Market Update:  2008-10-24

Here we go again. The next few days, once again, are looking ripe for the capitulation we have been looking for.

This morning’s open is going to be especially exciting since major index futures have halted trading for several hours now due to the fact that they have hit their limit down stops. That means they have traded so low that they are not allowed to trade any lower until after the market actually opens! After a rout in Asia last night, with the Nikkei 225 crashing back to its 2003 lows, our markets could see major turmoil today. In addition, you have the dollar tanking against the yen but rising against the Euro (a joke of a currency), which is sending mixed signals to the markets. We have the potential for an outright stock market crash, down more than 10% in one day, today or early next week. A crash would be a blessing at this point because it would likely scare away all the speculators and help to calm down this raging volatility of late.

To take advantage of this morning’s opening, I have set two limit orders to buy EWJ (Japan) and XLK (technology) around 11-12% below yesterday's close. I don't know if we will get there or not, but we’ll see. Nonetheless, Japanese shares are being given away for practically free at the moment, so I have no doubt in my mind that by buying the EWJ now I will make a great return on it when the markets recover over the next decade or so. Remember, even with stocks selling so low right now, for every seller there is a buyer. I am one of the buyers! If you have any stocks or ETFs that you would like to mark down to even lower prices and sell to me, please give me a ring!

Have fun watching the markets today! If we do get a crash, before 4:00pm I plan to move cash into the S&P 500 index fund within my retirement account. I am eyeing 775-800 on the S&P 500, and we could be there soon. We will know more later. Until then, Happy Investing!

Gregory

Market Update: 2008-10-22

After dropping another 15% today, I just couldn't help myself to sit back and not pick up some more gold mining shares today.  I bought more GDX, which is and ETF and moves similarly to the XAU Gold and Silver Mining index. As of today, the XAU has wiped almost all of the gains of recent years and there is major support between 60-70 that goes back for the past 25 years. Of course, that is if you don’t include the all-time bottom in the low 40s back around 2000. Bu it didn’t stay that low for that long.  Plus, the last time the XAU was under 50 gold was only $250/oz. Gold is over $700/oz now, so I see a huge disconnect between the gold mining stocks and the actual metal price. I think gold mining shares are in an extremely oversold state now, and I just don’t see how buying now won’t pay off over the next few years. After all, pretty soon the Feds are going to run out of ink the way they are printing dollars. I don’t see how gold can’t benefit from all the money being thrown at this financial crisis. I guess the hedge funds have sold about all the gold shares they have left, so I anticipate that soon we should have a bottom on gold shares.  Gold shares were the biggest winners of recent years, so unfortunately they are being unloaded by the hedge funds that have to raise cash to meet all their redemption request. Shows how much those idiots know, I think they are soon going to regret the fact that they threw the baby out with the bathwater!

The other big sector I am watching closely is the oil and gas services and equipment sector. XES is my ETF pick for that sector. I have already bought some, and plan to buy more as it falls further. I anticipate that commodities and related stocks will see their bottom around the same time that the S&P 500 bottoms.  Remember, my target for the S&P 500 is 775-800, and with today's new closing low of 896, we are getting closer. I still think that the stock market is ripe for a relief rally, and I anticipate it could rally by 20-30% by early January. But I don't expect the rally to be anything more than a sucker's rally, so I will most likely cash out of some positions if we do get the rally so that I will have cash ready to buy back in later in the winter or spring when the market falls back to our autumn lows for a test.

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

Market Update: 2008-10-13

All three major U.S. stock market indexes including the Dow Jones Industrials, S&P 500 and the Nasdaq Composite, were up more than 11% today! That is the good news.

The bad news is that just about all other “biggest one-day percentage gains” in history occurred in a bear market. Bull markets do not see such big, one day events. Rather, they see steady increases over the long haul.

As I said last week in my 10/08/2008 Market Update, Congratulations, President Obama, this market was oversold and due for a relief rally. Specifically I wrote, “I am not even convinced that our markets will get a bounce from this cut today [the Fed rate cut, that is, and stocks did not bounce that day as some expected they would]. The only thing going for the stock market right now is that it is a bit oversold, which means we could get a relief rally any time now.”

Well, it looks like we got the bulk of our relief in just one day! Today marks the beginning of a dead-cat bounce that should help us recoup around 50% of the recent losses. That means the S&P 500 could see an additional 10% or so in gains (to around 1100 or slightly higher) before we head back down to test the lows later this year or next.

If you don’t know what a dead-cat bounce is, just think about it. What happens when you drop a dead cat on the floor? It bounces! But in the end, once all the bouncing is over, the poor cat is still dead.

We will know more about how high and long this dead cat will bounce later. Until then, Happy Investing!

Gregory

Market Alert! 2008-10-10

OK, it is a good thing I recommended taking money off the KBE last week. Over the past two months I have removed over 50% of my money out of the KBE, which tracks the banking index.  Since I posted my 9/29/2008 Market Alert! titled I just sold some KBE, I the banking index fund has lost 30% as of this morning's pre-market trading price.

The reason I have changed my stance on banks is because it is apparent now that more that just a handful have major problems. And even scarier is the fact that President Bush is likely going to announce at 10:25am this morning that the federal government will begin to take equity stakes in the banks in an effort to further inject liquidity into our broken financial system. This means that the banks will be issuing new stock shares, which will dilute shareholder earnings. This is not good for bank stocks, which is likely the reason they are down more than 10% in the pre-market trading this morning.

I am sorry, if the U.S. government is going to change the rules of the market as they have unrentlessly done for weeks now, it is impossible for me to make a reasonable market assessment with regard to the banks. And since the banks this morning are now trading below their 7/15/2008 low, that tells me that there is a very good chance that the banks will not hold at this support. If support doesn't hold, we will likely not bottom until we wipe out at least 80% of the value of the bank stocks from there peak in 2007. This is case in point as to why, as an investor, you have to take risks in order to make money in the long run. But when the rules of the game change or things become clear that they are not going to work out as previously thought, you also have to be willing to cut your losses and find another opportunity elsewhere. Having said that, I do still have some exposure to KBE...just much less so they I did several months ago. At this point I don't plan to sell anymore of my KBE position; instead, I will just wait for banks to recover. And I am a patient man!

Gregory

Market Update: 2008-10-09

Don't panic people! This week's market action was expected, and the week is not over yet! From the stock market open on Monday morning through today's close, the S&P 500 index has dropped 17%. As I mentioned in my posting on 9/29/2008, Sorry guys, no stock market crash today!, these losses were totally within the realm of what could be expected. At this point, I would say that we are within 10-15% of the bottom on the S&P 500. There is significant support around the 800 level. As I mentioned in my Market Alert! today just before the close, I moved cash into the S&P 500 index fund at today’s market closing price. Since the market did not fall as much as I was hoping it would, I held back a bit and only moved between 15-20% of my cash position to the market instead of the 20-25% I was hoping to transfer over. But I will buy more later!

I would like to make an interesting comment about the S&P 500’s support around 800. Just because we have support there doesn't mean that it is going to hold. My guess is that it will hold, but there is always the chance (let's say a 25% chance) that it will not. That is especially true if we end up having a total debt bubble collapse. Today I won't go into all the bad things that could happen in our economy if the entire American financial system was to go bust (as the saying goes, you ain’t seen nothing yet!), or if the People's Bank of China and the rest of the Asian central banks were to refuse to continue sponsoring our federal government's out-of-control deficit spending and lose their appetite for our worthless U.S. treasury debt instruments.

If you go back to the 1980s, normal trend growth of the S&P 500 would actually put the index around 800 today. So if we get to 800, you could say that we are back on track. The only problem is, just as in excessive bull markets stocks end up going substantially above trend, in big bad bear markets stocks can just as easily end up trading substantially below trend. That is why I say that it is possible that this cyclical bear market downturn, which is the second phase of our secular bear market that began in 2000, the S&P 500 could oversell and go below 800.  And if that were to happen, I really don't see any substantial support until we get down to 400-600 level on the S&P 500. Now, that is based on nominal values and not inflation-adjusted values (i.e. adding inflation gains to the levels from the early to middle 1990s). Of course when traders make decisions based on charts, they are not usually looking at charts that have been adjusted for inflation.

So in conclusion, I think we will see another 10-15% haircut before this market downturn is all said and done. My best guess tells me that we will soon find major support around 800. Regardless of where this market bottoms though, I can tell you that if you want to build wealth in the future you absolutely must be committing as much of your paycheck as possible to the markets right now. I am putting 100% of my retirement contributions into stocks (none to the money markets) with the largest percentage going into the S&P 500 index. Just about everybody has an S&P 500 index mutual fund option in their 401-k. It may be called something fancy, like the Vanguard Institutional Index, or the blue chip or large cap index, but you should have access to a S&P 500 index fund in your retirement account.

If you aren't contributing to your retirement, now is the best opportunity in your life to do so. If you are already contributing, now is the best time of your life to increase your contributions. If you don't understand investing, I am sorry to tell you that is not an excuse; if that is your case, simply put 100% of your contributions into the S&P 500 index fund. All I can say is that if you don't buy heavily into the stock market over the next few years, shame on you.  I promise you that you won't know what you missed until it is too late!

I am just so excited to have such a tremendous opportunity to buy stocks right now! I anticipate that we will find this cyclical bear market’s bottom sooner rather than later. Until then, Happy Investing!

Gregory

Market Update: 2008-10-06

If you look back at history, October is not always the best time of the year for the stock market. The Black Mondays (October 28, 1929 and October 19, 1987) and Black Tuesday (October 29, 1929), both famous stock market crashes, occurred during the month of October! They occurred after days of negativity and downward pressure on stocks that were followed by nervous weekends. Last week the major U.S. market indexes were down 7-10%, and that was after a failed rally attempt the middle of last week. Last Friday’s sell off confirmed that the markets are not convinced the bailout will work. Now it is Monday morning, the credit crisis is not any better, and Europe is seen as falling apart over the weekend. The euro is tanking because it is a currency that doesn’t even have a country, and those countries it is used in are in trouble without one central government that can make any decisions about what to do! Despite the fact that the U.S. dollar is up against the euro today, you could say the dollar is this morning it is down against the yen and gold this morning. The dollar-euro rate is useless since Europe is no better off than we are. Another interesting point is that we are getting ready to start the Q3 earnings procession, and earnings are likely to disappoint.

And as I finish writing, the Dow has just breached the key 10,000 level and the Nasdaq is back in the 1800s.

Will we write a new Black Monday or Black Tuesday into the history books this October of 2008? We will know more about that later. Until then, Happy Investing!

Gregory

Market Update: 2008-10-03

Good morning, or is it? With another 159,000 jobs disappearing last month, factory orders and manufacturing activity in decline, and the financial sector in turmoil, at least we can be comforted in the fact that Mr. McCain and Mrs. Palin believe the fundamentals of the U.S. economy are strong. What?  We are in recession? What I meant to say is at least we can be comforted in the fact that Mr. McCain and Mrs. Palin believe the fundamentals of the American workers are strong. I guess they mean that American workers are strong emotionally, which makes perfect sense to me since after our ninth month in a row of losing jobs in this economy, American workers must be strong or else they would be a little upset by now.

On the bright side, it looks like Wells Fargo is now going to actually pay Wachovia shareholders, including yours truly, a whopping $7/share. That is 7 times more than Citigroup had agreed to pay in their government-backed "agreement in principle" on Monday morning. Apparently the Wells Fargo-Wachovia deal doesn't include any government backing from what I am hearing, which is good because 1) it shows that some banks are actually willing to pay a market price for taking on some additional risk and 2) the U.S. government and FDIC can now keep a little money in the their pocket to help cover the next bank that falls into trouble. Since Citigroup was and still is one of the banks that the market has told us is in poor health, the Citi that never sleeps didn't need to take on Wachovia's mess in the first place. Who knows, if the next time FDIC and Citigroup have to get together the topic of discussion might be who is going to take on Citigroup itself rather than who the government wants the sleep-deprived bank to buy.

And speaking of banking slogans, what exactly makes Morgan Stanley so “World Wise?” Maybe the fact that MS is very experienced of late in begging around the world for capital injections from countries as far away as China? Sorry, I just had to go there.

And finally I get to the reason behind today's posting. Last night, 19 years into Japan's secular bear market, the Nikkei 225 closed under 11000 (10938 to be exact). During the past 15 months we have witnessed a brutal cyclical bear market for Japan, as the Nikkei is now down 40% from its cyclical bull market high of 18262 on July 9, 2007. To put that in perspective, none of the three major U.S. stock indexes are down even 30% from their 2007 highs yet! And to really put the 10938 level in perspective, the Nikkei's all-time closing high was made a few years back, uh, on the afternoon of December 29, 1989 when it closed at 38916. WOW! That was almost 19 years ago. As of today, the Nikkei is still down 72% from where it was in 1989! In my humble opinion, the poor Nikkei represents the fallout from one of the world's largest investment and stock market bubbles in history. And the Nasdaq, which also closed yesterday 61% lower than its all-time closing high of 5049 that was made on March 10, 2000, and U.S. markets in general, represent what is likely the middle chapter of a story similar to what has been told in Japan. Bubbles, whether they are in construction, stocks or just a mountain of wonderful American debt, never end well.

The good news is, if the history of America's unwinding in the 1930s and 1940s tells us anything, after nearly 20 years of negative market action in Japan it is probably just about done being down 70-80%. I predict that we are in the final phase of Japan's secular (i.e. long-term) bear market. We are now testing the lows of 2003 when the Nikkei fell below 8000. Sometime in the next year or so once we are done with this test, I expect that Japan will finally begin to come back to life.  And it will be for real this time. They have cleaned up a lot of their corporate problems, and after nearly 20 years of despair, Japan’s stock market will finally see the light at the end of the tunnel. If you don't already have exposure to Japan's market, now is the time of your life to add Japanese shares to your portfolio. I own EWJ which is an ETF comprised of shares of several hundred Japanese companies. Japan is actually my largest holding, as I have more money in Japan than China, gold mining, banks or anything else. I did acquire a lot of these shares around the bottom in 2003, and have been buying more this year as Japan has continued to falter. It is times like this, when negativity runs rampant, that you want to buy. Japan is screaming "I have fallen, and I can't get up!" And I am confident in my decision to make my small contribution, for whatever it is worth, to rescue Japanese shares. If I didn't already own so much, I would buy more EWJ today. However, I want to keep my powder dry to buy more China, Oil & Gas Services, and Technology shares, as their prices are being slashed for this holiday shopping season. Diversity is key as you always want to spread your risk around a bit.

We will know more about when Japan finally decides to wake up later. Until then, Happy Investing!

Gregory