs while leaving my outstanding shorts alone, let them keep running since overall we’re in a bear market. Summing up, numerous investors and traders operate this way. With the plan that their shorts will go up and their longs will go up as well. That’s the ideal anyway. Just another strategy for you to ponder and maybe adapt as your own. Good investing!

"No One Can Time The Stock Market"

Richard Schwartz — Tue, 11 Nov 2008 14:18:00 GMT

TECHNICAL VIEW. The Principle of Technical Analysis. I don’t want to jinx myself but I can’t keep quiet. Not after hearing the usual Wall Street mantra again this morning. That is, that no one can time the stock market so it’s always best to ride out its ups and downs. I mean this type of misleading & confusing information is one big reason why I started this stock market letter back some 18 years ago. Part of my motivation, to quote myself, was to “unveil the mystery surrounding the stock market.” I saw numerous misstatements and unfounded general beliefs which I just thought were plain wrong being foisted on the investing public, not large institutional investors but aimed at individual investors. After working as a stockbroker/financial consultant for 15 years, I realized that Wall Street kept nurturing the stock market’s mystery. Why? For Wall Street’s best interest. Why pay a stockbroker or brokerage firm big bucks if individuals could understood for themselves the market? No, only if individuals felt (and kept feeling) overwhelmed by the market’s workings would there be a need for advisors and a way to charge big fees.

Anyway, I don’t want to get off track. I just want to comment on the one line of reasoning which we’ve all heard repeated so often that most now take it as fact. That is that no one can call the tops or bottoms of bull and bear markets. We hear it from about 50% of the mutual fund managers, market strategists and others every time they come on TV. Many begin with something like: “Since no one can call a bottom, …” Not only does this perpetuate the need for market advisors it also justifies the roller coaster performance of these money managers. Hey, it takes the pressure off them, right? As long as they are doing about as well or as poorly as the overall stock market, then they are doing their jobs well. At least that’s the thinking.

But then what about all the traders out there? Why did hedge funds start then? If no one can time the market what about this whole cadre of people trying to outperform the market? And what about those fabulously successful speculators we hear about? Some do time the market correctly is my answer.

Schwartz View: I’m sure many others did as well so I’m speaking just for myself now. After studying the stock market for 35 years, all facets from timing to investment themes and much, much more, I was able to correctly identify last year’s market collapse as the beginning of a bear market pretty early on. In spite of those who say no one can do such a thing. And I stepped up, following my own reasoning and got Lucy’s 401k or 403b or whatever it is into 100% cash. Right before we went away on our annual Christmas beach vacation last year. And thus kept her retirement account from falling about in half! With my managed accounts, I followed generally the same path, figuring my top priority was protecting our downsides because the market was turning bearish. Since then I’ve been able to keep mostly to the sidelines, watching this bear market unfold, gather steam and keep on rolling. This in spite of hearing the “Trillion Dollar Man,” BlackRock’s Bob Doll, incorrectly call a bottom in March, Mad Man Cramer call a bottom in July and other bullish, skin-in-the-game advisors come on CNBC and say they are buying, that a bottom is near or building a bottom is a process and you’d better get in now “…since no one can call the bottom.” Well, the bear market continues and we keep seeing further and deeper declines. My sense, as I’ve been writing for months now, is that this bear market will last for at least two years or until at least next October simply because what’s hit us is the worst mess since the Great Depression of the 1930s. So why wouldn’t this bear market last at least as long as the last Papa Bear market, the two year long drop in 1973-1974?

Bottom line, while I don’t expect to call the bear market bottom before it arrives or to the day (except in hindsight) I believe with the tools, skill sets and experience I’ve now got, after studying the market’s primary trend, history, psychology, value, technicals, etc. for decades, I should be able to identify the bottom reasonably well. Part of my overall game plan entails trading most possible rallies so when one does prove to be the real thing, I’m in with at least one foot near the start. Then, as I see prices rising, I should be able to get in more heavily. Bottom line, I believe anyone who’s willing to put in the time and effort should be able to quickly identity tops and bottoms in the stock market, totally counter to what we always hear. Oh, one last point. Be careful of the fear that these always 100% invested advisors love to leave you with (just like dentists do). That is the mantra that if you miss the first days of a new bull market, you’re in trouble. Sure the first days up are normally exciting and big. But bottoms generally are retested, providing the sharp-eyed observer more than one reentry point. And bull markets run for years not just for a couple of days. So don’t worry, be happy, if you’re now 50% or more in cash on the sidelines. Just stay tuned here. Because one way to indeed miss the bottom is to lose interest in stocks during a long bear market. Go ahead, lose interest if you’re 100% invested now because you’re already in a bind. But don’t lose interest if you’ve played out this hand fundamentally correct. If you’re saved yourself a bundle by already going against the Wall Street mantra of staying invested “because no one can time the market,” then stay in touch with stocks for your reentry point. One good and easy way to do so is by just reading this letter each day. It’s only a couple pages long, doesn’t take much time to read, you’ll learn something new most of the time AND you’ll be aware pretty quickly, & ready to profit, when this market turns up.

Oil Rally Likely Says Elliott Wave Theory

Richard Schwartz — Wed, 05 Nov 2008 14:18:00 GMT

COMMODITY VIEW. Oil Rally Begins. Elliott Wave theory, originally produced by R. N. Elliott in the early 1900s, and now carried forward by Bob Prechter, past #1 market guru, basically says Elliott waves or complete market movements come in threes. Well, to more accurate, Elliott says movements really come in fives, three in the prevailing direction, and two counterswings in the other direction. Right now I see three distinct and obvious movements downward in oil and other commodities. Meaning I see a complete movement just finished. So now I have to expect a move in the other direction, a rally upward in oil. For chart lover’s edification, and to see what I see, the three legs down are as follows.

Complete Elliott Wave Movement. The 1^st leg lower off the July 3^rd, 2008 crude oil top ended roughly August 12^th. After a minor sideways counterswing upward until August 29^th, oil, and commodities in general, began their 2^nd legs down with a gap lower the next day and continued downward to September 16^th, where the second counterswing rally upward began. This lasted for only a few days, until September 22^nd before the 3^rd leg down began. Starting September 22^nd, oil, and commodities in general, fell along with most everything else financial in the rare forced panic right through to the bottom on October 27^th. So we now have a complete three legged or Elliott Wave decline in place.

Schwartz View: At this point then I expect some type of oil and general commodity rally, which has already begun, beginning six days back. Maybe going hand in hand with a general stock market rally. But remember, there’s no saying oil can’t just keep on falling after this pause or rally attempt ends. We could easily soon start another whole new movement down in oil. But, bottom line important, this is the price and time point where it’s logical to play for a rally if one’s so inclined. I am so I took a small position in oil on Monday on the dip which took oil back down but not down below its October 27^th lows. Then yesterday we had a big up day in oil after which we were left posted a higher high. Add that to a higher low the day before and over the last week we’ve quickly met the definition on an uptrend, a series of higher lows and higher highs. Thus traders might want to take note and mirror me, using the next decline, oil’s down as I write this morning, to do so as long as we don’t break the old crude price lows. As for additional reasons oil why oil may have finally found its leveling off price, crude at its recent low was down a Fibonacci number, down very close to 61.8%. Normally a great point to expect a bounce. Plus hedge fund commodity deleveraging might just be ending along with the thawing and maybe long awaited ending to the horrific credit crisis. Finally, just use some common sense. No matter how poor the US and global economy gets, a certain amount of business is still going to need to be done.. And with no progress made in freeing ourselves from oil over the last 30 years, no matter what I want and believe will is on the way to happening, it’s not going to occur overnight. Oil is still going to have to be utilized for years to come; why not a rally to some leveling off point, say maybe at about 50% off its highs or in the low $70s?

Disclaimer! I own a little oil with small positions in Rydex Oil & Gas Ultra (RYEIX) and in ProFunds Energy (ENPIX).

Studying Similar Sharp Declines & Their Bottoms

Richard Schwartz — Tue, 07 Oct 2008 18:26:00 GMT

The Principle of Understanding History & The Principle of Technical Analysis. Written Tuesday, October 7th, 2008

OK, yesterday I heard one analyst, I believe it was Liz Ann Sounders, chief investment strategist for Charles Schwab say the recent sharp year-over-year (yoy) stock market decline is only rivaled by the year 1974 and two years back in the 1930s. I could make a good guess which years in the 1930s those steep yoy declines came but I went back and checked anyway because those are the years along with their stock market bottoms that I want to start studying, their charts and their economic, financial and psychological backdrops as well. All three years were big bad bear market years as yoy declines of -30% or more would have to be. 1974 was the year our last Papa Bear market ended, and was the second year of that bear market. 1931 was smack in the middle of that big Papa Bear (stocks bottomed May 1932 and in rallied the second half, preventing 1932 from making the list). And 1937 was the year the five year, first bull market after the Papa Bear of 1929-1932 ran out of steam and the economy ran off the cliff and we had a short but very severe Mama Bear market. (I distinguish Papa bear markets from Mama bear markets by their lengths, the 1937-1938 bear market lasting only one year.) A first, brief cursory review of those big down years is as follows:

· 1974. The total decline in the Dow came to -45.1% in just under two years. The stock market’s bear market ending was immediately preceded by a most severe leg down in stock prices, losing -27% in less than two months from early August through October 4^th. The ultimate bottom was characterized by the Dow Transports NOT making one last new low along with the Dow Industrials in early December. Schwartz View: Diverging in other words.

· 1931. The total decline in the Dow came to -89% and took just under three years, September 1929 to July 1932. 1931 came in the middle of that horrific Papa Bear market so that’s dismaying for us today. But, similar to the bottom in 1974, the 1932 bottom came after a grinding last leg down in stock prices. From March through July 1932, we saw an inexorable day-after-day, four-month decline totaling -54%. Whew! Schwartz View: Trading volume was the distinguishing characteristic of that market bottom, shrinking up noticeably.

· 1937. The total decline in the Dow came to -49% and took almost exactly one year. The bulk of the 1937 Mama Bear market occurred primarily during a sudden market collapse from August through December and encompassed another extended, depressing, sharp down leg of -40%. In October of this four-month leg down, trading volume spiked during a mini crash but that wasn’t the final bottom. Schwartz View: The bottom came on much reduced trading volume in March of the following year and prices didn’t really move up until volume again picked up, in about June.

SCHWARTZ SUMMING UP. My first, quick gleanings from reviewing past market bottoms after the three most severe year-over-year declines in stock prices, like one we're in right now, indicate we might look for anultimate market bottom to include: (1) a sharp leg down just preceding the bottom, (2) a divergence between the Dow and the Dow trannies and/or (3) sharply lower trading volume for some weeks before the ultimate bottom. Stay tuned for more to come while hanging tough.

Strategy for a New Leg Down

Richard Schwartz — Tue, 16 Sep 2008 14:18:00 GMT

TECHNICAL VIEW. Written Tuesday, September 16th, 2008

A New Bear Market Leg Down Likely Starting! Schwartz Strategy.

Right at the close yesterday, the Dow Industrials dropped sharply going from -400 points down to -500 points down, closing at 10,917.50, below its previous bear market July 15^th closing low of 10.962.50. The S&P 500 did the same, closing at 1192.70, below its previous bear market low of 1214.91 also set on July 15^th. Thus, after yesterday’s big down day, the Dow & S&P have both gotten back in sync to the downside with the Nasdaq Composite and S&P 400 Midcap, both of which closed below their previous bear market lows last Tuesday. The question is which way next. Is this breaking of support just a head fake, a false move, and stocks will ultimately hold around here? Meaning that these new, still modest new lows are just widening out the bottom end of the trading range we’ve been in since mid-July. Maybe if the Fed or government again rushes in on their white horses to save the day. OR is this the beginning of another leg lower in stock prices during this grizzly bear market? I suggest the latter.

Bear market corrections upward usually last from three weeks to three months and take the form of either a bounce, or if technically too weak to bounce, some sideways, killing-time price action. Earlier on in bear markets, upward corrections are likely to be just that, upward bounces, since many investors still don’t believe a primary downtrend has taken charge. Note our recent mid-March to mid-May, two-month bounce. But now, a few months later in this now widely-acknowledged bear market, when its more obvious that something is deeply wrong, we were only able to post a weak, one-month, July 15^th to August 15^th killing time sideways “upward” correction. Thus I make the odds high we’re now breaking lower.

Schwartz View: Yep, my guesstimate is that indeed we’re beginning another new leg down in stock prices. Just common sense alone tells us after the major convulsions and damage going on in the investment banking sector, the financial & economic backdrops are in worse shape than back in July. Thus lower stock prices should result as the market gropes for a new lower price level to make its next stand.

The next few days should tall the tale for sure about a new break lower or not, but if you agree with me, correct strategy is to again follow my Schwartz Rule: Move Early! That means moving today! Shorting something today. Whatever happens, up or down. Remember, when cutting back after any market index or individual stock tops out, the “first loss is normally the best and smallest loss.” Well, the same thing applies when buying or when selling short. The first early move is generally your best.

· WHY? So if you haven’t been able to follow through on my consistent, persistent advice to lower your market exposure since I first starting calling this decline a bear market last November, now’s another point in time to do so. I know, I know, many advisors on CNBC say it’s too late to sell now but I disagree. Please remember these are the same advisors who’ve been seeing bottoms each step downward and who have to always carry a bullish market bias. As I see it, the downside from here could be just as great as the -20%+ we’ve lost so far. I’ve been writing that for awhile now. And now a move to lower prices may be starting. Thus if you have previously cut way back, to 50% or less market exposure, I applaud you since I know it’s very hard to make the decision to sell anytime, especially after you’ve seen and felt your portfolio at higher valuations.

· WHEN? The other, second, fundamentally logical time to sell or sell short is in a day or two or three when the stock market bounces. Say if we go lower for the next few days, then bounce for a day or two. The closer to the July 15^th lows the better because old downside support, when broken, becomes new upside resistance.

· WHAT? As to what to short, that gets more sticky. Remember the marketplace itself, by money once more quickly flowing into US Treasuries, is lowering long term interest rates on its own. Thus rounding up the usual suspects, REITs, utilities and the other beaten up, battered down financials (which many still adamantly say bottomed out back on July 15^th) may not be the way to go. Lower interest rates should take some near term pressure off these interest-sensitive sectors. Better may be finding a way to short the real economy, namely those businesses that aren’t really financial in nature but that actually produce or manufacturer something tangible. That’s what I’m investigating today. To find some inverse sector funds and or ETFs which suit this purpose.

Potential Rally Remains on Tightrope

Richard Schwartz — Fri, 01 Aug 2008 13:49:00 GMT

TECHNICAL VIEW. Written Friday, August 1st, 2008: 6:30 a.m. EST

With the S&P 500 closing just above it’s week ago Wednesday’s close this past Wednesday and the Nasdaq Composite following suit, we have a series of higher lows and higher highs in both, i.e., an uptrend in place. So I was hoping for some follow through by the Dow and other indices yesterday to confirm such. But no such luck. Turned out the market couldn’t overcome more depressing, recessionary-like economic data and even oil turning down didn’t help that much. Just wonder if Mr. Market has already reached the conclusion that lower oil won’t resolve all our problems. Nah, it’s hard to believe we’ve squeezed all the bullishness and resulting rally out of lower oil just yet. The crude price continuing to drop should continue to help stocks, just looked like a breather to me yesterday. Getting back to the technical view, and Investor’s Business Daily (IBD) putting the “Bull back in the Box” after a bullish “follow-through” day after Tuesday’s big up day on higher volume, IBD always recommends watching closely in the days immediately following. So I pulled out an dog-eared IBD publication because I remember well they have a good explanation of whether a follow-through day is succeeding or not. Yep, here it is, in William O’Neil and Gil Morales’ short 2005 book HOW TO MAKE MONEY SELLING STOCKS SHORT (get yourself a copy): “In a few instances, you may have a strong follow-through day and the market will still fail. When this occurs, it usually happens rather fast and can be figured out in a few days.” [Schwartz: This latest follow through day came very late, past the 4 to 10 day normal limit.] IBD follows with this: “If the market is making very little price progress on decreased volume, or if it abruptly begins to fail badly after a sharp, one-day rally, you are probably at another short selling point, as far as the general market averages are concerned.”

Schwartz View: I was prepared to push a little more money thru the windows yesterday – not too much! -- figuring a rally was started but didn’t when I remembered the first Friday of each month we get the JOBS report. Better to wait one more day. So let’s see what the 8:30 am data brings today (although I don’t trust the data, short term traders do trade it). FLASH! Data not too bad, if one trusts it. And while yesterday wasn’t any bearish “distribution day” because of the reduced trading volume, it still looks like we could get a market failure as IBD warns us to always watch closely for. And in spite of me possibly buying a bit more today, please remember, overall, I believe a recession is here & the market will have to factor that in & move lower over the next year or so.

Reasons For a Summer Rally

Richard Schwartz — Wed, 30 Jul 2008 13:22:00 GMT

UPDATE ON THE STOCK MARKET. Written Wednesday, July 30th, 2008: 6:30 am EST.

Another ‘flashy-splashy’ rally yesterday So typical of bear markets, especially those with much further in time and points to go. Grizzly bear markets thrive on investors’ hope and adamant investor reluctance to believe things can get worse. Bear markets end when that hope is gone. Anyway, everyone jumped on board the stock market yesterday, figuring that, once again, the credit crunch is over or at least winding down. I doubt that and really doubt that the nine month bear market is over but one never knows the future for sure so we always have to keep an open mind.

A SCHWARTZ RECAP. Bulls, still fighting this bear market, did a great job of spinning (it’s always easier to spin when there is a germ of truth) that Merrill Lynch’s capital raising move yesterday and more billions in write offs showed we’re in the “end game” of this crisis. That Merrill selling some distressed assets, doing what no one has wanted to do, selling out and thus setting a low market price, about 20 cents on the dollar, for some of their CDO’s, means that everyone else may be forced to follow suit and thus that will call an end to the prevailing uncertainty. But this game doesn’t end with Merrill alone, this may just be the beginning of the end, which, as we all know, can go on seemingly interminably. And subprime write downs are now just one piece of the now larger and still spreading problem, although a big part I admit. And subprime sell offs at whatever price would have been better if done many months ago, following the old Wall Street rule which Wall Street, when pressed, totally disregarded: “The first loss is the best loss.” Not many are noting the awful details either, that Merrill is paying Temasek Holdings, a Singapore-owned SWF (no, not meaning Single White Female!), a sovereign wealth fund to buy more stock. Previously Temasek bought Merrill stock and lost a bundle. Thus in this deal Merrill is now paying Temasek a cool $2.5 billion to offset some of Temasek’s losses on that first buy. Plus Merrill is financing the deal for Temasek and this deal will increase and dilute Merrill’s outstanding shares by 36%. And, ironically, the sale of these CDO’s are at a price lower than Merrill’s just announced mark-to-market quarterly earnings report and stated value. Finally, this whole new deal flies in the face of what John Thain, Merrill’s relatively new boss, has said previously, that Mother Merrill wouldn’t need or be raising any new capital. Schwartz View: Net, net, some say Merrill is a goner, that it will have to be taken over down the road some. I don’t know any details but agree with the concept, that brokers will have to merge.

TECHNICAL VIEW. IBD PUTS THE BULL BACK IN THE BOX!

Yep, yesterday was a bullish “follow-through” day according to Investor’s Business Daily (IBD). On the 11^th day, pretty late, after the recent July 14^th bottom, a number of key market indices followed through yesterday, that is rallied more than +1.7% and on heavier trading volume than the day before. Obviously lower oil has been the underlying linchpin to this rally; oil down stocks up and vice versa. Schwartz View: My stated view is that this drop in oil will help stocks for a time, for the time it takes investors to realize that lower oil isn’t going to be the panacea for this bearish stock market. That at some point lower oil will scare the pants off investors (so to speak) because they will see lower oil as confirmation that a recession is here and spreading globally. But we’ll have to wait on this theory of mine as for now lower oil does means higher stock prices.

IBD goes on to remind us that: “Every bull market in Wall street history started with a follow-through. But not every follow-through launches a new bull market.” I believe their stats but also know IBD has put the bull back in the box and then had to take it out a few days or a week or so later a couple times during the last few months. So, remember, nothing, no particular indicator, is perfect, by any means.

More Reasons For a Rally. But I’ve also been writing that the market is oversold, that the US government has come up with a boat load of temporary fixes and props to support the stock market including the stimulus plan, unprecedented lending to non-banks and barring short selling or at least making it extremely difficult to short the financials (the SEC extended this one week ban to August 12^th yesterday). And that a historical study of the pace of declines during extended bear markets show the market is now ahead of itself on the downside. Plus I must say I am impressed by many European stock markets posting a sequence of five straight up days after an extended, inexorable, grinding-lower decline, i.e. a bullish Trader Vic 4-Day Rule and change of intermediate trend. So we could certainly have a summer rally now.

Schwartz View: Myself I’d like to see and have written that a Dow Industrials and S&P 500 close above last Wednesday’s highs would give us a series of higher highs and higher lows, the definition of an uptrend. Well, we didn’t get quite that high a close yesterday another good day or two could do it. As for “Trader Vic’s” as easy as 1-2-3 change of trend, we have condition #1, a broken downtrend line and condition #2, a market which has stopped going down in place. We don’t have, as of yet, condition #3, that’s the higher high I’m watching for. Still, Trader Vic Sperandeo in his two excellent books from the early 1990s, get them, writes we don’t need all three, we can turn bullish with just one or two conditions met. Just be more cautious in proceeding and realize there’s always the chance for a whipsaw and have a backup plan for what you’ll do if that happens, how fast you’ll backtrack. With those caveats in mind, I put on some longs yesterday, not a lot and not terribly risky ones. Basically my theme is that as crude and other commodities correct, pressure should come off the food companies, off their raw material and input and power costs. And that at the same time these pressures diminish, food companies are successfully pushing through price increases such as mentioned by Kraft yesterday. If this summer rally holds together, say we get a new higher high by the Dow and S&P, I’ll push the envelope for short term trading purposes further.

Summer Rally Ahead?

Richard Schwartz — Fri, 25 Jul 2008 13:44:00 GMT

TECHNICAL VIEW. Summer Rally Ahead Or Not?

Now is the time for all good men and women to watch the key stock market indices very closely!

We have a possible bottom in place (if it is a bottom I have to believe it’s a temporary one). Yep, after basically falling out of bed for two months, from mid-May to mid-July, the stock market stopped going down a week and a half ago now. We then rallied sharply based on an accumulation of propping up moves by all parts of the US government. Then yesterday, we had the normal fall back, after any sharp move up. Now things get interesting and critical. Do we fall back and successfully retest and firm up those July 15^th lows, setting the stage for further gains and a lasting late summer rally? Or lapse into a sideways trading range, the other normal way for bear markets to correct themselves? Or do we take out those lows and thus continue the stock market slump for, say, the rest of the summer? Last I heard, #1 market guru of the past Joe Granville says that’s what’s ahead, more declines for the rest of the year.

If we do lapse back into what I’ve predicted as a “rough and rocky summer” and thus suggested it’s time to get your vacations in, then thus those of you following my advice and reading this advisory from your summer beach place or mountain vacation, please just settle in for more swimming, golfing and fly fishing for trout. Or whatever you like to do in the summer time (“when the living is easy”). My son Brian, by the by, is certainly getting to know Iowa and the heat in the summer time as he’s stationed in Iowa as a field organizer preparing for the November general election. He emails me: “Meeting lots of Iowans. Rural is rural. There is definitely a different way of life here from the city. Lots of cultural mix, county fairs.” I say “Go Brian Go! Live the dream! Hey, wonder if you’ll come home to Boston with an Iowan girl on your arm; wouldn’t doubt it.

Schwartz View: Back to point, if we do hold above the July 15^th lows and then rise above Wednesday’s closing highs, say of Dow 11,632.40 and S&P 500 1282.19, I’d suggest trading this rally. We would then have in place a successful retest of the old lows, a lower low in place. And also a higher high and thus enough technical evidence to buy (for a summer rally anyway).

Stock Market Strategy: 6:30 am EST, Thursday, July 17th, 2008

Richard Schwartz — Thu, 17 Jul 2008 13:55:00 GMT

STRATEGY VIEW. This morning please let me warn a bit further about using inverse vehicles. Appropriate because yesterday’s big rally must have gotten everyone’s attention, longs and shorts alike, but especially those now using these shorting vehicles. And because I’ve been getting increased interest in my hedging strategy of offsetting my longs and this bear market with inverse mutual funds and short ETFs. I’ve been recommending starting small and going slow. Exactly because even during sustained and extended bear markets, as I believe this one will prove to be, a too aggressive investor can get taken and/or shaken by jumping into new territory. Hey, it only is fundamentally correct policy to proceed into new, unexplored territory v-e-r-y s-l-o-w-l-y, right? I mean there’s sayings about such like: “Fools rush in where wise men never go.” And wagon trains sent out just a couple advance scouts to test out unexplored territory (I know from watching all those old cowboy and Indian movies). But I know we’re all impatient and want to resolve gray matters quickly, to get that monkey off our backs, especially so when it comes to investing, so we can get back to sleeping well at nights. But enough of those warnings … for the second.

My advice remains putting one foot slowly ahead of the other. Say if you have a $100,000 account. First, I would be keeping roughly half of it in cash or laddered short term US Treasury notes (for a little more income). Then with the other half I’d have roughly half long and half short, shifting with the tide.

· Longs. Say have the longs spread over the strongest acting market specific sectors, picking the strongest acting sector charts in technology, health care, and maybe chemicals or transports as a continuing cyclical play (likely boosted if oil keeps coming down). So try to play the strongest relative strength sectors you can find in an overall declining stock market.

· Shorts. Then on the short side I’d be short the S&P and or Dow, as both indexes have a diversified mix of industry sectors. Yesterday, for example, while the banks jumped sharply, utilities, energy and precious metals fell. So a diversified mix will benefit you if the whole stock market slumps as I continue to expect (although we could easily see somewhat of a sustained rally here on the hope that the government is going to fix things).

Go Slow! No matter what, (from first hand experience!), I would advise moving slow. Say today, tomorrow or soon take your first step. Again with that $100,000 portfolio, if you are 100% long, I’d lighten up into this rally, again doing so in steps in case this rally proves sustainable, trying to sell a little each step higher. And of the projected goal of putting the remaining 50% or $50,000 to work, $25,000 long, $25,000 short, I’d start off by going short with just 20% of the $25,000. Say buy an inverse fund or a short ETF with $5000 or 20% of the $25,000 you’re now long. Then watch the account’s value for a few trading days. If you’re still seeing your portfolio value fall more than you can stomach, go short another $5000, thus giving you a position of $10,000 short and $25,000 long. And so on, step by step. And, of course, only go short on or after up days. You need to sell most anytime midway through a big bear market, not waiting for rallies, but to go short you have to wait for rallies. You need to build yourself a profit buffer as you go otherwise big up days like yesterday will devastate you mentally and hurt too much financially. And cause you to abandon the whole scheme (scheme used in the best sense of the term).

Schwartz Summing Up. The goal again is to hedge your downside, not make a bundle going short!

Portfolio Strategy: Monday, July 14th, 2008

Richard Schwartz — Mon, 14 Jul 2008 13:34:00 GMT

PORTFOLIO STRATEGY

This year’s mid-March to mid-May bear market rally was the first rally versus the new primary bear market downtrend. Usually the first rally is the best rally (just like the first loss is the best loss) because many investors believe the bull market still lives and thus it’s eminently playable as bears still have buyers to sell to. But this second time up, if we do get a rally going, the odds are higher it may not last as long and thus not be playable. It may be just a quick, sharp bounce – futures are way up today -- but then after a few days dissipate quickly. Comparing today to the last Papa Bear market (of 1973-1974) we did get a three-month playable rally seven months into the first year of that two-year decline. But I have to equate that to our just completed (in mid-May) two-month rally (which began five months into this bear market).

Generally this middle phase of a bear market is pretty consistently down, except for short, sharp rallies caused by events like the government stepping in. Thus, for aggressive market participants, correct strategy may be just to cover one’s shorts, temporarily. Taking advantage of this morning’s excitement that the long suffering financials may be bottoming. Remember that’s the consensus view on Wall Street, that when the financials finally bottom out, that will signal the bottom in the overall stock market. And for others who are still too long this bearish stock market, which is down -20% but over time looks destined to go as much again lower, any strength here on the latest Fed moves may be to just sell into strength. That’s sort of my strategy as I watch the market this morning. To watch this rally unfold and then to use it for our best interests, keeping in mind that its very likely only a “flashy-splashy” normal bear market rally.

Dow 12,000 Now A Memory

Richard Schwartz — Thu, 26 Jun 2008 13:45:00 GMT

Thursday, June 26^th, 2008: Written 6:30 a.m. EST Going to find our “way to San Jose” next week, on vacation, so I’m been auditioning books for the plane rides. One coming along is Hamish McRae’s THE WORLD IN 2020. I previewed it and got caught up by his writing, the history he provides and his insights and conclusions. Anyway I’m in Monday am so one last missive then and next Friday is the 4^th of July so I’m only missing 3 letters.

UPDATE ON THE STOCK MARKET. After any break to new lows, one can generally expect a reflex rally. So after Tuesday’s confirming lows in numerous key US indices, “telling” us the near term stock market trend remains down, it wasn’t surprising to see the stocks up from the get-go yesterday, tracking a prior bounce in Europe. Later yesterday, the Federal Reserve’s 2:15 p.m. “no change” interest rate announcement didn’t change anything. Still, we had the normal late day sell off, common these days. As I see it, the mornings recently have been characterized by bulls rallying the market after the usual opening sell off runs its course, buyers stepping in after sellers temporarily exhaust themselves, just when a little buying can be very effective. Buyers looking to support their stance that things are and will be all right. Then these, now summer, afternoons are characterized by late day sell offs as large, institutional investors sell into the strength, lightening their heavy loads of stocks, as the bear camp grows slowly, but ever larger.

Schwartz View: We’re now very likely morphing into a steady and sustained stock market decline, i.e. a firmly entrenched bear market. Take a look around yourself, it could be sneaking up on you, you don’t want to be missing it. This bear is of the deceptive nature, not outright grizzly, not yet. Take the Dow Jones Industrials, “the Dow,” for example. Take a peek. We’re now below Dow 12,000 which we’ve only been below twice before now since the subprime implosion last summer, and then only briefly. First time down, the Dow closed below 12,000 for just one day, at 11,971 on January 22^nd, before jumping back above 12,000. Then the Dow closed below 12,000 on four days in mid-March, surrounding nervous weekends. The Dow closed at 11,893 on Friday, March 7^th and at 11,740 on the following Monday, March 10^th. Then after watching Bear Stearns rapidly fall apart the next week, from, oh, $70.08 down to $30.00 the Dow fiddled slightly above 12,000 for three days before closing again below its psychologically key, big Round Number on Friday, March 14^th at 11,951 and again the following Monday, March 17^th at 11,972. That was it. Since then its held above Dow 12,000 … until this past week. This third time down (may be the charm) the Dow closed below 12,000 last Friday and has traded below it for four straight days. To me this is a sign of more admittance and acknowledgement that things are getting worse not better, a sign of resignation. That likely a new and second leg down in stock prices has begun.

Charts Reinforce Latest Downtrend

Richard Schwartz — Wed, 25 Jun 2008 13:03:00 GMT

TECHNICAL VIEW. Charts Say Down, Again! Yesterday, the Dow Transports, S&P 400 Midcap & S&P 600 Smallcap joined the bear market party, err, pardon my loose use of the word party. Whatever, first it was the Dow Industrials closing below their June 11^th lows last Wednesday. Then the S&P 500 closed below its June 11^th low last Friday. Then this Monday, the Nasdaq Composite closed below its previous June 11^th low. And yesterday, capitulation. The Dow Transports, S&P Midcap and S&P Smallcap all closed below their June 11^th lows. Thus what we now have in place is a series of lower highs & lower lows since the two-month bounce from the lows of mid-March to the highs of mid-May ended.

Bulls, that includes most all professionals with only one job to do, invest in the stock market through good times and bad, a.k.a relative return investors, still disagree. In fact one such bullish guest on CNBC yesterday, resurrected the argument that “a bottom is a process not a one day event.” This is the argument that the Trillion Dollar Man, Bob Doll of BlackRock, Inc., the influential institutional money manager, proffered after the Fed backstopped the whole financial system at the bottom in March. She, yesterday’s CNBC guest, when asked why she thinks the stock market has bottomed, pulled out Mr. Doll’s mantra, that a bottom is an event not an event. And added that’s the way the stock market bottomed in 2002, 2003, three bottoms in relatively the same price range over nine months. Guess that strategy works for money managers with seemingly unlimited funds, they just keep buying, scaling in near what they figure is good value and a bottom. But other times that doesn’t work if the stock market confounds and breaks decisively below what the pros think, and have focused in on as a long term solid bottom. Then the relative return investors fall back on, “Hey, we’re all going down together.” So no one looks particularly bad. That’s what happened in the subprime mortgage, securitization implosion last year, they all went down together.

Schwartz View: Anyhow, the Dow Industrials is the first important index to come close to it’s mid-March, first leg down, bear market lows. After losing a modest 35 points or -0.3% yesterday it starts off today at Dow 11,807.43 only 67.20 points or +0.57% above its March 10^th closing low of 11,740.20. As I’ve written for some time now, I expect a rocky summer ahead. We could retest successfully here and if so, get stuck in an extended trading range. But I’d venture more likely we slowly, just like we’ve been doing since mid-May work our way lower and lower. First, one key index breaking below its previous bear market lows set in March. Then a bounce. Then another key index breaking lower. And so on and so on. Just what’s happened over the last two weeks in breaking this latest declines lows. That’s the way economically-spawned bear markets operate. Sorry Mr. Market, I know you just want this decline over right away, hey, we all do, but that’s just not how recession-stylized bear markets unfold. Economic trends take lots of time to work their ways through the marketplace and stock markets are mirrors of this, only operating in advance with their discounting feature. So it still looks like a rough and rocky summer ahead, a good time to take a close-to-home vacation (with minimal driving).

Ho Hum, Another Bear Market Summer Day

Richard Schwartz — Fri, 20 Jun 2008 14:08:00 GMT

UPDATE ON THE STOCK MARKET. Witten Friday, June 20th, 2008: 6:30 a.m.

Looked to me like yesterday’s stock market rally was a knee-jerk reaction to China announcing it was going to raise oil prices by 17%. Crude dove on the news while stocks jumped. But if one thinks it through, is China raising oil prices really such good news? The bullish knee-jerk was that higher prices for gasoline in China will mean lower overall oil demand from China and that will reduce oil prices globally. As we’ve been hearing a lot lately that it’s government subsidized gas prices in China, India and many other developing countries that isn’t allowing crude demand destruction to occur and thus lower global crude prices. I mean Americans drove 30 billion fewer miles from November through April and that hasn’t lowered prices. The bullish train of thought continues that if the world gets lower oil prices, everything will improve. But, with further thought, if gasoline prices go up in China, won’t that cause demands from Chinese workers for higher wages? I mean the very last thing that the current communist Chinese leadership wants is any revolution from the Chinese people. Already, super big picture investor and Chinese advocate Jim Rogers says its inevitable that China’s government will go capitalistic over time, what with the Chinese people getting a taste of free markets for the last decade or so and realizing that free markets are the pathway to future wealth. Remember: “To be rich is glorious,” is the Chinese people’s new mantra. Hm? … and won’t higher Chinese wages mean higher Chinese export prices, thus higher import prices for us here in the US since we import tons and tons of stuff from China? And thus higher consumer goods prices intensifying the already ongoing and tightening squeeze on US consumers? We’ve had stagnant wages for many, many years with no light at the end of that tunnel and now we’re seeing higher prices for just about everything; food, fuel, health care, taxes, etc. Guess the still entrenched bulls figure lower crude will lead to lower gasoline, diesel, heating oil, and food too, eventually. And since the trend is the thing in the stock market, meaning the markets start discounting immediately upon seeing a new trend emerge, stocks rose yesterday. Still, is a gas hike in China really going to bring down global energy prices? I mean China already raised gas prices late last year and that didn’t bring prices lower. And we now live in a very globally competitive world as all countries and regions want to secure their energy and other needed mineral futures. And food futures too now after the recent global rice shortage has exposed the fallacy that it’s ok to depend on other countries for food staples. Anyway, the first thought was that lower oil is good for stocks and thus the stock market got stronger as the afternoon proceeded, led by lower energy beneficiaries such as the Dow Transports. But while I turned bullish on the Transports back in late March, after technically it broke three fan lines and formed a Head & Shoulders Bottom, I’m now bearish on the group after the two-month dead cat rally ended and the transports formed a bearish, rarely seen Broadening Top, an indication of loss of intelligent sponsorship and leadership. Thus I would certainly use yesterday’s nice bounce back in the trannies to get out if you haven’t already. And, for aggressive traders, if you can find a way to short the transports, I’d do so in a small way now. Schwartz View: Again, yesterday seems like just another bounce in a larger bear market environment, caused by entrenched bulls who refuse to admit the primary trend has now changed and is now pointed downward. The problem with this bullishness -- investors refusing to admit they are wrong, a terrible habit in the stock market! -- is that it indicates we’re still in the early stages of this bear market. Again, safely position yourselves and, unless you’re a trader, take the summer off. Of course, keep reading my letters. Why? Well, let’s see, to improve your knowledge base of how the stock market works and to make sure you don’t miss the opportunity to get back in. Bear markets do have endings. The last Mama Bear market, 2000-2002, ran for slightly less than two years with the most damage coming in the 2^nd year. The last Papa Bear market, in 1973-1974 ran for two years. And that very famous big bad Papa Bear market, which this one is looking more & more like, ran from 1929-1932, or just under three years. So all bad times do pass.