Doug Kass recently predicted the S&P500 stock index will finish the year at 920.  It is currently right at 1000 (on September 2, 2009).  I agree with the prediction of 920 sometime in the next couple of months.  I think 900 may be possible and even lower to 875 based on the bottom set in July.  But unlike Kass, I think the market will rebound by year end.  I will wait for signs of a possible rebound once this current drop (begun last week) is further along.  The signs of the bottom to this dip will be a stall in the decline just as the recent market top was shown by a stall or resistance around 1040.  The rebound will happen when the market goes up on bad news.  I think that may happen during the Q3 earnings season the middle of October into early November.  I am still thinking that 1200 is a possibility by year end.  This would completely retrace the panic selloff starting from the Lehman collapse on September 15, 2008.  So, if we wait until 900 to redeploy our cash raised the past few weeks, that could provide a nice 33% finish to the year.

Where Kass is probably wrong, along with many others on Wall Street, is that there are just too many people with a bearish market view.  There is virtually  no one on the financial networks (CNBC, Fox Biz, etc) today saying that the selling should be ignored and the market will go much higher.   There are just no Bulls as far as I can tell.  The market always confounds the consensus position.  It has to in order to work.  If there are a majority of bears, then by definition, there is hardly anyone left to sell.  Once all of us who had our finger on the trigger, pull the trigger, there isn't anyone left to sell.  So, I think the decline will be shallow and the market will rebound in 6-8 weeks.  This can't be like the panic last year because all the retail investors that bailed out in the fall and winter are still on the sidelines.  People who sold everything in January and February never got back in. 

There are a lot of factors to a panic that are missing right now (as they usually are, fortunately).  To get a true financial panic, first everyone must be euphoric and unaware of or discounting trouble.  Then when the decline starts because the market just can't go any higher (everyone who is going to buy has bought), investment holders must be forced to sell at any price by margin calls or other financial misfortune.  Last year, there was a cascading of events that are no longer in play.  Most importantly, the leveraged, collateralized securitization market, the core of the trouble, is almost completely unwound (except CMBS, which is where there is still concern).  The leverage in 2007-08 was in the carry trade, which is what caused the dollar to soar and interest rates to drop when foreign currencies were sold and dollars bought to cover margin calls.  The securitized loans are mostly back inside the big banks now with backing by government guarantees or in private hands where they have been de-levered which allows them to be held to maturity, if needed.  So, there are no large institutions needing to dump stock or other financial instruments into an illiquid market to raise money to stay afloat.  That is a big and significant change.

On the way down, I am using portfolio hedges to protect my positions.  I like the SP500 Double Inverse fund by Proshares, with ticker SDS. 

I like this ETF because it is a double short of the SP500, which is a pretty basic / broad index of the market and includes all the big financials, techs and energy companies.  I also hold another hedge, hte Proshares product called DUG.  DUG is basically the double inverse of the energy market, something like IYE but with a little Materials exposure too. 

I use it to hedge all my Materials and Energy exposure, although I also use covered calls for this on stocks like Suncor that have good premiums.  I also have used covered call options on the Canroys, but the premiums are not very good because of the large dividends.  It is just an alternative to outright selling them. 

Even though it has become popular, I don't do those Direxion 3X ETFs.  They are just too wild for my taste.  Even the doubles are a little scary and I am careful to keep my exposure balanced with opposite long positions.  I don't bet naked short, even now when I am pretty convinced the market is going lower.  The market always goes up in the long run, so being short should be very tactical and short term.  I don't want to get caught on the wrong side of that trade.

Tags: Doug Kass, DUG, ETF, Forecast, Hedge, SDS

Just six months ago, at the bottom of the financial crisis during the darkest days of October and November 2008, it was unclear whether the American banking industry would survive.  Fannie Mae, Freddie Mac and AIG had already been effectively nationalized (more than 80% of stock owned by the Feds) and Citigroup, Bank of America, Morgan Stanley and others appeared to be on the doorstep of investor-owned demise. 

Now, in May 2009, the world seems a much better place for bankers and the rest of us that use bank money.   I for one, don't think banks will lead the market higher, but they need to at least regain their health and participate in the economy for growth to happen.  It seems they are on their way.  BAC, one of the sickest of the surviving banks, successfully sold over 1 billion shares after hours on Tuesday to close the gap on its capital needs according to the government "Stress Test". 

Dick Bove, who has been a lone voice for the survival of the banking industry, sees a very bright future for BAC, at least as compared to now.  He came public Monday with a statement that he expects BAC earnings to normalize around $4 per share, even after dilution, within the next 2-3 years.  Applying a 10-12 multiple to earnings, this implies a $40-48 future share price as compared to the $12 today. See his comments towards the end of the embedded news clip.

A great way to play the banks over the next few years is UYG, the leveraged ETF of the financial index.  UYG is today comprised mainly of the superior banks such as JP Morgan, Goldman Sachs and Wells Fargo, but BAC also has a place on this index.  Barrons posted an article on options trading strategies for BAC stock that might provide some ideas to capitalize on the return of the banks:

http://online.barrons.com/article/SB124265990717130781.html

Tags: BAC, banks, Barrons, C, Dick Bove, ETF, Fannie Mae, Fed, Financial, Financial Crisis, FRE, Freddie Mac, Gold, Goldman Sachs, GS, JP Morgan, UYG, Wells Fargo

As we begin to move towards economic recovery, it begs the question "what next?"  It is unlikely America will have a strong economy, as measured in 4+% GNP growth, for many years to come.  We have oceans of debt to pay off.  Even if the Feds are able to transfer the enormous debt hole from the private to the public sector to assist the economic recovery (and save the banking system), that debt still must be paid back in some form. 

There is a high liklihood that the public debt will be paid back through several different means: higher taxes, limited spending and most significantly dollar devaluation (aka inflation) over a long period of time.  Higher taxes and limited government spending will put a cap on American economic growth and will ensure a very slow economic recovery or even stagnation.  An extended period of 1-3% GNP  growth can be expected.  But with a weakening dollar, it is possible that rate of growth will not keep pace with inflation of 5-7%.  So, real GNP will be negative for several years undermining domestic investment returns.  All this is very remiscent of the late 1970s.

But there was a way to make decent, and maybe even excellent, real investment returns in the 1970s.  It was by investing away from America in hard or real assets like commodities and in the growth of non-dollar economies like Japan. 

In the 2000s, the new Japans are the BRIC nations: large, motivated and politically willing.  Today's post is on investing in three of those four.  Brazil, India and especially China meet my requirements for foreign market investing.  But Russia, I do not trust.  Its political system has shown contempt for foreign investment.  It very much resembles the politics of the USSR, with a newly energized "politburo" that controls the economy and stifles free enterprise (though we here in America are catching up fast on this front).  So, I will focus my non-dollar investments in BIC, not BRIC. 

As of today, I am selling all of my long term international mutual fund investment in Fidelity Diversified International (FDIVX) and will gradually move those dollars in equal amounts to IFN (India Fund), EWZ (Brazil ETF) and FXI (China ETF).  I will dollar cost average in because all three markets / funds have just experienced a very strong surge from the bottom of the market crash and may correct. 

My goal will be to move my portfolio to 20% in non-dollar market investments.  Beyond the country ETFs, I also will buy strategic investments in Canada, Australia and non-China Asia.  I will have another 35% of my total portfolio invested in commodities and energy.  This position is already in place with most of the commodity portfolio in Canadian Royalty Trusts (Canroys).  I am also adding FXC and BHP to provide more industrial metals exposure along with additional precious metals exposure, adding to VGPMX and GGN by buying gold miners like AEM and AUY.   The balance of my portfolio will be in domestic stock and bond funds, especially high yield bonds which can keep up with the devaluing of inflation.  In this way, my portfolio will have less than 50% US dollar exposure to protect against inflation and a decade long weak economy.

Today's Barrons runs a great story on this same subject. 

The [most important factor in the coming commodity boom is the] growth of the middle class in the rapidly developing economies; large-scale infrastructure investments in many developing nations; and the emergence in these regions of a huge new consumer cohort, which has developed out of the poverty of the past.  The size of this low-income cohort dwarfs anything the global marketplace has ever seen. Approximately one billion people, one- seventh of the world's population, are moving out of poverty and entering the market as consumers. If these billion consumers were a nation, they would have the third-largest population in the world and the 10th-largest gross domestic product.

China lacks the raw materials it needs to manufacture steel. This has turned it into the world's largest importer of iron ore. It has been accounting for 40% or more of the international iron-ore trade in recent years.  China's need for steel will continue long into the future. Remember that the U.S. took 35 years to finish its Interstate highway system. It took 16 years for Japan to build its New Trunk Line railway. Even with China spending a reported 9% of its GDP on infrastructure, it will take decades to bring its roads, ports, airports, power-generation capacity and other infrastructure systems up to speed.

Read the entire story here:

Commodities' Coming Rebound

Tags: AEM, AUY, Brazil, Canada, Canroys, China, devaluation, ETF, FXI, Gold, India, inflation, Japan, Precious Metals, Russia, silver

This market is looking very strong. Every day there is another challenge by the bears, and every day, the bulls shake it off and drive the market further up.

Today, the challenge was to Intel (INTC). It reported good earnings (well above consensus) and also decent future prospects, which is a big change for people in the tech space. The future prospects, though, were less than what some analysts expected, so the stock was sold off on profit taking. But now it is bouncing back along with the tech sector and the whole market.

Same thing happened with the financials this week. Goldman reported great earnings on Monday, stock sold off from $140 to $115 by this morning, and has now bounced back to $120 as of noon. JPM reports tomorrow and we may see a big day after the knee-jerk sell-off.

I am positioned for all of this as I have bought more Proshare Ultra Financials (UYG) today at $3.33 (sold off 1000 shares on Monday at $3.58 to take some profit, after buying for $3.15 last Friday). I have another order in at $3.05, should it fall that far, but I don't think it will. I also have an order in for INTC at $15.05 trying to catch a bounce down from a high of $16.40 yesterday leading up to earnings. To catch more of the tech rally, I also have another order in for both XLK (tech ETF) stock at $16.30 and XLK put options for the May 17 (XLKQQ) at $1 a contract.

I am still of the belief that we will trade up like this in sawtooth fashion with a bullish trend through April and into May. Then, we will bump into the 200 day EMA for SP500 at around 970. That will represent long term resistance coinciding with the typical summer selling season. We will then move down to around 760 through the summer selloff. But until then, we have another 15% to rally and good trading opptys.

Tags: BAC, Bear, Bullish, C, DOW, EMA, ETF, Financial, GE, Gold, GS, INTC, Intel, JPM, OR, Put options, Tech Stock, UYG, XLK

Just picked this up off the E-Trade News. The article from this PM confirms the points I have made recently regarding a rotation from the commodities to the financial equities. It sure is nice to see someone independently come up with the same technical indicators that I have identified ;o) The rotation may not be long term in nature, but it sure looks tradeable over the next few months (today's action notwithstanding).

The chart below compares the Financials index, XLF with the oil index, OIL. The relationship between the two is almost perfectly inverse the past month. So, as oil and commodities decline, financials and other related equities will increase. This makes sense because oil / commodities are a reflection of inflation denominated in the home currency. Higher inflation must mean higher interest rates, which must damage financial equities.

"Goodbye commodities, hello financials" 1:01 PM ET 7/24/08 Marketwatch

NEW YORK (MPTrader) -- It seemed as though there was no place to hide when Apple and the technology sector, along with Bank of America and the financials, got clobbered with the rest of the market at Tuesday's open. Though by mid-day, the market did recover in a big way and left behind another significant low within a "rolling bottoming process."

Tuesday's action in the Standard & Poor's 500 Index (SPX) established a low of 1248 and high of 1277. That dwarfed Monday's daily range, closing well above Monday's close and high, so from a strict technical prospective the blue chip index had a key upside reversal.

In addition, unlike the rally off of last week's July 15 low, Tuesday's rally did not have the feel of a temporary oversold rally. The morning sell-off wasn't as dramatic, with the S&P; 500 only down 11.5 points from its previous close as opposed to nearly 28 points on July 15. So it was a higher, secondary low -- more corrective looking than that of the previous week, and less susceptible to a mere reactive bounce.

Driving the S&P; 500, which has now recovered 6.8% from its July 15 low (through Wednesday's close at 1282), are the financials, which have room to go higher. Over the last several months the percentage that the financials make up of the S&P; 500 has diminished just by virtue of the price deterioration, while the energy sector percentage of the index has increased. But institutions in the last week, in particular, appear to have begun to shift their money out of the once high-flying energy sector into equities.

One way to play this trend is through the Financial Select SPDR (XLF) or its sister ETF, the Ultra Financials ProShares (UYG), which moves two times that of the XLF. Since its low of 14.08 on July 15, the UYG is up 68% through Wednesday's close at 23.67.

Traders should look this week for a break of 26.40. That's where the major resistance trendline from Sept. 30 of last year cuts across the price axis, a break of which would be the first major signal of damage to the downtrend that's transpired since the fourth quarter of last year. Beyond that, if the UYG can sustain above 33.75, it would indicate the end of the bear market in financials.

Likewise, the Ultra Short Oil & Gas ProShares (DUG) provides an opportunity to play the downside move in energy shares. The DUG has put in a rounded bottom at around 25.30, closing Wednesday at 36.16, up 42% from its low, as oil prices have declined 15% from their $148 high. Its chart points to 39.50-41.00 next.

Another way to play the trend is through the iShares Dow Jones Transportation Average (IYT), which for obvious reasons is getting a major lift from declining energy prices. The IYT chart shows it made its bear market, corrective low on January 6 at 72.86, and went to new highs after that at 99.09 on May 18. The July 15 low at just under 82 was the pullback low after that new high, and from there it's gone to just above 92 as of Wednesday's close, a 12% gain in just a week. Tuesday was the first time it closed above its 50-day moving average since the first week of June, suggesting the IYT is in a new upleg and heading directly back to 99 to test that high.

Other commodity indexes are confirming what the IYT is suggesting, like the PowerShares DB Agriculture ETF (DBA), which closed below its 200-day moving average for the first time in a year on Tuesday. The PowerShares Commodity Index Tracking Fund (DBC) closed for the second day in a row below its 50-day moving average and looks like it has considerable room to go down as well.

In addition, the streetTRACKS Gold Shares (GLD) looked like it was on its way to retest high levels at around 98 early Tuesday but instead ran out of gas at around 96.20 in the pre-market hours and then reversed in a big way and closed at 93, falling to 90.57 as of Wednesday's close. Chances are the GLD now will move back to below 90, and possibly towards a full-fledged test of its rising 200-DMA, now at 86.80, which must contain any further sustained weakness to avert a total breakdown in gold prices towards $800 ($80 in the GLD).

The financials, transports and stock index ETFs are turning up, while we have sell signals in the, energy, agricultural and precious metals sectors. For people who have followed markets for a long time, this inverse relationship between equities and commodities makes intuitive sense and suggests there are trading opportunities developing that will last longer than a few hours!"

Mike Paulenoff is author of MPTrader.com, a diary of his intraday technical chart analysis and trading alerts on ETFs for gold, oil, equity indexes and other major markets. (mptrader.com)

Tags: Ag, AU, BAC, Bear, BP, C, commodities, DBA, DOW, Energy, ETF, Fed, Financial, GE, GG, Gold, inflation, money, moving average, Oil, Oil Prices, OR, Precious Metals, RIO, ROC, RSH, UYG, XLF