July 2010


The Markets


Last month was the worst May since 1940 for the Dow. It went down 1000 points in a day went back 1000 in a week and then dropped 1200 points only to rally 500 points sto below its 50 and 200 day moving average.

The Transportations are below its 50 day MA but above it 200 day MA. Both have their MACD and relative strength (on Stockcharts.com) starting to go up. We have gone though a serious correction and it’s possible that it may be over for awhile. We’re suspecting the Industrials will go through its 200 day MA and test its 50 day MA at around 10750. We aren’t convinced it will go much higher. We wouldn’t be surprised that we have seen the highs for 2010.

The market action at the April top was suspicious to us which leads us to think it was a distribution top and major resistance in the future. The markets remain distorted because of government intervention along with world and natural events. Be cautious and defensive for now. Review your shopping list and be ready to trade. If you don’t, a good percentage of cash is good. It’s still early to judge the market’s direction for the year but we’ll go with the cautious side for now.

Other Opinions

Dow Theory Forecasts  says the Dow Theory is bearish and they would recommend 25% to 30% cash.

Dow Theory Letters says we will  have a sell signal if the Transports fall below 3792.89.  The Tranports have not yet confirmed the Industrials. They are already in 50% cash and  50% gold. A short term rally could be coming.

Wall street Journal Opinion page July 7, 2010:  Keynes vs. Hayek: The Great Debate Continues by Geral P. O’Driscoll Jr. His final 2 point:s, “Is all spending equally productive, or should government policies aim to simulate private investment? If the latter, then Mr. Obama is following in FDR’s footsteps and impeding recovery. He does so by demonizing business and creating regime uncertainty through new regulations and costly programs. In this he follow neither Hayek or Keynes, since creating a lack of confidence is considered destructive by both.
    
Finally, is creating new public debt in a weakened economy the path to recovery? Or is “economy” (austerity in today’s debate) and thrift the path to prosperity now, as it has usually been considered before?”

We suggest that depressions can be caused by legislation and regulation. Confidence, faith, trust /truth and cooperation  could over come them if there were any of them.

                                                           


Investment Notes

Morningstar Comments: There were 6% to 10% drops in each sector last month but risk remains popular. Large cap s continue to underperform  small and mid caps but big caps dropped less than mid and small caps. 

Investment Notes: The markets have probably finished the year long counter trend rally In a bear market. We are likely to be in the process of completing a head and shoulder top started in January. The likely short term rally could go to around 10,350  where the 50 and 200 day moving averages have recently met. The Dow could go higher to 10,700 area. 

The percentage of NYSE stocks above their 200 day moving averages is 35%. Below 30%, stocks start to become values. They had gone up to 60% last month before dropping. This one indicator implies a decline of a few weeks to months. It does not indicate how low it might go. Earnings season is upon us again which should keep the markets active for awhile. We think the earnings won’t stop the market from going lower because the multiple investors are willing to pay for earnings will be lower. Higher earnings may mean the market goes down less.   

We’re still looking at growing equity income values. Rates may stay down so we’re looking at preferreds, maybe the fixed time ETFs and a few gold stocks. Cash of 25%-30%. 

 



Heard in the Village

The villagers have been hearing about Paul Krugman, a Nobel prize economist, talking of depression, John Paulson, hedge fund trader, betting on economic growth and the rest of the financial media wondering about a double dip recession. They also were listening as to why the market would be going up or down based on the speakers favorite indicators as they behaved over the last 30 years. “They’re looking at the bark on the tree while a forest fire is coming toward the watched tree and bark” was the common comment heard around the village. Many people are believing the causes for this recession are the same as the ones in recent decades but just more severe than the others. It’s what the villagers call an inventory adjusting profit and loss recession. Most are not aware that it is what the villagers call a balance sheet correction.

Balance sheet corrections are far less common than the usual inventory recessions. They happened in the1870s, the1930s and now. They are correcting excessive amounts of debt on illiquid assets and inflated asset values. They are also ignoring the correction cycle of a 25 year bull markets in interest rates and equities.  The market cycle has 3 legs up and 3 legs down. We have had 1 leg down to the 6600 area and a nice big year long rally. That rally is over and we are likely to be going into the second down leg in a bear market that could last until around 2016. 

The villagers remain convinced the markets will stay down or go lower because of a lower p-e attached to whatever earnings are generated. Villagers are contrary value players so when they saw the BARRON’S Bond yield/stock yield (in BARRON’’S every week) at .80, they began thinking of accumulating better quality equity  income stocks more actively because they may be better valued than any time since the 1970s when it was around.70. (1 is when stocks and bonds are equal. Below 1, stocks are favored. It has been as high as 2.5  and rarely below 1 until recently) 

They would buy their stock picks at p-es at 10 or less and they would consider buying more as their yields go higher. They knew euphoria and bleakness can be overcome by the market with things unseen by investors, economists and the news media.