Wednesday, March 11, 2009

How far can this (Bear Market) S&P 500 Stock Market Rally Go?

On March 10, 2009, the S&P 500 went up 6.37%. Some pundits are calling for a bottom, but many see this as merely a Bear Market Rally.

How far can this rally go?

First major candidate is S&P 500 level of 740 to 760. This was the previous low held late in 2008, and is also the level that held in the Bear Market Bottom of 2000-2002.

Another candidate is the breakout point off a symmetrical triangle pattern.

Previously, this blog demonstrated that the S&P 500 recently broke down from a symmetrical triangle.

According to

Prices sometimes return to the breakout point of apex on a reaction move before resuming in the direction of the breakout. This return can offer a second chance to participate with a better reward to risk ratio. Potential reward price targets found by measurement and parallel trend line extension are only meant to act as rough guidelines. Technical analysis is dynamic and ongoing assessment is required.

It is possible that the rally could continue to this breakout (breakdown) point of around 825 on the S&P 500.

The 50 day moving average is very close to the 825 breakdown point on the S&P 500.

Overextended from the 200 Day Moving Average

The S&P 500 is also very overextended underneath the 200 Day Moving Average. This suggests that the rally could have some room, or go sideways long enough for the 200 Day Moving Average to catch up.

Today's Stock Chart of the S&P 500

Thursday, March 5, 2009

Bull Market in Guns and Ammunition in this Bad Bear Market?

Over the last few months, we've seen the next leg down in this terrible bear market. Since the US Election on November 2008 to March 5, 2009, we've seen the S&P 500 go down 28.6% and the Small Capitalization Russell 2000 index go down 34.4%.

But yet, two stocks, SWHC (Smith and Wesson Holdings) and RGR (Sturm Ruger), two Gun and Ammunition companies, have gained 45.8% and 39.8% respectively.

Despite the Current Bear Market, we have had a Bull Market in Guns and Ammunition.

Different Articles, such as from Minyanville, have attributed this boom to two main factors:
  1. The new Democratic U.S. Administration is traditionally not friendly to gun rights and gun owners.
  2. Worsening economy increases crime and mayhem encouraging people to buy firearms and ammunition.

Anecdotal evidence also shows the high demand. This Orlando Sentinel article has said that sales of ammunition have been flying off the shelves and there is a high demand for it.

The FBI has reported that background checks on potential firearms purchasers increased 41.6% from November 2007 to November 2008.

Even the earnings report from handgun maker Sturm Ruger (RGR) suggests this national trend. Demand is so high, Sturm Ruger reported over 175,000 of 776,000 units ordered were on back order. Over the last year, the order book grow almost 50% from $156 million to $223 million.

SWHC (Smith and Wesson) is a small capitalization stock ($179 million) with a PE (Price to Earnings) ratio of 13, and a 5 year estimated growth rate of 21.7% for a Price Earnings to Growth Ratio (PEG) of 0.60 (PEG > 2 is expensive, PEG < 1 is a good deal).

RGR (Sturm Ruger) is also a small capitalization stock ($191 million) with a forward PE ratio of 24.

Both stocks appear to have broken out recently out of bases

The trends remain strong, but how long will it last?

If the economy and stock market continue to worsen, higher unemployment would lead to higher crime rates, which can boost sales of guns and ammunition.

We could also currently be in a secular Bear Market that started in 2000 and will end sometime around 2016 or 2017.

Today's SWHC Stock Chart

Today's RGR Stock Chart

Today's CAB Stock Chart

Performance Comparison of SPY, IWM, SWHC, RGR, and CAB

Cabela (CAB), is a retailer of outdoor items such as hunting, fishing and camping equipment.

Tuesday, March 3, 2009

Profit from Current Bear Market with Inverse ETFs

We have recently broke down below the major support level of 741/768 on the S&P 500 which were held recently and during the great bear market bottom of 2002.

This blog has set a target of 450 to 600 on the S&P 500 based on many factors.

Excellent Chartist Louise Yamada, who has been right so far, agrees with this assessment.

If you do believe that the market could go down from here (700 level) to 600 (drop of 15%) to 450 (drop of 36%), what can the investor do?

Conservative Method: Cash

The most conservative method is to increase the cash position in the portfolio. The next decision point would be when to start reallocating money in stocks again.

More Aggressive: Profit using Inverse ETFs

The more aggressive option is to purchase Inverse ETFs, or Inverse Exchange Traded Funds.

Exchange Traded Funds, such as the ticker symbol "SPY", are similar to indexed mutual funds, but they can be traded, and bought and sold just like stocks. You would normally pay a commission.

SPY, for example, represents the S&P 500 index. If the S&P 500 goes up 2x, the SPY would attempt to track that performance and go up 2x.

Inverse ETFs, on the other hand, are very similar, but they perform the opposite of the index.

For example, the inverse ETF "SH" is the Short S&P 500 ETF. When the S&P 500 goes up 2x, the SH goes down 2x. If the S&P 500 goes down 3x, the SH goes up 3x.

Another example is the double inverse ETF "SDS". This is the Ultra Short S&P 500 ETF. If the S&P 500 goes up 1x, SDS goes down 2x. If the S&P 500 goes down 1x, SDS goes up 2x.

These ultra and short ETFs are not meant to be investments, but trading vehicles.

Other Inverse ETFs from Proshares

Proshares is the company that provides many of the popular inverse ETFs.

Other examples include:
  1. DOG: Short Dow30
  2. MZZ: UltraShort MidCap 400
  3. SKF: UltraShort Financials
  4. SMN: UltraShort Basic Materials
  5. SRS: UltraShort Real Estate

Some of the UltraShort ETFs are very volatile and do handle them with care.

Trading Strategies

Using inverse ETFs is not meant to be an investment, but a trade. You should come up with a plan when to buy, when to sell, and know how to cut your losses.

You can use techniques as using limit orders (specifying the largest price you'll be willing to buy an ETF, for example), setting stop orders (in case you are wrong, you get to cut your losses quick), or even set trailing stops (as you profit, the stop order to sell follows your stock).

The strategies to trade these inverse ETFs are beyond the scope of this particular blog entry.

Stock Chart of SPY (S&P 500 ETF, Long)

Stock Chart of SH (Inverse or Short S&P 500)

Stock Chart of SDS (UltraShort S&P 500)

Stock Chart of SKF (UltraShort Financial)

Stock Chart of SRS (UltraShort Real Estate)

Stock Chart of QID (UltraShort Nasdaq 100)

Stock Chart of SMN (UltraShort Basic Materials)

Stock Chart of SIJ (UltraShort Industrials

Stock Chart of DUG (UltraShort Oil and Gas)

Stock Chart of REW (UltraShort Technology)

Stock Chart of EUM (Short MSCI Emerging Markets)

Stock Chart of EFZ (Short MSCI EAFE, International)

Sunday, March 1, 2009

Stock Market S&P 500 to Continue Large Drop If We Break Important Levels.

S&P 500 Level of 741 is a very important technical support level. It is the major bottom in late 2008. It is also very close to the major bottom of the great bear market which ended in 2002.

In the chart above, we notice the importance of the S&P 500 level of 740 to 760. We also notice that in 1995, the slope of the chart increases at an unsupportable rate. It was during this time, that the mantra "buy the dip" was used with great success.

However, starting in 2000, the Bubble burst going down to S&P 500 level of 768.

From 2002 to 2008, we had another Bubble (credit, housing bubble), and it burst again, and went all the way down to S&P 741.

This major support area of S&P 740 to 760 has to hold. If it doesn't, then there is not much support all the way down to S&P 500 level of around 500 (1995 levels). There is not much congestion between the the S&P 500 level of 500 to 740, and support will be hard to find.

This bottom of S&P 500 level of 500 is consistent with this blog's target of S&P 500 level of 450 to 600.

On Friday, February 27, the S&P 500 closed at 735, below the important level of 740 to 760. This may be a sign that we are continuing to head to the lower S&P 500 target. If the target is S&P 500 level of 500, that is another drop of around 47%.

60 Year View

Notice that in the 60 year view, the trend line shows a support level starting at around 400, and as time passes, the support level would increase. This is close to the lower S&P 500 target of 450 to 600.

So from 1995 to 2000, we had the "Buy the Dip" Mantra. Now, as we go back in time to 1995 S&P 500 levels, we will have the "Sell the Rally" strategy which should work in this market.

Today's Stock Chart