Market Tips and Tricks

What a Sector Rotation Chart Says About the US Economy

What sectors rise when the economy begins to emerge from an economic downturn? The answer may surprise you.

Source - http://www.onlineinvestingai.com

The chart to the left is of the economic investment cycle. The blue shaded area represents  the stock market and the yellow the economy.

The first thing you’ll notice is that the stock market  typically bottoms and peaks 6 months to a year before the economy does. This chart also shows that bull markets are formed on the back of a healthy financial and transportation sector.

You’ve probably noticed that the financial sector began to recover thanks to the billions of dollars in backdoor handouts that the Fed has given it. The transportation sector seems to have found a bottom as well as imports and exports rise.

But the problem is that banks still aren’t lending. Consumer credit has dropped for 11 straight months. That’s a record. And with contracting credit comes contracting purchasing power.  Prices inevitably go down (I love cheap milk!).That’s deflation.

Another nagging question is exactly how the banks will do once interest rates rise and the Fed shuts down the printing press. If banks aren’t lending now, I doubt they’ll lend in a tight-money environment.

My prediction: Second half of the year, when the stimulus and quantitative easing wear off, we’ll run into some “rough patches”.

As an investor, you have to realize that the market will start to price in weakness as soon as the data starts coming in weaker. The big clue for you will be if the market sells off because economic data has come in under expectations. If you see that “under expectations” phrase one too many times, you’ll know the repricing is coming.

What does the dollar rally mean to investors?

When I used to date (before I got engaged), I never tried to kiss a girl unless she confirmed her interest in me.

A first date was never enough. People date all the time and it leads nowhere.

But if the girl was fiddling with her hair, touching my arms and telling me how I was a “strong and powerful Puerto Rican”, well, I would definitely kiss her by the end of the date.

Other guys I know aren’t as conservative. They try and kiss a girl whether she shows interest or not.

These are the same guys that spend money that they don’t yet have. Or that put all of their money on one big bet. And the same ones that try and predict tops and bottoms before they ever happen.

Their success in the stock market – as with the ladies – was limited.

I guess you can say I’m on the safer side of things. I like to wait for confirmation before I act. With the girls, as I explained above, I like them to show an interest in me. I don’t like to spend money I’m not holding in my hand. And I definitely don’t try and pick tops and bottoms in the market before they happen.

Rather, I ride out the trends and look for predictable buying or selling opportunities to take advantage.

In yesterday’s issue, I told you that I wouldn’t become a bear until the 50-day moving average was breached on the major indexes.

One thing I didn’t cover though was the dollar.

Careful observers have noted that the buck is now above its 50-day moving average. On Friday, I explained the relationship between the dollar and the stock market. Suffice it to say, a rallying dollar is bearish for the stock market.

But just because the buck is above its 50-day doesn’t mean I’ve become a bear. As I said before, I like to see confirmation first. In this case, confirmation would only happen if the major indexes drop under their 50-day moving averages (10,076 on the Dow Jones).

In the end, you have to stay realistic. Don’t let ideology drive your actions in the stock market. Instead let the market guide you.

Even though the dollar broke through a major resistance point, the trend is still up for the stock market.

Act accordingly.

Want to Bet Against Wall Street?

If you’re a boxer, the first thing you have to learn is how to bob and weave. You have to avoid punches and punch back at the right times if you want to survive out in the ring.

Other forms of martial arts fighting, like tai chi, focuses on using your opponents energy against himself. A person who fights tai chi doesn’t just swing like a drunk Puerto Rican in the Bronx. He sits back and actually waits for the drunk Puerto Rican to rush him… then he quickly gets out of the way and pushes the drunk bastard down to the ground… kicking him while he’s down.

So if you want to make money on Wall Street, I propose you use the crowd to your advantage by betting against them. Some people call it being a contrarian. Others call it having balls. Whatever you want to call it, I’m going to show you one way to be a contrarian right now.

Check out this news clip from Bloomberg…

Trading of options on the benchmark index for U.S. equity derivatives surged to a record in a bet that the so-called VIX may decline in the next two months.

“It looks like they’re trying to short the VIX in January and February,” said Dan Deming, a VIX options trader at Stutland Equities LLC in Chicago. “They’re selling the call spreads so that would indicate they think it’s going to be under pressure.”

More than 634,000 calls to buy futures on the VIX, as the Chicago Board Options Exchange Volatility Index is known, traded today, six times the four-week average. Eighty-seven percent of those contracts changed hands as part of two spread trades, according to data compiled by Bloomberg. The calls were probably sold, meaning traders were betting the VIX would decline, Deming said.

Now, over the longer-term I think the VIX is going down. So these smart asses selling calls are probably going to make some cash doing so. But there is a risk that the VIX pops up to 30 in the next 3-5 day sell-off which could happen at any time.

In fact, I’m pretty sure it’s going to happen either late this month or in early January.

Early January is more suspect because banks will be forced to put some junk assets back on the balance sheets as FAS 167 comes into effect. In other words, banks will have to use market value to price these assets and may lose a few billion in the process.

Plus, we should see lower consumer spending in January as jobless, cash-strapped individuals with maxed out credit cards try and pay off their newly acquired debt.

That’s going to act as a drag on retailers and probably spike the number of layoffs that happen after the holidays.

In the end, it’s likely that we see a big sell-off in the next few weeks. And when it happens, these VIX call sellers will turn into buyers and push the value of VIX calls through the roof.

I know what side I’d rather be on.

Want to Pick a Value Stock?

This is  one of the first things I learned as a financial analyst.

The style is very buffet-esque.  Basically just looking for really cheap stocks.

Here’s what you do…

Go here: Yahoo! Finance Stock Screener

Now input the following…

Operating Margins <= 20%

Return on Equity <= 15%

P/E <=15

Book Value <=2

When you find some stuff, make sure it has a EV/EBITDA ranking of under 10. Revenue and Earnings growth is always nice too. And Never discount a healthy dividend.

Of course, make sure to research the companies this screener pulls up. A lot of times companies are in value territory because they are doing horribly. So make sure you can tell the difference.

This Chart of the Dow Shows Opportunity…

I woke up this morning… grabbed a cup of coffee… and sat down at my computer looking through charts.

Most of what I saw was ridiculous crap. Stuff not even worth mentioning (expect to say that they sucked)

But then this GEM popped out at me…

Dow Jones Chart

This is a 15-minute chart of the Dow Jones.

Notice that 200-unit resistance that has proved quite resiliant. Well, if the Dow can hold its 8,000 support and break above this 200-unit average, then the Dow is rallying.

I really like the fact that neither the RSI or Slow Stochastic are anywhere near overbought. That means the fuel is there for a move much higher…

Hmm… There’s a great credit-spread one can do : )

One Thing I Should Say Now…

I’ve been writing for http://www.contrarianprofits.com for the past month now.

You can see my writing in the ‘Chart of the Day’ section of the site : )

I’ve also been tasked with the duty of finding them great recommendations.

Should be easy though – investing in times like these is pretty straight forward. You just have to have the “cohones” to do what your gut tells you to do. Half the times, everyone else will think you’re crazy. But then again, you and I know better…

By the way, should probably toss you a bone and let you know what I think the best place to put your money is…

Well, I don’t really trust the stock market much. But I do trust discount retailers (do a Google search).

Otherwise, you can sell me a high-interest, high-grade corporate bond trading under par and with a short-term maturity any day (now that was a mouthful)…

Admittedly though, it’s about 3:33 AM on a Friday night. I think I’m going to crawl back in my “money making” cave (you know, the bed).

Take care,

Charles

P.S. My lazy designer informs me that a design for the blog is coming soon! Which means I have to work on giving you a lot more content (money making wisdom, stock market tricks, and a thorough analysis of the big picture!).