Market Update 2011-08-04
Contributed by Charles Guest, SinoCentury Guest Commentator

This is the first update in quite a while, but today warrants a word of caution.  

The S&P 500 index appears to have completed a head and shoulders pattern, which would be a very ominous sign for the markets. Specifically, the neckline support around 1250 was broken today. Once that support was broken the markets went into free fall, since traders respond to these critical levels. Also, computerized trades were triggered. We now rest at 1200, which is a major support level from which we fell off a cliff in 2008, eventually dropping to under 700. Traders remember that pain and will not be inclined to sit idly by if we cannot hold here.

There is a chance bulls will try to push us back towards the 1250 level, as we have only been below it for one day, in which case the bulls could conceivably regain the higher ground to push us back to recent highs. I am skeptical given the macroeconomic problems. Those problems include a near bank run in European banks, faltering economic indicators in the U.S., sovereign debt problems around the world, and diminished will and ability for more bailouts. If the bears take control, there are numerous support levels on the way down. If they don't hold, we could go all the way back to major support levels around 700 last seen in 2009.

Bottom line, I will be taking profits from the 2009-2011 bull market, reducing exposure to stocks, and raising cash levels for future buying opportunities.

Market Update 2010-05-11
Contributed by Charles Guest, SinoCentury Guest Commentator

A lot has happened since my last update on April 14th. At that time the S&P 500 Index had just closed at 1197 and I wrote that it would likely continue to run up to the 1225 level, at which point we would encounter a major crossroads in the market. I was off by 5, with the S&P 500 reaching 1220 points intraday on April 23rd. Since then it has been in a decidedly bearish mood, including a spectacular selloff on April 6th.  So what should we be watching now?

The market is trying to recover from last week’s huge selloff as I write. Once again, I am watching the Fibonacci retracement numbers. Resistance would be expected between S&P 1164 (the recent decline’s 50% retracement level) and 1173 (its 61.8% retracement level). To refresh your memory, Fibonacci retracements are watched by traders, who are about the only ones playing the market now. True to form, today the market sold off at the 1170 level and closed down at 1156. It just could not break through resistance today. I cannot say how this will end, but if the market can clear 1173 for more than a few days, it could once again approach the 1225 level. If not, we will likely go back to or below the 1110 level we closed at after “The Flash Crash” on May 6th. Either way, I expect quite a bit of volatility the next few days.

Also note that gold is now trading at a new all-time high. If it can hold here, it is likely to make a new major move up. I believe the recent price gain is in response to the European bailout plan. The European Central Bank, which was the last bastion of hard money, has now caved. And to add insult to injury, our own Federal Reserve Bank is now engaging in swaps with the ECB. I did a little research on this today. The Fed will swap dollars for Euros at current exchange rates. The ECB will swap them back to us at some future date at the same “fixed” exchange rate, at which time I would guess the Euro will be worth much less. Sounds like a good deal for American taxpayers and another nail in the coffin for the U.S. Dollar!      

It is a sorry world. If you want some insurance, I would once again recommend and am still accumulating the ProShares Short S&P 500 ETF (SH ), which is an exchange traded fund that trades at approximately the inverse of the daily return of the S&P 500 Index. And if you don't own gold or gold stocks already, what are you waiting for? For a play on gold mining shares, I own the Market Vectors Gold Miners ETF (GDX ). For a play on the price of the precious metal itself, you may consider owning the SPDR Gold Trust (GLD ), but beware that as a commodity fund GLD is set up as a publicly-traded partnership and will generate a little K-1 form headache each year at tax time if you own it outside of a retirement account. Meanwhile, happy investing. And as always, we will know more later!

Market Update 2010-04-13
Contributed by Charles Guest, SinoCentury Guest Commentator

Yesterday the Dow hit 11,000 with great fanfare.  Were you impressed?  It is just a nice, round number.  As I wrote last month, once we cleared the level of 1150 on the S&P 500 Index, the next level of major resistance would be at 1225. Yesterday the S&P 500 closed at 1197, so there is likely still room to run.  At 1225 points, the Fibonacci 61.8% retracement number comes into play (for more info on Fibonacci numbers, click here). Once we reach 1225, we will have retraced 61.8% of the bear market loss since the October 2007 high of 1562. This is a key technical level which drives stock traders (who are about the only ones playing the market right now, since the average Joe was already wiped out twice, once in 2000-2003 and again 2007-2009).  

As the stock market reaches S&P 1225, we face a major crossroads in the market. Will the market tumble or make a major move up? Given all the landmines which could blow up at any moment, we may resume the secular bear market. However, it is important to keep in mind that the next key Fibonacci retracement number is 1.00, meaning a possible 100% retracement of the entire bear market loss. That would take the U.S. stock market all the way back up to the S&P 500 Index’s high of 1562 that was reached in October 2007.

Which way will the market go? That is the dilemma. At the moment there are conflicting signals in the markets and the real economy. On the positive side there is a strongly positive yield curve,  the ISM numbers are reading well above 50 (which indicate an expanding economy), and the advance/decline lines are good (which indicates a broadly rising stock market and not just a few stocks). On the negative side the Federal Reserve Bank has stopped purchasing mortgages, economic stimulus spending will begin winding down soon, home buyer credits will expire at the end of this month, the federal deficit is ballooning, sovereign debt is still a major problem in Europe, China's real estate bubble could pop at any time, P/E ratios are rich, the volatility index indicates a high degree of complacency (it’s only 15 points), the number of shorts is at the lowest level since 2007, and I could just go on and on!

So what's an investor to do? My inclination is to the bearish side, but I cannot completely discount a further rise in the stock market. I have accumulated a portfolio which I believe to be good long term, but it could be crushed in the short to medium term. I have already sold some holdings to raise cash levels. I had planned to sell more as we approach the 1225 level on the S&P 500, but over the last couple of weeks, I have come up with another alternative. I have been looking at an exchange traded fund which is designed to yield a return of one time the inverse of the S&P 500 Index. In other words, if the S&P drops 50%, this fund will increase 50%. This fund is the ProShares Short S&P 500 (SH ). By owning this fund, I can hold onto my stocks for possible future gains (albeit partially negated by reductions in the value of SH) and at the same time have some insurance against potential losses. I made my first purchase last week, using cash which was sitting idle earning practically nothing in the miserly money market. I plan to purchase more as we get closer to S&P 1225, and even more if we go up from there.  

As a short fund, SH is not without risk. One risk is counter party risk. The fund consists of swaps with counter parties (JPMorgan Chase is the largest counter party for this fund). As Warren Buffet so famously said, "Derivatives are financial weapons of mass destruction." If we should approach a systemic meltdown scenario similar to 2008, then I would unload this fund (but by then I should have reaped my reward). The other major risk is market risk. In other words, if the market rises by 25%, you lose 25%. However, I am a betting man and would be willing to bet the farm that the market will at some point in the next 3 years return to today's level, thus erasing most if not all of any temporary losses.

So, what will you do?  Hang on, sell, or buy insurance? That's up to you. We report, you decide. And we will all know more later. Meanwhile, happy investing.

Market Update 2010-03-19
Contributed by Charles Guest, SinoCentury Guest Commentator

It’s time to turn off the NCAA tournament and watch CNBC, the most exciting game in town at the moment.  I believe the stock market game is getting more interesting by the day and you better play it right.  As you all know by now, I have long been of the opinion we remain in a long term secular bear market.  With debt at 370% of gross domestic product, I do not believe there is any long term recovery of the market in sight.  I believe the huge run up since March 9, 2009 was a normal correction within an on-going bear market.  I was buying during the most recent down leg in late 2008/early 2009 and that has paid off handsomely.  I began taking profits in August 2009. I am still in the market, but I have raised considerable cash to prepare for the next leg down.  

So how am I playing this game now?  I am watching the behavior of the S&P 500 at the 1150 level.  The market has traded very narrowly around this level for about a week now.  Why is this?  The reason is that the 1150 level was first reached in January of this year and then followed by a correction to the 1057 level in February.  The 1150 level is now resistance.  1150 is also important for another reason.  It could be argued that it represents a 50% Fibonacci retracement from the October 2007 high to the March 2009 low (Fibonacci retracements are key technical levels used by traders.  For more info, click here.).  The more precise 50% retracement level is 1120, but 1150 is close enough for government work.  If the market can not clear this level and stay above it, then we will have completed a double top, which would be a very ominous sign.  How low could we go?  I don't really know, but there is a chance that we could go to a new low below the S&P 500’s closing low of 677 that we saw last March.  However, if we can clear above the 1150 level there is no further resistance until the 1225 level, which would indicate a 61.8% Fibonacci retracement from the March 2009 low.  That would represent an even more important resistance level of major proportions.  So here is my strategy.  If I had not already raised significant cash, I would do so now. Having already raised cash, I will raise more if and when the S&P 500 approaches 1225 points.

So, turn off the NCAA tournament and tune into the more important game being reported on CNBC.  And as usual, we will know more later.

Market Alert:  2009-09-11

I am still extremely concerned about the ability of the U.S. stock market to maintain its current "pricey" valuation.  Due to the strong recent gains in gold mining shares, China and other holdings, my portfolio has had a very strong swing to the upside lately.  When looking at my portfolio this afternoon it was almost too hard to believe that we ever had a 55+% drop in the markets in the past 23 months since my holdings have recovered nicely and better than the stock market in general. Remember, the S&P 500 is still down more than 30% from its all time high that was reached in the fall of 2007. 

A rising stock position can be a little dangerous if you are not keeping your portfolio in check, especially in a secular bear market.  As stock holdings increase in value, the percentage of an investment portfolio that is dedicated to cash decreases unless you sell some of your equity gains.  As of today my cash allocation had decreased to only 24.5% of my portfolio; that is too low in my opinion given the current market complacency and lack of growth potential and economic guidance.  To get my portfolio back on track, today I am selling a nice chunk of my S&P 500 index fund and some of my Munder Mid-Cap Growth Fund (I only own the Munder fund because it is one of the few decent options in my 401k plan, not because I love it or anything) to increase my cash position by nearly 25%....in other words, as of today's close I will have 30.5% of my portfolio OUT of the market.  I may sell more equity shares to raise additional cash later, but at least now over 30% of my portfolio will now be sitting in cash so that I can buy more equity shares at lower prices if, and really when, we get my much anticipated market correction.

I encourage everyone to check your portfolios as well to determine whether or not you are comfortable with your current allocations.  Do you have enough cash on hand to benefit from a market correction?  If not, you may want to hurry up and start raising a little cash now so that you will be able to buy stocks back at lower prices later on. 

Gregory

MARKET UPDATE 2009-08-21
Contributed by Charles Guest, SinoCentury Guest Commentator

It has been over six months since I have bought or sold stocks.  I was buying during the decline last year and early this year and have ridden the rally, but over the last two days I have been selling.  I am not selling everything, but I am raising cash levels to take advantage of opportunities which may arise over the next year. Let’s face it--neither I nor anyone else really knows where the market is going to go.  So why am I selling now?  Here are the reasons:

1.  The secular bear market that began in 2000 is not over. Price to earnings ratios (based on a 10-year moving average of earnings) never dropped below 20. During the secular bear markets in the 30's and 70's, the S&P 500 index’s P/E ration fell all the way below 7.

2.  The debt bubble that precipitated this secular bear market is still with us and it is even growing larger. Our total national debt (including government, corporate and private debt) is now over 370% of GDP. In the 1930's this measure peaked at 270% of GDP. Now private debt is being moved to the government's balance sheet to some extent. This debt has to be liquidated thru default, repayment, inflation, or a combination of all three. This process will take years.

3.  The market took 34 months to reach a bottom on July 8, 1932. The current cyclical bear market which began in October 2007 is only 22 months old.

4.  China, which is the world's main growth engine, is close to entering bear market territory with the Shanghai Composite Index experiencing a decline of nearly 20% since July's top. China led the U.S. down by a two-month lead last fall and then again led the U.S. market up with a two-month lead this spring.

5.  The BKX bank index is having trouble getting above the 45 level from which it dropped in January to a low of 17.75 in March. The financials could lead the overall market down once again, since they still have the same old problems.

6.  Insider selling this July reached the highest level since the market top in October 2007. These are the people in the know as to their companies' prospects.

7.  Bullishness of market timing newsletters is at its highest level since January when the Dow was last above 9000. This is a contrarian indicator.

8.   The market has had a good run since the March 6 low of over 53%. Why not take some profit and look for another opportunity down the road?

9. Last but not least, we are now moving into September and October, a part of the year that historically has seen many instances of bad things happening in the stock market.

So what did I sell? I sold 25% of my China holding (FXI) because China has had some of the biggest gains. I sold my last remaining bank holdings (KBE and WFC) which also had some of the biggest gains.  I sold half of my rather small holding of SPY since the S&P 500 companies derive much of their profits in China. I did not trim any of my holdings in Japan, agricultural commodities, oil and gas services, technology, pharmaceuticals or gold and gold mining since I think these have the greatest potential for gain over the long haul. I may be wrong, but that's my story and I'm stickin' to it.

Market Update: 2009-08-21

Hello everyone,

I guess you are wondering why I haven’t posted anything in months. Well, it is simple: nothing material has changed with regard to my opinion of the market. My portfolio is near a record high for the percentage of my portfolio that is held in cash. And for the most part, other than two agricultural ETF (DBA) purchases during the past month, I am not trading much at all right now. I did unload all of my remaining financial and bank stock holdings earlier this week, but that’s about it. If you are interested, you can follow my every trade on the Sinocentury Facebook fan page.   

I am leaving for China tomorrow, so I hope to have some comments to share about how China’s economy is weathering the storm upon my return.  I will visit Shanghai, Beijing and of course the pearl farming area in Zhejiang province to source some premium freshwater pearl jewelry for HinsonGayle Fine Pearl Jewelry, on the web at HGpearls.com. I am really excited about these pearls, because this will be a new line of what will be the best freshwater pearls available. The goal is to further differentiate HinsonGayle by moving the brand towards an upscale image.

In the meantime, I pretty much agree with my Charles Guest (my dad) as to where we stand in the markets. His is getting ready to contribute this week’s Market Update, and it is a very good read because he outlines nine reasons why the market is in trouble.

I’ll see you when I return from China. I have a feeling by the time I get back the markets will begin to change course. We will know more later. Until then, Happy Investing!  And be sure to enjoy my dad’s market commentary!

Market Update:  2009-03-30

I just returned from the United Arab Emirates on Saturday, after spending a week in the beautiful emirates of Abu Dhabi and Dubai.  While I was gone, it looks like the market wrapped up its bear market rally.  Since the S&P 500 marked its 2009 YTD closing low of 676.53 on March 9, the index managed a sharp rally of just over 23% to a close of 832.86 last Thursday, March 26. 

If you remember, in my last Market Update “Keeping my Powder Dry” on March 11, I said that I would consider selling some more of my S&P 500 fund to raise a little more cash if we get a meaningful rebound rally.  I wish I could have sold last week when it became obvious that the market was teetering, but I was too busy in Dubai to be bothered.  Today’s market pullback is enough to convince me that the next major move is likely to the downside, as you do not get a 23% market rally in less than three weeks during a bull market.  Such huge and rapid gains are usually only seen in the middle of a bear market.  Thus, I am 99.9% sure that the March Madness rally of the past three weeks was a head fake, and that later this year we will retest the March 9 low.  We may not pull back to exactly 676, but will likely at least fall into the low 700s. 

So, today I am selling a little of my S&P 500 fund to raise a tad more cash.  I am sure I will have an opportunity to buy more shares back later at a lower price.  The only question is, will that opportunity be at 700 or at 500?

Also, I was glad to hear that the Obama administration canned Rick Wagoner of GM today.  If the government is going to use my tax dollars to throw at a lost cause such as GM, the least our leaders can do is to set some rules of the game.  Mr. Wagoner was an abysmal failure of a CEO, just as are the top dogs at many of the large U.S. financial institutions.  If we are going to continue to flush money down the drain, the least we can do is to get rid of the guys that helped to create the problems in the first place!  Regardless, in the end I don’t believe that we will be able to stop the banks and other bankrupt companies from failing.  The U.S. currently has the largest debt bubble this country has ever had, and our economy must and will deleverage.  The government can only try to minimize the pain, which is a nice way of saying that the government can only try to stretch out the amount of time it takes us to actually get through this crisis. 

We will know more later.  Until then, Happy Investing!

Gregory Guest

Market Update: 2009-03-11

After my Market Update "Time to Sit and Wait" on March 5, I got an inquiry as to whether or not I had moved all my stock positions into cash.  Just to clarify, I am definitely not in all cash. 

I have about 30% of my portfolio in cash, the rest is in the market.  On February 18th I upped my cash position by selling some of my S&P 500 fund and moving the proceeds to cash.  That move took my cash position from 20% to 27%.  I was pretty sure support wasn't going to hold, so I sold out when the index closed at 790.  I did this so I would have extra money to use later if things get really bad.  With the market falling further since then (as low as 676 two days ago), my cash position is now around 30%.  I have also not bought anything since the S&P 500 broke its support at 750.
 
To be clear, I am just keeping my powder dry until the market shows me a more convincing effort to make a bottom.  In the meantime, if we get a meaningful rebound rally back to the resistance levels (i.e., former support levels) of 750-780 and cannot break above, I may decide to sell some more S&P 500 into the rally and further bolster my cash position.  I will let you know what I do if and when that time comes.

We will know more later.  Until then, Happy Investing.

Gregory Guest

Market Update:  2009-03-05

Just a quick update.  We are definitely testing support on the S&P 500 now, and if we don't rebound soon then we will have broken support.  The government has yet to have the FDIC take Citigroup and Bank of America, and the administration's unwillingness to do what is necessary in a timely manner is really upsetting the markets.  Citigroup is now a penny stock, trading under $1.00/share! 

The issue is that JP Morgan, Wells Fargo and other banks that were relatively healthy compared to the Citigroup and Bank of America are now tanking as well because there cannot be any certainty or confidence in our banking system until the U.S. government does something about the bad banks.  And as I have said before, anything less than a full FDIC takeover of Citigroup and Bank of America is, in my opinion, not likely going to work.  I think the market has proven that since Citigroup begged the government to take a 36% stake in their bank last Friday and the stock has cratered since the government agreed.  There can be no confidence in a financial system that is propped up by taxpayer dollars without the taxpayers having full control of what it is they are propping up.  And the bad thing is that by the government picking favorites, like Citigroup, to pour money into, it then make the healthly banks lose value and their ability to raise capital because they are not favored.  It is crazy!

My best guess is that the market is breaking support, so major selling may continue for a while before we get any meaningful rebound.  Also, when we do get a rebound, the old support of 752-778 level on the S&P 500 will become a resistance level.  So it will be very interesting to see if we can get back above that resistance.

As of right now, the S&P 500 is trading at 688.  That puts it 8.5% below the November 2008 support level of 752, and 11.6% below the October 2002 support level of 778.  Either way you slice it, it is not encouraging.  If we are going to hold support we need to rally very soon or else we could be looking at 600 or lower in the blink of an eye.

Bottom line, something must be done about Citigroup and Bank of America ASAP, or else our portfolios will continue to tank.  For now, I am not buying any more shares of anything, as I want this market to show me an attempt to make a bottom before I commit any more money.  Sitting on the sidelines is what I am doing for now.

We will know more later.  Until then, Happy Investing!

Gregory Guest