Good news, bad news

In today's Barron's Online column I talk about the market latching on to good news and shrugging off bad news. That is typically what happens when the market is in bull mode and several colleagues have pointed this out in various IMs and emails.

But is it true? The market rallied Tuesday not when record housing foreclosures were announced or when Google cratered but when IBM announced a ginormous share buyback plan. It did not rally on lousy retail earnings outlooks but on the idea that the Fed is going to chop rates by another 50 basis points.

So, I don't think it was shrugging anything off and indeed was in a relief rally, thanking the stars that it had not broken down already.

Stranger things have happened.

Trading the Red Sheets

Well, the progression of the credit crisis has finally made it all the way to the common good. With the bond insurers losing or about to lose their AAA ratings, the places that need to cut costs most - municipalities - are going to have trouble getting affordable financing. Who needs a sewer? Let's just raise the tolls on the Turnpike! And forget about that music program after school.

It's a good thing our bridges are so well built that they don't collapse. Oh wait.......

It's now moved from the greedy (bankers) to the needy (subprime borrowers). From stupid investors buying the pig with the lipstick to Main Street where credit cards are threatened.

It's a good thing that households have enough reserves to ride it out. Oh wait........

OK, you know all that. Here's where I am going with this. We all see the fallout from all of this but everywhere there is a bubble there is the inevitable bursting. Where are the pundits saying will survive any global slowdown sparked by years of cheap credit? China and India of course with a lot more emphasis on the former. Everyone is scrambling to make a yuan (who wants greenbacks these days?) that they are throwing investment dollars at anyone hanging a shingle in Shanghai.

That's good, you say? Go where the growth is! So the market over there is a bit overheated. We're in it for the long haul.

I am not talking about a bubble in Chinese stocks. I am talking about a bubble in throwing all your dough at China where nothing is regulated and everything, including some political stuff I won't get into in this blog and simple stewardship of resources is for sale. China is nearly number 1 in global pollution already. Do any of the waste products and casualties of business matter as long as there are profits to be made?

Investment in China is the bubble. How many companies in your portfolio are taking excessive risk over there? How many are judging their investments on some silly Tech bubble metric like price to advertising budget ratios?

To me, China is one giant OTC-BB but with much higher stakes. Call it the Red Sheets.

I am not saying that Chinese investment is a bad thing and indeed I do believe exposure to that kind of growth is needed. But too much of it will most certainly turn sour down the road when the poor business ideas and excessively risky venture blow up. They always do.

Mmmmmbac

Watching the stock market today. It did its usual - for February - head fake early on by zigging in the morning and then zagging in the afternoon. But this time it decided to soar 200 Dow points in the final 45 minutes of trading.  Another fake! Imagine that.

Usually, it has only been one reversal per day to mess us up. Today we were blessed with two. 

The catalyst? Bond insurer Ambac is getting a capital injection. The day is saved!  We can resume issuing tons of bonds (investment grade, please) and the credit crunch is over.  Right.

I fail to see how the saving of one company can elicit the second coming. It looks more like a relief rally that there was some good news of some kind. Better than more write-downs.

But through it all, the major indices remain in their trading ranges. New 52-week lows remained in tripled digits. Dead cats for the financials.

I'm still watching just in case this event has legs as stranger things have happened. 

Shameless book plug

No free lunch, right? I promised some folks that I'd help with the PR so here it is. My third book on charting is out and it is aimed even lower on the expertise scale than the last one. If you've been reading my column and get lost in some of the concepts then this book is for you. No indicators. No formulas. No need to stop using fundamentals. Just help in making the buy, sell or hold decision.

Check it out. Amazon UK has it already and it is coming to US outlets soon.

Report from the Traders Expo, NY

I spent a few hours at the Traders Expo in NYC today, mostly to visit the exhibitors, catch up with some old friends and connect with a few potential business partners. While there was nothing ground shaking there, at least in my view, there were two big themes running through the vendors - foreign exchange trading for everyone and trader education. Some even were selling both!

Now, I'm not going to take this little sojourn into the Big Apple as a definitive sign but the proliferation of forex vendors, traders and brokers is getting into high gear. Is everyone trading their own account for 2 pip spreads? Is forex trading as liquid - and therefore lower risk - as many are suggesting? And how many forex bucket shops are popping up to fleece the ever-gullible public in the latest way to get rich?

Maybe I'll open up a forex hedge fund. Buy cash, sell futures and spread options on top of it all. Maybe I can find a subprime margin guy, too! Why not?

I'm wondering when the public's new fascination for forex trading and its mystique will blow up in their collective faces the way 'net stocks did eight years ago.

My message to unsuspecting newbie forex traders - there is no such thing as no-risk trading. You can control your risk but how many of us truly employ real risk controls such as optimal position sizing, seasonality and even time of day cycles? Sure, we use stops but is that enough?

And that brings me back to the education stuff. Many may be selling snake oil but it is better to seek out real training than to think you know what you are doing. Find a quality educational vendor and learn something before you buy or sell anything.

Oops, I ranted again! (sorry Britney)

Success from failure

When the market rises, it is easy to bash the bears. Negative, pessimism, doubters and stubborn are descriptions that seem to be tossed about to describe those who believe, after thorough study of the evidence, that the stock market is going to be lower - a lot lower - in a few weeks than it is now.

Check out this article I wrote almost a year ago on Investopedia.
http://www.investopedia.com/articles/trading/07/indicators_fail.asp

It talks about how a bear (that would be me) made plenty of money on the long side by reading the charts and leaving opinion on the back burner. The evidence was certainly in place for a decline yet up went the market and that is the only thing that really matters.

Of course, it took a while for evidence to overwhelm the bulls (March through October) but the longer it went on the bigger the decline to be expected.

I'll be following up that article in the March edition of "Trading Strategies" coming out on MarketWatch.com on March 3. It will talk about the current bounce and how, despite plenty of whipsaws, there was money to be made on the long side until the house of cards comes tumbling down.

Have a good long holiday weekend and make it a safe one!
Michael Kahn
Editor, Quick Takes Pro daily technical newsletter

Junk

The credit crisis is everywhere with the latest casualty being insurance companies holding all that junk in their portfolios. Who's next?

The following chart, taken from www.KDPadvisors.com, shows the spread between junk bond yields and the 10-year Treasury. Note how the spread was very high when the stock market was just starting to bottom. And then note how it plummeted when the Fed started to cut rates.

The yield spread - and reward for taking on that extra credit quality risk, stayed flat and low for years as the mortgage market ballooned. Cheap credit meant squeezing more profit by taking more risk. Eventually, it catches up with you.

The chart started to rise when? Yep, last summer when the subprime crisis broke. And it looks as if the spread has a long way to go before it peaks.

Here's another view:


The black line is the 10-year Treasury bond ETF and the red is the HyGrade (junk) ETF. No end of these opposite trends in sight.

Dangers from without

I was watching Glenn Beck on CNN Headline News and must admit there is something about him. First, let me reiterate that this is not a political blog, it is about anything that might affect investment decisions.

To me, Beck is a hard core republican but at the same time he eschews many of the so-called Republican values to which the candidates of today seem to kow-tow (look that one up). He is for getting government the hell out of the way and that includes things like letting people do what they want with their lives, making their own mistakes and taking the consequences like a man/woman.

Anyway, let's bring this to your portfolio. His report yesterday had two relevant points to us here.

1) Oil money and how those with it are beating the cr*p economically out of those who don't have it. Makes sense to me. Money is power, even for communists and certainly for terrorists.
2) He also said something to the effect that the US is so focused on helping poor homeowners in default that it is borrowing money from China to bail them out. That makes the credit crunch today look mild in my view.

On point 1, he compared the US today to the Soviets just before they crumbled. No revenue (oil was low) and fighting "you know who" in Afghanistan. Economically, they were a disaster and poof, they were gone. Now, with oil so high they are flush with case and dictating an awful lot of political stuff in their world.

On point 2, he basically said that we are moving towards socialism - and economic ruin. I love to quote a comedian on this one - Nick DiPaola - who said on his short-lived talk show that this country is becoming a "Nanny State."

So what do we do to make sure we can ride out these issues and keep our retirement nest egg?

1) alternate energy, not to be green but to get off oil (although green would be a great side effect)
2) stay diversified globally
3) own hard assets

The Lighter Side

An Oldie but Goodie

Here is a song parody that made the round in April 2000 and we all know what was going on in the stock market about that time. Amazing how it fits today. More after you read it.

Sing this to "American Pie."

Humble Pie
A long, long week ago
I can still remember how the market used to make me smile
What I'd do when I had the chance
Is get myself a cash advance
And add another tech stock to the pile.

But Alan Greenspan made me shiver
With every speech that he delivered
Bad news on the rate front
Still I'd take one more punt

I can't remember if I cried
When I heard about the CPI
I lost my fortune and my pride
The day the NASDAQ died

So bye-bye to my piece of the pie
Now I'm gettin' calls for margin
'Cause my cash account's dry
It's just two weeks from a new all-time high
And now we're right back where we were in July
We're right back where we were in July

Did you buy stocks you never heard of?
QCOM at 150 or above?
'Cos George Gilder told you so
Now do you believe in Home Depot?
Can Wal-Mart save your portfolio?
And can you teach me what's a P/E ratio?

Well, I know that you were leveraged too
So you can't just take a long-term view
Your broker shut you down
No more margin could be found

I never worried on the whole way up
Buying dot coms from the back of a pickup truck
But Friday I ran out of luck
It was the day the NAAAASDAQ died

I started singin'
Bye-bye to my piece of the pie
Now I'm gettin' calls for margin
'Cause my cash account's dry
It's just two weeks from a new all-time high
And now we're right back where we were in July
Yeah we're right back where we were in July

The credit for this one goes to an American investment banker working for CSFB in London, named Sean Brady, or so says one source.

So how is this a good fit for today? Some might make the sentiment argument that Nasdaq in 1999 = Subprime in 2007.

Musings on the Dollar

This is a quickie. If the US economy hints at slowdown and the rest of the world has a coronary, what does that say about them? How about this - they are in rough shape, too. And sooner or later their central banks are going to have to try to combat their own slowdowns by cutting interest rates.

Lower rates there means capital is going to flow back here, in the opposite manner that it did when US rates were falling like candidates in an election year. The dollar is going to find some support and surprise everyone.

Remember, markets of all kinds like to fool as many people as possible and what market is more lopsided than the US dollar?

Stocks do not Equal Economy

It seems that every time the stock market pulls back the fundamental folks come out with another call to buy good stocks at cheaper prices. Technicians call that "buying the dip" and in a rising market it is a great strategy.

Or is it?

In a roaring bull market there are no little pullbacks. The market does not let johnny come lately bulls get in easily with a nice pullback to, say, the 50-day moving average. No. In real bull markets, momentum indicators get overbought and stay overbought.

In kinda bull markets, when things are rising but in hindsight not by too much, we get those nice pullbacks. Your target stock drops 2% and you are in! Baby, that was easy! But then you think about it - nothing is easy. What's wrong here?

Real bull markets make you sick when you pull the trigger. You buy high and sell higher and have no comfort in buying low or buying at an obvious support level where you can set a nice stop.

That's one of two types of markets that buying dips favors. What about flat markets? Yes, buying the trading range bottom and selling the trading range top works nicely. But when do you see that kind of market? They don't stay flat for long, do they?

And finally, what about a falling market? Buying a dip in a falling market is buying a falling knife? How low is low for an intermediate swing? Beats me. The correct strategy, as anyone will say, is selling rallies, not buying dips. That way, you stay with the trend in force.

So when the pundits come out and tell you to buy stocks during this unprecedented fire sale, think about the trend in force. According the many knowledgeable technicians, the bull market ended a few months ago.

Giants Win - Stocks Will Rise

It's that time of year when the superbowl indicator is trotted out to predict where the stock market will go. With the NFC Giants beating Grumpy's Guys from the AFC the indicator predicts an up market. Yeah, and the Washington Redskins last home game predicts the Presidential winner (that one was actually perfect until 2004 - hey, just like Grumpy's Guys this year!)

There is no doubt that the bulls have the ball in the short-term and my view that last week's Fed Failure was going to be it for the dead cat bounce. Don't worry, as if anyone were, I sold my short ETF pronto when the market reversed. But now with an O'Neil follow through day triggered - despite what O'Neil's crew themselves say, we have to consider that there will be some more strength before the whole thing rolls over.

But as I sign off Sunday night with Asia in full rally mode, anything can happen. There are some severely beaten down sectors now leading the recovery but dead cats are not really where you want to pin your hopes.