Archive for February, 2009

In earlier posts, I talked about the signficance of the S&P 500 staying above the price level of 741.  Incidentally, if you have not read Thursday’s post yet, please do so.  This will help you understand the meanings behind price levels.   The S&P 500 has been as low as 734 this morning which should be a stern warning to investors.

As I write, the S&P 500 has managed to rise back above 741.  Where the market finishes at the end of the day is critical for three reasons.  First, it would be a big negative if the market finished the day below 741.  Every professional money manager in the free world is watching that level.  So, that in itself could cause a great deal of future selling.  

Second, today is the last day of the month.  We would be closing at a month on a very negative note. 

Finally, investors will be receiving more bad news when they go to their mailboxes in March.  This should create more selling as the small investors starts to throw in the towel and yell surrender.

The market is reacting to a decline in growth (Gross Domestic Product or GDP) of -6.2% for the fourth quarter announced this morning.  That was much worse than expected.  It was the biggest decline in growth since 1982.  The report also showed the largest drop in consumer spending in 28 years.  The bigger problem is that although the fourth quarter was very negative, the first quarter of this year looks like it could be even worse.

The Government also announced that they were increasing their control (read:Nationalization) of Citigroup to 36%.  So, we should see some real fireworks today with the end result anyone’s guess.  If the stock market were to end on a positive note, that would be short-term bullish (postive) for the market. 

On an interesting note, the S&P 500 did close below 755 yesterday (see Thursday’s post).  I noted that was a critical price level.  That ended up being a warning that the stock market is about to fall apart again. 

Check back at the end of the day for another post.

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Please leave a comment and let me know if this is useful or what you would like for me to write about – this is to help educate you on how risk works.  Also let me know how I can simplify this so that it is easier to understand.

Yesterday’s stock market really didn’t tell us much about where we are heading in the near-term.  When looking at the stock market and evaluating risk, it is important to look at 3 different timeframes – short-term, med-term, and long-term.  You could define those time-frames as being bullish (positive), negative (bearish), or neutral (neither bearish or bullish) 

I come to those conclusions by watching the price levels of the S&P 500.  Let me give a real quick definition of price levels. 

Each day the stock market has a value.  When things were great in the stock market back in October 2007, the S&P 500 had a value of  1565.  Now the value of the S&P 500 (referred to as the stock market) of 775 – YIKES!!!  The value of the S&P 500 has declined by over 50%.  So the price level or value of the S&P 500 rises or declines everyday.  If you are invested in stocks or stock type mutual funds (of any kind) chances are the value of your account is rising or declining with the stock market. 

Wouldn’t it be helpful to know when the S&P 500 is at a good value which makes sense to invest and when the S&P 500 is at a value where it doesn’t?  Well, we cannot ever know for sure.  However, we can get an idea. 

Understanding how price levels determine risk, will greatly help you know how much risk to take at any given time.  Also for first-time readers, I only focus on the S&P 500.

Long-term Bearish – For this to change, the S&P 500 wiould have to go above the price level of 1083.  Currently, we are at a price level of 775 (39% away from that price level)

Intermediate Bearish – For that to change the price level would need to rise above and stay above 875.

Short-term Neutral – As long as we staybetween 775 and 741, we are in a waiting mode to see which way the market is heading. 

The most dangerous position for investors is when all three time periods are bearish.  That was the case through last Monday.  So how do you apply this to your investments?  Well when risk is this high, you really want to limit the percentage that you invest into ANY type of stock or stock fund. 

To give you a good idea, the long-term trend for the stock market turned bearish December 26, 2007 (49% ago).  At that point it really paid to be cautious and start greatly reducing risk (removing money from stock and stock funds)

It works the other way as well.  As the timeframes start to change to bullish (positive), then investors should start increasing positions. 

They say that you cannot time the market and that no one can perfectly make all of the right decisions.  There is an element of truth to that statement. This is not a perfect system and sometimes you will make the right decisions and sometimes you will not make the wrong decisions.  However, if you apply some discipline to your investments and follow the direction (positive or negative) of the stock market during these timeframes, I would argue you can save yourself a lot of pain and loss.  Doing nothing at all is ridiculous advice.

Please leave a comment and let me know if this is useful or what you would like for me to write about  – this is to help educate you on how risk works.

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If an event is occuring in our country, the stock market will vote on it and tell you whether it is positive or negative.  Last night President Obama gave a very important speech that was designed to reassure America and bring back some confidence into the system.  The markets are voting today and the results aren’t good.

So, a few things might be taking place right now.  First, there is so much negativity that the stock market will not be able to muster even a small recovery rally.  If that is the case, then the S&P 500 should fall  below 741 and we should be heading south down towards 600 in short order.

Second, markets have a tendency to decline after a big move up.  The S&P was up over 4% yesterday.  After a big day like that one, two things can happen.  The market will go up in strength a second day.  That would take a very confident and strong market environment .  An undecided market will decline and “test” some lower levels.  If you are a first time reader, go back and read some of the blogs that I have written about levels.  We always want to watch the levels.  For the S&P 500, it is positive if the market can close above 755.  If that occurs and the market can remain above that level, the S&P 500 might be heading up for a small stock market rally.  A close below 755 would mean a potential decline back to 741.  Remember,741 is the line drawn in the sand. 

You have to love the liberal media.  This writer (after drinking the kool-aid last night) wrote that the Obama speech would inspire the markets.  She might be regretting that a bit.

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Well the Fed Chairman speaks, and the markets like it.  Well, at least that is what the media is assigning to the better than 3% lift in the stock market.  The market was at a 12 year low yesterday and extremely overdue for a good day.  That is more like the real reason. 

Chairman Bernanke said that there was a “reasonable prospect” (wink, wink) that the recession will end in 2009.  He also warned that credit and financial markets would have to start “operating normally” again for a recovery.   Besides being the master of the obvious, he might want to count out 2009 if he is looking for normal operating markets. 

Unfortunately, he probably cleared a lot up for those politicians by essentially telling them that things would have to get back to normal for us to recover.  So, you can see why the markets are not rallying because of that nonsesnse on Capital  Hill today.  There was very little enlightenment.  Chairman Bernanke’s time on the Hill today was nothing more than an opportunity for the politicians to blame someone other than themselves for the mess we are facing today.  

Yesterday, I wrote about levels on the market.  Let’s look at some levels on the upside.  Remember that 741 is critical on the downside.  On the upside, I will give you a range of 800 to 820 on the S&P 500.  That is where the market might have a little trouble.  However, that would give the S&P 500 about a 10% advance off of yesterday’s lows.  It would be a positive step in the right direction for the market to advance pass those levels.  We are in a precarious position right now as the market will continue to go through a bottoming process. 

President Obama is speaking tonight.  Let’s see if there will be an Obama effect tomorrow. Thus far, since he has been inaurgurated, the effect has not been a good one.

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I appreciate your helpfulness & knowledge. I find it puzzling that you don’t put more emphasis on hard assets in this environment. Check out the Tocqueville funds 4 portfolios from Jan first & compare! Also, gold has been a winner each year for the last 8 to 9 years & was the only asset class to post positive returns last year!

I realize that  Gold Bugs will strongly disagree with my opinion.  Hard assets are a good investment.  However, ultimately not in this environment.  As deflation continues to set in, gold will have a tough time continuing too appreciate. Gold does not historically do well in deflationary environments.  So, I see a few scenarios for gold.  First, Gold could go on a rampage for a few months and then go through a sell off like oil did last year or Gold could top here around 1000 (putting in a double top) and then start a decline over the balance of the year. 
However, longer-term we have a major inflation problem to deal with and I think that gold will be a great investment.  There is a little to much hype right now (much like oil last year) that indicates to me that we are seeing somewhat of a bubble atmosphere.  If gold does take off from here, I really do feel that we will see a similiar situation as oil.  When something seems like a slamdunk and every other commercial on cable tv is peddling gold, then there is a red flag.
Here is a good article on gold and deflation – http://www.elliottwave.com/deflation-gold-relationship.aspx
Actually hard assets wasn’t the only asset class to do well last year.  Bear market mutual funds did incredible last year.  This is an asset class that doesn’t get much press.
Keep the Faith

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Today on Prudent Money, I talked about how extremely important it was to reduce your risk when it comes to your investments.  You can listen here for the podcast.  I also didn’t even get to remotely cover the topic today as I would have liked.  So, I am working on a special paper on the subject which will go out this week in the Prudent Money Newsletter. 

Make sure that you sign up for the newsletter so that you will receive it in your inbox.

I want to stress that making sure you understand your risk in this environment is extremely important.  Unfortunately, the mutual fund industry scares you into believing that you should never change your investments and definately never sell stocks because you might miss out.  I want to make sure that you are looking at this the right way and not the way that the financial services industry wants you to view it (which makes them the most money).

The problems in this economy and financial markets are many and they run deep.  That is still the case after the Government has thrown billions of dollars of our money at the problem.  The problem is that the crisis just doesn’t go away.  AIG announced today that they will report a loss of $60 billion for LAST QUARTER.  They will need another $40 billion or so.  How about we continue to pump more of our money into a horrible business model?  After all, we are going to continue to keep propping up the car industry.

Finally, we are now proud owners of 40 to 50% of  Citigroup.  Throwing even more taxpayer money at this problem will probably not make this problem go away.

That was just Monday’s news!

So, we are not in just a normal cycle and you shouldn’t view your investments as if we are experiencing normal risk.

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Welcome to the Prudent Money Market Outlook.  This is the very first post of our new market outlook report.  I have been posting on a weekly basis and now will be posting throughout the week.  I am doing so to help you get a better understanding of how markets actually work.


I believe that it is crucial that investors start understanding how the stock market works in order to better manage for the risk that is present.


One of the subjects that I will be talking a lot about is stock market levels.  Think of a stock market chart as a graph of how your investments grow or decline.  If you start to understand how a stock market chart works, you will start to see whether there is high risk in the market or a good opportunity in the markets.  We determine that by looking at levels.  How we get to those levels is a discussion for another time.  For now, I am just going to tell you about the levels.


Think of levels in the stock market as either ceilings or floors.  If you were falling, you would hope that the ground below would break your fall.  If the ground turns out to be a thin layer of dirt, then obviously you are going to break right through the layer of dirt and keep on falling. 


I will focus on the S&P 500.  When I first started managing money, I determined that the most effective way to approach the stock market is to get to know and understand one market versus trying to understand all markets.  I chose to focus completely on the S&P 500 versus trying to focus on the Dow Jones Industrial Average and the NASDAQ all at the same time.


There are levels that we watch on the S&P 500 and hope that they will hold the market and prevent the market from falling further.  Ultimately, a bear market finds a “floor” that is strong enough to hold.  We are currently getting close to a very important level in the stock market.  If it does not hold, the next decline could be rather large because the next potential floor for the stock market is much further down.


As I write, the S&P 500 is sitting at 754.  That is the value of the S&P 500.  The floor for the S&P 500 should be 741.  So, I fully expect the S&P 500 to fall down to 741.  This is the critical floor we are looking at and would expect to hold up the S&P 500, at least for now.


Whatever happens around 741 in the S&P 500 will be critical for the market.  The next floor down is 575 to 600.  That is another decline of -20%. 

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