STOCK MARKET FOR BEGINNER | Stock & Option Guide

Hold your breath. It’s that time of the year … the time of the year when the market either makes it or breaks it. It’s Crash or Rally time.

We are all familiar with all the bad news that comes with this period of trading. Here’s a brief recap:

• 1929, Oct 24 (Black Thursday) The Great Depression
• 1929, Oct 29 (Black Tuesday) The Great Depression
• 1987, Oct 19 ((Black Monday)
• 1997, Oct 22 (Asian Financial Crisis) DOW lost more than 11% in 4 consecutive down days.
• 2007, Oct 10 – Start of the Sub-prime Mortgage Crisis Decline
• 2008, Oct 06 to 10 (Black Week) The “Panic of 2008?. DOW closes below 10,000 on Oct 6 for the first time since Oct 26, 2004
• 2008, Oct 09 & 15 2008 – DOW loses more than 7% on each day.
• 2008, Oct 24 (Black Friday) World markets lose more than 10% in one session

Now, also take note that when the market was at a bottom or recovering from a bottom, Octobers were great rally starters;

• 1921, October – After a three year low in August that year, DOW went on to gain 446% over the next 8 years that led into the Crash of ‘29.
• 1934, October – Having recovered from the Great Depression, the market gained 110% over the next 28 months.
• 1949, October – After finding a 4 year low in June, the market broke its 52 week high and started a 16 year bull run that took the DOW from 190 to 988 by Jan 1966.
• 1982, October – Dow breaks above 1,000 and gets above its 10 year high and starts a 5 year rally that extends beyond 150% before breaking down in October 1987.
• 1987, October – After that spectacular break down, Dow started an immediate recovery that went from 1,840 to 3,000 (63%) in 33 months and peaked out at 3,000 by July 1990.
• 1990 October – Dow pulled back from 3,000 in July 1990 to 2,365 by October that same year and found a bottom which rallied to 9,340 (294%) in 8 years, ending with the Russian Financial Crisis in 1998.
• 1998, October – The Russian Financial Crisis ended with a Double Bottom and rallied the DOW from 7,631 to 11,107 by May 1999 for a gain of 45.5% in only 7 months.
• 2002, October 10 – DOW found the Dot.com recession bottom at 7,286 and went into a 16 month recovery that topped out in February 11, 2004 at 10,737 for a 47% gain (albeit with a scare between January and March of 2003).
• 2005, October – Dow holds above 10,200 in a two year consolidation and breaks out the following November and makes a two year run to the all time high of 14,164 by October 9, 2007 for a 38.8% gain.

So what can we expect this time; Tank or Rally?

Dow, Nasdaq, S&P500, VIX, Dollar, 10yr, Oil, Nat Gas & Gold

This market is doing things I’ve never seen before and is making unprecedented patterns not seen in history;

The benchmarks are cracking new highs with the DOW breaking and holding above 10,000 and staying well above its 200DSMA while the VIX is at a 14 month low of 21.72 and the 10yr Treasury Yield’s two month decline indicating a return to a bull market.

But the dollar is at shark-shit lows, Oil is climbing unbelievably above $78 and Gold is no less crazy above $1,050 indicating an onset of inflation against the back drop of that weakening dollar while Natural Gas remains unnaturally and divergently low below $5.

And how is it logical to have inflationary commodity prices when Americans don’t have incomes, jobs and the kind of spending power to support $78 oil and $1,050 gold?

The economy is undoubtedly still very weak and the pain in America is still quite bad. The fundamentals of the country just don’t justify the rally we are seeing and it would be foolish and too soon to assume that the economy is truly in a recovery state. But the market can be a different factor altogether. Seldom in history has the economy led the market. Statistics show that the market has often led the economy, sometimes regardless of the economic fundamentals.

In recent times, the market rallied without really recovering from;

• the 1973/74 Oil Crisis and the dollar’s divorce from the gold standard,
• 1987 inflationary recession,
• the 1997 Asian Financial Crisis (economic recovery was lagging by then),
• the 2000 LTCM debacle,
• the Dot.com deflation the 2001,
• SARS in 2002
• and it would seem, now in 2009 during the Financial Crisis.

I have little faith that this rally is sustainable and will continue to hold on to my 20 year cycle theory. But what is undeniable is the money making opportunities that have presented themselves over the last 7 months. Markets will tank and markets will rally. What matters more than a bearish opinion is that one makes money regardless of that opinion. I find it foolish to hold to the market’s fundamentals and deny an “empty” rally that is so ridiculously profitable, hyped or not.

Missing out on a 53.7% rally does not an intelligent trader make.

At the same time, committing more than 50% of your cash to trading this rally is even more foolish. Knowing that the fundamentals will catch up with the market sooner or later, makes highly leveraged trading a dangerously foolish prospect for now. With most of the pros and high-leveraged players staying sidelined or playing it conservatively, taking on this market with guns blazing will get you killed as surely as the last mad rush by Butch Cassidy and the Sundance Kid.

Play it safe. Buy some insurance. Spread it. Hedge it. Trade this market bullishly by all means but always protect yourself and keep your stops tight. Better to get stopped out in small profits than risk wiping out half or all of your capital. If the market continues to run, at least you’re not missing out. If it tanks suddenly, you’re prepared for the worst. Calculate your risk and stick to your rules. Don’t think about it when the shit hits the fan – just do it and take the pain. It’s a short stab and it’ll hurt. But like all bitter medicine, it is a good thing.

Remember that this rally is fuelled by ignorance and hype. Such “buy the rumor, sell the news” investors have been responsible for some of the worst market bubbles in the history of the stock market. And you know what always follows a bubble.

The property scene in Singapore is no different. What makes this bubble even more hazardous is that these investors are flipping with borrowed money. God forbid a property market correction – banks are going to be holding a large portion of our housing inventory then and owners are going to be paying for mortgages that are above the lower selling price – defaults will surely rise.

In parting, allow me to leave you with a wise quotation by Joseph Patrick Kennedy from 1929;

Even when shoe shine boys are giving you stock tips, it’s time to sell.

Have a great weekend!

[Conrad Alvin Lim]

With the Dow hitting 10,000 on Wednesday, it is a good time to check the intermarket PerfChart for 2009. West Texas Intermediate ($WTIC) is by far the biggest winner this year with a gain around 55%. Gold-Continuous Futures ($GOLD) is up around 24% and the Dow is up 11.87%. Bonds and the Dollar are in negative territory for the year.

Rate Decisions Spark Further Buying

Global equity markets rallied significantly last week, as optimism about global growth returned to the markets.    The Dow Industrial average finished the week at 9864 reaching a 52 week high, two years after reaching an all time high of 14,198 points.

The S&P 500 Index (the broader market) rallied 46 points or 4.6% to settle the week at 1,071.  Optimism began early in the week after the Institute for Supply Management reported that its index of nonmanufacturing activity jumped last month to 50.9, from 48.4 in August, while its business activity/production index hit 55.1, from 51.3.  These positive results pushed the S&P 500 up 15 points or 1.5% at the start of the week, showing investors that the U.S economy is slowly crawling out of its recession. One must note that a number above 50 is classed as a positive sign and will often point to expansion.

Positive news continued to grip the market at the beginning of the week as the Reserve Bank of Australia increased its benchmark interest rate to 3.25% from 3.00%.  The surprising news pushed the US equity markets and Dollar counterparts higher, with DJIA and S&P rising 1.4% and 1.4%, respectively. On the Forex market the Australian Dollar soared higher reaching a weekly high of $0.9098.  European markets rose too, as DJ Euro Stoxx 50 ended up 2.7%.

On Wednesday night and Thursday the US markets received two surprises as Alcoa announced positive earnings and Jobless claims declined.  Net third-quarter profit for the aluminum giant was $77 million, or 8 cents a share, compare to expectations of a loss of 9 cents a share.  On Thursday jobless claims decreased by 33,000 to 521,000. Economists were expecting a decrease of only 11,000.

Positive Economic News is Bad for the Dollar

The dollar continued to trade on the defensive side, as currency traders were forced to digest a wave of economic news.  Following the RBA rate hike, the Australia dollar showed significant gains against the greenback.  This was compounded on Thursday after the Australian Economy also showed extremely strong gains in employment.   From a technical point of view the Australian Dollar has presented a phenomenal come back, breaking all Fibonacci levels, heading higher. Even though a pullback could take place, the current angle of the trend is signaling that this pair could be headed for its previous high.

The Canadian dollar set a new high for the year around C$1.0565 against the US dollar, using the unexpectedly strong Ivey PMI as a catalyst.  At 61.7 (vs. 56.2 exp), the Sep PMI report, showed the strongest result since July 2008.Despite the positive number one must note that the index is not seasonally adjusted and September tends to be a strong month regardless of economic conditions.

On Thursday after Canadian employment grew by 30,000 jobs, the Canadian dollar made new highs for the week.    The CAD/USD broke through recent tight range of 1.0630 – 1.1125, and is now presenting enough momentum to test the parity level.

Over in the Euro-zone, ECB President Trichet’s post-meeting press conference left little doubt that the ECB will leave both conventional and non-traditional policy measures unchanged well into 2010. To date the bank wants to ensure that the euro zone’s economy returns to a healthy state, characterized by proper economic growth. Even though Trichet stressed on the importance of the U.S Dollar following the ECB’s rate decision, his comments eventually led to a euro relief rally, as it became apparent that the ECB remains on a very low rung of the intervention ladder.  While the euro has since pulled back below $1.4740 with further support around $1.4680, the fundamental picture has not changed with new euro buyers likely to emerge on the pullback.

Gold and silver lead the charge this week in the commodity markets.  Gold hit a new all time high at $1067, while silver also hit a 2009 high at $17.91.  A strong technical breakout along with the growing demand for an inflationary hedge, pushed precious metals higher during the course of the week.  The moves gained momentum after the RBA increased its central bank rate, especially as gold and silver are known to be the best instruments to use as an inflationary hedge.

The Week Ahead

This week a wave of global economic data will be released, some of which traders will need to keep an eye on.  After a bank holiday on Monday in the US, Tuesday will start off with National Australia Bank’s Business Conditions (Sep), Consumer Price Index, Retail Sales in the UK, and the Zew survey of economic sentiment in the EMU.  On Wednesday eyes will turn to retail sales in the U.S and EMU Industrial Production.  Europe and the U.S will take center stage on Thursday as both are expected to release inflation data.  The week will end with Canada in the spot light, scheduled to release its Consumer Price Index.