Stock Market (S&P 500) Short Term Positive, Intermediate Term, Still Bearish

After today's S&P 500 breakout above the 50 day moving average and short term downtrend, the stock market should have some short term momentum.

The S&P 500 is currently around 1350.



Next resistance area is around 1400 on the S&P 500.

Intermediate term, the S&P 500 is still on a downtrend. The S&P 500 is still below the 200 day moving average.

But let us see how the market performs as the S&P 500 reaches initial resistance (1400).

We might be in a trading range short to medium term, but looking towards the end of the year, it is still possible that we will still break down below 1270 on the S&P 500 based on a 5 year view of the S&P 500.

Today's Chart

Lower Trading Range on S&P 500 after Today's Drop (August 15, 2007)

Today, Wednesday August 15, 2007, the S&P 500 ($SPX) dropped 1.39% to 1406.70. The $SPX dropped below previous good support of 1427, and that level is now resistance.

Where are the next more significant support levels on the $SPX?

In order to determine this, we have to take a 2 year view of the $SPX.

I put a Raff Regression Channel (orange uptrending three line channel) which shows the trend channel, and also the support and resistance levels. 1400 is a support level. The middle line also nicely marks resistance on the early August bounce.

I also put a Fibonacci Grid (five blue horizontal parallel lines) from the Late 2005 lows to the July 2007 highs. Fibonacci theory says that the numbers 38.2%, 50% and 61.8% show up in nature and in charts over and over again. If these lines coincide with other resistance levels (such as moving averages or horizontal resistance), the support levels and resistance levels defined by these lines are more valid.

In this case, $SPX has already gone below the 38.2% retracement (1410), and the next target zone is the 50% retracement of 1364. This 50% retracement level also coincides with horizontal resistance (previous low occurred around 1364 around March 2007), so we can have more confidence with this support level.

RSI, the Relative Strength Index, is still at 33 and has not gone down below 30. So we aren't extremely oversold according to that metric, though the Stocks under 200 Day Moving Average Metric ($SPXA50R), is a very low 34.20%. Numbers under 45% are usually signs that the end bottom could be near.

However, this is a fearful market, and I expect a new trading range between 1364 and 1427 on the $SPX.

Long Term Investor Suggestions

Over a very long time, stocks have outperformed bonds and inflation according to Professor Jeremy Siegel, author of Stocks for the Long Run. So it would be okay to be mostly invested in your discretionary portfolio.

However, rotate out of stocks that are not working, and rotate into stocks that are doing well and holding up well throughout this correction.

For those who want to Hedge without Put Options or Traders

If you want to hedge the portfolio without using Options, you can use Proshares ETFs. Proshares offers double short ETFs such as SDS. SDS is the Double Short S&P 500 ETF. If the S&P goes down 1x, SDS goes UP 2x. So as the market goes down, you profit using SDS. However, if the market goes up, you lose money with SDS.

In general, you would not want to hold SDS for a very long time. You can sell the SDS after it hits a target area, such as 1380 or 1365 on the $SPX.

For traders, once we get an idea where the intermediate bottom is, we can determine how to play a bounce. But we don't know exactly where the intermediate bottom is. Maybe 1365-1380 on the $SPX?

On TheStreet.com, Roger Nusbaum writes about Hedging a Portfolio with Double Short ETFs.

Today's Chart with many of the the indicators above

Lessons Learned from the Last Bear Market

The Great Bubble ended in 2000, and the Great Bear Market of 2000 to 2002 ensued, and brutalized stocks and portfolios. The Dow Jones Industrial Average dropped 38% from January 14, 2000 (11723) to October 9, 2002 (7286.27). The Nasdaq dropped even further, falling 78% from March 10, 2000 (5048.62) to October 9, 2002 (1114.11).

Investors and traders lost fortunes during this very difficult time.

Can anything be learned from this traumatic event? What lessons can we learn?

1. Valuation does matter.

During the Bubble which preceded the Great Bear Market, the valuations of large capitalization stocks especially tech stocks and tech stocks on the Nasdaq rose to unprecedented and astronomical levels.

Jeremy Siegel, in an article in the Wall Street Journal in March 2000 titled "Big-Cap Stocks are a Suckers Bet", says that of the 33 largest firms based on market capitalization (those with values greater than $85 billion), 18 of those were technology stocks, and their market weighted PE equaled 125.9. Mr. Siegel also notes that half of the large cap technology stocks had P/Es over 100.

Even if we look at the trailing PE of the more conservative of S&P 500 during the Bubble, we notice that the PE ratio went up to 35, when historical trailing PE is 14.1 and the trailing PE of the S&P 500 is 17.1 as of May 2007.

In addition, during this time, many people thought this was a different era, and that new methods were needed to justify the extreme valuations of tech stocks.

In 1999, Louis Corrigan writes about Michael Mauboussin in 1999, the head of value based research at C.S. First Boston. In this article, Louis Corrigan explains Mr. Mauboussin's position:

1. "We disagree with the consensus view that hype and hysteria drive the highflying valuations of Internet stocks," Mauboussin writes in the introduction. "Like all businesses, Internet companies are valued on their ability to generate cash."
   




2. "Mauboussin's work ultimately instructs investors to focus on FCF, to account for the whole cash economics picture."
   



3. In Louis Corrigan's introduction to Mr. Mauboussin's work, Mr. Corrigan says:
   

   "Traditional metrics like book value, the price-to-earnings (P/E) ratio, or even the price-to-sales (P/S) ratio are of limited use in valuing start-ups. They are particularly worthless in examining Internet start-ups."
   

Even Fed Chairman Alan Greenspan repeatedly warned people of "irrational exuberance".

With unsupportable valuations, it was only a matter of time before the market corrected itself to more reasonable levels. Valuations, apparently, does (eventually) matter.

2. Buy and Homework not Buy and Hold

People at the time, had often learned to "Buy and Hold" but people misunderstood this and applied this to Dot-Com stocks and high flying tech stocks.

Professor Jeremy Siegel, economist and author of "Stocks For the Long Run"(1st edition published 1994), proclaimed that over the long term, stocks have nearly always outperformed bonds and inflation. And that even if you bought some of the most expensive stocks at the worst possible time (such as the "Nifty Fifty" growth stocks of the 1970s), you could still make money as long as you just hung on.

Of course, people who followed this strategy without regard to price suffered during the Great Bubble and Bear Market.

In an interview with Money Magazine in 2004, Jeremy Siegel responds to a few questions regarding this:

Q. In the 1990s a lot of people used your finding that stocks nearly always make money in the long run to justify some pretty aggressive investing. Did you feel like Dr. Frankenstein -- you know, like, "I've created a monster"?

A. [Laughs.] Somewhat. I worried that people would interpret my message as "Just buy stocks without any attention to price."

Now I wish that in the second edition of "Stocks for the Long Run" I would have warned much more loudly -- but at that point it wasn't as out of hand as it got. And I was speaking out in 1999 and 2000 against what was going on with Internet and technology stocks.

Still, if you ride the bubble up and down, you do darn well indexing the stock market in the long run -- about 7 percent annualized, after inflation. I never told people that there wouldn't be a bubble or a bear market. I just said that indexing has done well over time.

Q. Would you modify the message now?

A. I now think that you could do better. After what I saw in 2000, I concluded that by applying some common sense and reducing your exposure to the hottest sectors and stocks, you could pick up about half a percentage point more return, on average, each year. If you just stay away from these manias, you've got an edge.

At the top of the bubble, I moved away from tech stocks. I repositioned my-self. I still held money in an S&P 500 index fund, so I didn't entirely sidestep it, but I moved a lot into value. And boy did that help me on the downside.

Then I said, if I did that and it helped so much, let me explore whether staying away from wildly priced growth stocks is something that works over much longer periods of time.

[...]

Q. You observed in "Stocks for the Long Run" that investors could make money even if they bought the high-flying stocks of the 1970s at their peak. Now you're saying that investors shouldn't buy expensive stocks. A contradiction?

A. I'll tell you why it's not contradictory. Among the fast-growing stocks dubbed the Nifty Fifty, those in the cheapest 25 did much better than the more expensive half. I mention that in the third edition of "Stocks for the Long Run."

When people are paying 100 times earnings for big companies, you better watch out.

But right now growth stocks look cheap to me. You shouldn't be afraid to pay for growth. The average P/E ratio of what I call the El Dorados -- the 20 top-performing companies since the inception of the S&P 500 -- was a few points above the market's average.

But none had a P/E over 27. [The S&P 500's average P/E today is 20.]

That links well with my findings on the Nifty Fifty. The most expensive ones -- the tech companies like Polaroid, Digital Equipment, Texas Instruments, IBM -- didn't do well at all.

Among the Nifty Fifty companies, only Johnson & Johnson, in retrospect, deserved a P/E over 50. The key, and it's a theme I talk about again and again, is not wildly overpaying. You almost never want to pay over 30 times earnings.

After this Bubble, I understand perfectly well why Jim Cramer preaches "Buy and Homework" and not "Buy and Hold." Valuation does matter and holding absurdly overvalued stocks is not a good idea over the long term.

While some stocks recovered from the bubble, others, like some of the dotcom companies, are no longer in business, or their stock prices are more than 99% from their all-time highs.

One exception to "Buy and Hold" would be if an investor used very broadbased indexed funds or ETFs instead of individual stocks. More on this in the Diversified section below.

3. Markets can remain irrational for periods of time

Valuations of many tech and large cap companies were very expensive, and for a time, they became even more expensive. Markets can remain irrational for periods of time. And during this time, the largest gains in these stocks were made.

This is a very difficult time for all. Do you invest in a massively overvalued stock that keeps on going up? Or do you invest in value stocks and smaller capitalization stocks that were underperforming the market? During this period, those who were nimble enough to trade momentum, and get out at the top were rewarded, but many who learned "buy and hold" and applied it to overvalued tech stocks were badly burned.

Then there are those who avoided the whole bubble completely (and many were criticized for underperforming the "market" during that time) and invested in value oriented stocks and small and mid capitalization stocks and were greatly rewarded. The period from 2000-2007 favored small and mid cap stocks and value stocks.

4. Diversification is very important.

People learned that diversification is very important. If someone had ridden the dot-com companies from Bubble to Bear market, that person would have lost most of the value in their portfolio. If a person had diversified into small cap, mid cap and value stocks during this time, they would have lost less money and during the recovery, these stocks outperformed the Nasdaq and the S&P 500.

From March 1, 2000 to July 30, 2007 (Adjusted for dividends):

1. Nasdaq: -46% (4784.08 to 2583.28)
   
2. S&P 500: +6.87% (1379.19 to 1473.91)
   
3. S&P Midcap 400: +92.37% (468.71 to 866.31)
   
4. S&P SmallCap 600: +96.67% (219.57 to 413.86)
   

If an investor had an indexed portfolio of ETFs representing the S&P 500, the Midcap 400 and the Smallcap 600 and invested near the Bear Market Peak on March 2000, and held to July 2007, that person would have had a decent return because of the large gains in the Midcap and Smallcap Indices.

5. Diversify from your own company stock

People also learned that they needed to diversify away from their own companies stock. People were very bullish on their own stock. But when the Great Bear Market showed itself, many of those people were laid off at the same time their company stock started plunging. This was a bad combination. People need to diversify away from their own company stock!

6. Many people survived the Great Bear Market of 2000-2002

While many people suffered and lost their jobs during this painful time, many people have recovered from such a brutal Bear market. We are still here and we are the survivors.

What's a correction after you've experienced a very deep and painful Bear Market?

Computer and Video Game Stocks: By the Numbers

The Computer and Video Game Sector

According to the Entertainment Software Association, in 2006, the US computer and video game software sales grew to $7.4 billion, tripling industry software sales since 1996. This is a large, high growth industry.

In addition, there are other reasons to be bullish on the Video and Computer Game Sector:

1. We are at the beginning of the Gaming Cycle with three major gaming consoles out (Nintendo Wii, Sony Playstation 3, Microsoft Xbox, plus Nintendo DS, Sony PSP, and other devices),
   
2. Growth in online gaming in the United States, and in other emerging countries such as China, whose middle class is growing and increasing their purchasing power.
   
3. Demographics favors growth in the industry. Generation Y is 2nd in size to the Baby Boomers, and they've grown up with games and computer and internet interactivity.
   

Demographics of the Computer and Video Game User

According to the Entertainment Software association, here are some facts about the US Game Playing Demographic:

1. The average game player is 33 years old and has been playing games for 12 years.
   
2. 38% of all game players are women.
   
3. The average age of the most frequent game buyer is 40 years old.
   
4. Age of game Players: 31% under 18 years old, 44% 18-49 years old, 25% 50+ years old.
   
5. Average Adult woman plays 7.4 hours per week. Average adult male, 7.6 hours per week.
   
6. 44% of frequent game players say they play games online.
   
7. 58% of online game players are male, 42% are female.
   
8. Those gamers 18 years and younger tend to play console games more, and those over 35 tend to play computer games more.
   
9. 32% of heads of households play games on a wireless device such as a cell phone or PDA.
   
10. 35% of American parents say they play computer and video games. 80% of gamer parents play video or computer games with their children.
    

The Gaming Console Makers

The main three console makers, Microsoft (MSFT), Sony (SNE), and Nintendo (NTDOY.PK) are not listed in the charts below because Microsoft and Sony are not pure plays on video games, and Nintendo is missing some key financial information on Yahoo Finance. I don't think Microsoft or Sony should be bought purely because of their Gaming Divisions. Nintendo, with the popularity of the Nintendo Wii and the portable Nintendo DS, might be worth researching as a stock to invest in.

Gaming Retailers

The dominant Gaming retailer here is Gamestop (GME), a very good investment whose stock has been doing well, and still only has a MyPEG of around 1. Their former competitor, Electronic Boutique, is part of Gamestop. People can buy games and gaming hardware from other places too such as Best Buy (BBY) and Amazon (AMZN), but these two companies are not pure plays on gaming.

Gaming Accessories

Logitech (LOGI) makes computer accessories and peripherals including devices used by gamers. Nvidia (NVDA) makes programmable graphics processor technlogies, many of which are used and needed by Gamers.

Software makers

Electronic Arts (ERTS), THQ Inc (THQI), Activision (ATVI), and Take-Two Entertainment (TTWO) are all gaming software makers. Atari (ATAR), Konami (KNM), and Majestic Entertainment (COOL), were not listed below because they are lacking some financial information from Yahoo Finance. Among these, from a growth at a reasonable price (GARP) view, THQ Inc. (THQI) with a MyPEG of only 0.76, very cheap. Electronic Arts (ERTS) still remains one of the major players in the gaming software industry, and sports a MyPEG of 0.95.

Mobile Gaming

Glu Mobile (GLUU) is a small company providing some games on mobile devices. Their former competitor, Jamdat, was bought out by Electronic Arts (ERTS).

China Gaming

The China Gaming market is a very big market. The Chinese middle class is growing and showing their increasing purchasing power. According to play.tm, and according to research from American Market research firm, DFC Intelligence, "analysts predict strong growth for online games in China. Following the trend of South Korea, online gaming is already one of China's favourite pastimes, but it is expected to be worth a great deal more by 2010: 1.7 billion USD we're told. That's up from a 2005 value of about 560 million USD. " "The game market in China is all about online play and charging by usage. There is even a growing market for the items used in games like weapons and characters," states Alexis Madrigal, one of the experts behind the new report."

The three main players in this market are Shanda Interactive (SNDA), The9 Limited (NCTY), and NetEase (NTES). Shanda Interactive and The9 Limited seem the most investable, having MyPEGs of 0.56 and 0.71 (very cheap). The9 Limited has the right to bring Blizzard's World of Warcraft to China. Shanda Interactive also has a good business model. According to a China online gaming survey conducted by Piper Jaffray, "55 percent of respondents said they prefer Shanda's business model, in which users can play games for free and are charged to purchase virtual items within the games. Shanda also tied with competitor The9 Ltd. as the company in its market that offers the best games."

International Gaming

There are other International Gaming plays such as GigaMedia (GIGM), a Taiwanese company, "through its subsidiaries, develops and licenses online gaming software, and provides application services, as well as owns and operates an online games portal." Gigamedia has a very low MyPEG of 0.36. Even if people don't trust the 40% growth rate, the forward PE is still a low 15.67, so GigaMedia seems like a good value with respect to its growth.

According to the American firm DFC Intelligence, online gaming is also popular in Korea. I wouldn't be surprised if there is good growth all around the world, and growth in the online gaming market.

By the Numbers

Data taken from Yahoo Finance on Friday, July 6, 2007:

Symbol	Stock Name	MyPEG	Forward PE	5 yr growth	Yield
GIGM	GigaMedia	0.37	15.67	40.00%	0%
SNDA	Shanda Interactive	0.56	19.20	27.27%	0%
NCTY	The9 Limited	0.71	19.72	25.18%	0%
THQI	THQ Inc.	0.76	17.94	18.23%	0%
NTES	NetEase	0.92	15.36	13.00%	0%
ERTS	Electronic Arts	0.95	25.84	22.04%	0%
NVDA	Nvidia	0.98	20.84	19.46%	0%
GME	Gamestop	1.03	22.46	20.75%	0%
ATVI	Activision	1.06	32.00	24.75%	0%
LOGI	Logitech	1.14	18.09	14.62%	0%
GLUU	Glu Mobile	1.57	48.79	25.00%	0%
TTWO	Take-Two Interactive	1.67	29.97	16.71%	0%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Symbol	Stock Name	EV/EBITDA	%Short	%Inst. Own
GIGM	GigaMedia	N/A	8.20%	36.70%
SNDA	Shanda Interactive	N/A	0%	12.00%
NCTY	The9 Limited	N/A	0%	35.70%
THQI	THQ Inc.	5.45	9.80%	109.20%
NTES	NetEase	10.092	0%	1.20%
ERTS	Electronic Arts	38.214	3.40%	92.50%
NVDA	Nvidia	18.933	6%	76.30%
GME	Gamestop	14.059	3.90%	81.70%
ATVI	Activision	19.536	6.50%	95.20%
LOGI	Logitech	15.827	0%	3.40%
GLUU	Glu Mobile	N/A	2.70%	N/A
TTWO	Take-Two Interactive	75.161	38.50%	92.30%

EV/EBITDA

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.

"How do I invest in my Child's Education?"

Question:

"I have two young children right now, and I would like to start investing for their college education."

Answer:

I'm glad you are thinking ahead!

There's a good overview in this article, and do consider the 529 plan they mention.

Here is information on getting started on investing.

Here is more information on investing a sum of money.

Here are some book recommendations on personal finance and investing.

Good luck with your investing!

How to invest $100 per month

Question:

Hello. I have $100 that I can save or invest every month.
How can I invest this?

Answer:

Good job saving $100 (or more) per month that you can save or invest.

1. What you can do is open a brokerage account such as:

1. E*Trade
2. TD Ameritrade

They offer many kinds of accounts, and you buy and sell stocks, and mutual funds. The minimum to open each account is $1000.

2. Then, choose a mutual fund with a minimum you can afford. Look through your brokerage mutual fund list, and only choose mutual funds that have no-load or no transaction fee. You can then visit Morningstar.com and look for 4 or 5 star mutual funds.

In order to have a diversified portfolio, you can have three mutual funds:
1. Diversified International Mutual Fund
2. Large Capitalization USA Mutual Fund
3. Small Capitalization USA Mutual Fund

If you don't have that much money to start with, you can start with one mutual fund. And as you have more money to invest, you can start investing in another mutual fund, and so forth until you have three mutual funds.

3. Setup automatic investing using your Brokerage account. You can automatically invest at regular intervals (for example, once a month), and the system will automatically invest for you whether the market goes up or down.

Over the years, with the growth of the stock market (on average, gains around 10% per year over many years. Yes, some years, you could lose 10% and other years, gain 20%), you'll be amazed how much money you can accumulate!


What if you don't have $1000 saved?

I was researching mutual fund companies to see if they allowed a very low minimum to start an account (such as $50). I wasn't satisfied with the results.

So what I recommend is open a high yield money market or savings account which, at this time, should get you at least 5%. Then when you have $1000, you can open the brokerage account and invest at regular intervals in mutual funds as described above. You can also open a Complete Savings Account at E*Trade (getting 5.05% at this time). Then, when you are ready to open a Brokerage account at E*Trade, you can link both accounts (your complete savings account and your brokerage account) to the same E*Trade login/account.

If you are interested in getting started in investing (mutual funds, ETFs, or individual stocks), you can try this link here.