Will S&P 500 Stock Market Rally or Continue Downtrend? Market is at Resistance.

The Market (as represented by the S&P 500) is at a decision point. Does the S&P 500 rally or continue the downtrend?




Currently, on Friday, Dec. 5, 2008, the S&P 500 is at 876, and is very near many resistance levels.

1. Horizontal Resistance: Around 900 to 916
   
2. 3 Month Downtrend Resistance: Around 879
   
3. 50 Day Moving Average Resistance: 936
   

If Stock Market breaks through these resistance areas with good volume, there's a good chance the rally continues to at least 1000 to 1040 on S&P 500.

Otherwise, the S&P 500 could continue its downtrend.

We can also pay attention to any big gap up at the open, followed by a high volume reversal to the downside to end the day down. This could mark a failed attempt to breach resistance.

Today's S&P 500 Chart

Secular Bull and Bear Markets; Cyclical Bull and Bear Markets

According to Wikipedia, "A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential 'primary' trends."

A Cyclical Market trend is a shorter term trend lasting around two to four years.

A Bull Market "tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains."

A Bear Market, "is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle."

Some would refer to the current market starting in 2000 as the beginning of a longer term Secular Bear Market, with a Cyclical Bull Market occurring between 2003 and 2007.

Secular Markets in History

Market Analysts and Historians would group the stock market periods from 1906 between Secular Bull Markets and Secular Bear Markets.

One grouping (by Amateur-Investor.net), would be as follows:

1. 1906-1921: Secular BEAR Market
   
2. 1922-1928: Secular BULL Market
   
3. 1929-1949: Secular BEAR Market
   
4. 1950-1965: Secular BULL Market
   
5. 1966-1982: Secular BEAR Market
   
6. 1983-1999: Secular BULL Market
   
7. 2000-????: Secular BEAR Market
   

How the 1950 to 1965 Secular BULL Market Looked Like



The Clear Trend is a powerful Bull Market.

A Buy the Dip strategy would have been profitable during this period.

How the 1966 to 1982 Secular BEAR Market Looked Like



Many say that we are in the middle of a Secular Bear Market which started in 2000.

If this is so, then we can look at the last Secular Bear Market, the Period between 1966 to 1982.

What is interesting is that even in this Bear Market, the Stock Market did rise, but at a much slower rate than during a Secular Bull Market. The Average Yearly Return on the S&P 500 (according to Amateur-Investor.net) during this period was 3.64%. Compare this to the Secular Bull Markets from 1922-1928 (17.90%), 1950-1965 (11.40%) and 1983-1999 (14.96%).

Also notice the general sideways action but with violent swings in the market.

We see Drops of 33%, 47%, and 23%, and Gains of 42%, 64%, and 122%.

So even in Bear Markets, it is possible to make good gains in the market if traded correctly. Of course, trading correctly (and calling market tops and bottoms) is difficult.

Using an index strategy, it would appear that even in Bear Markets, buying the index when the market drops 30% to 40% from a market peak would be profitable, in preparation for the next big gain in the next Secular Bull Market.

In fact, this blog studied the one year forward return based on an index's relation between the 52 week high and 52 week low. The more overextended the index in relation to the 52 week high (and the more underextended the index in relation to the 52 week low), the greater the one year forward return.

How the 1983 to 1999 Secular BULL Market Looked Like



Clearly, the primary market trend during this long period was up. There was a scary drop in 1987 (Black Monday), but during this entire period, this drop was just a small blip.

Accumulating stocks/equity during the long bear market from 1966 to 1982 would have paid off before the start of the powerful 1983 to 1999 Secular Bull Market.

How the 2000 to ???? Secular BEAR Market Looks Like



If we are in a Secular Bear Market lasting around 17 years, then if the Secular Bear Market started in 2000, the Secular Bear will end around 2016.

If the 1966 to 1982 market is any indication, we will be in for a wild ride in the market, as we have already experienced.


Today's S&P 500 Chart

Stock Market S&P 500 Long Term Bottom Target: 450 to 600, a Drop of 25% to 44% from Here

Previously, we offered analysis that the US Stock Market could be in trouble if the S&P 500 goes below 768.

The S&P 500 recently went to an intraday level of 741 but successfully tested the major low of 768 set 6 years ago on October 10, 2002.

It is still very possible that the S&P 500 could re-test (at least once) 741/768, and the S&P 500 could break below this level.

At this point, where would a potential long term bottom be?

In the Dire Consequences if S&P 500 goes below 768 post, we hinted that a long term bottom might be reached around the S&P 500 level of around 500.

The Long Term bottom could be around 450 to 600 on the S&P 500 over the next several years, a drop of around 25% to 44% from here (S&P 500 Level of 800).


A. No Major Support Until Around S&P 500 level of 450 to 500.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

The S&P 500 Level in late 1994 right before the S&P 500 rocketed upwards at an unsustainable rate is around 450.

This sets up the lower end of the long term bottom range of 450 to 500 on the S&P 500.

B. Reverting Back to 60 Year Trend Line Suggests Level around 400-500



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 450 to 500, which coincides with the predicted long term support level above.

C. Five Month Fibonacci Grid Suggests Bottom of 600



When we look at the five month chart, we place a Fibonacci Grid and align the top to a recent high (of around 1265), and align the 61.8% and 38.2% line to coincide with the recent trading range between 850 and 1010. The lower range of the Fibonacci Grid suggests a potential bottom.

This S&P 500 level is 600, setting the upper range of a longer term S&P 500 Bottom.

D. 60 Year Fibonacci Retracement: 50% = 770; 38.2% = 588

Early in 1950, the S&P 500 was around 17. At the top of the market, the S&P 500 reached around 1560.

If we use the Fibonacci Retracement Rule of 50%, that would lead to the S&P 500 Retracement of 770, which coincides with the recent major bottom of 768 that was achieved October 10, 2002, and very recently.

If we use the Fibonacci Retracement Rule of 38.2%, that would lead to the S&P 500 Retracement of 588, which is within the 450-600 range using previous methods of analysis.

E. Chartist Louise Yamada Opinion: 400 to 600

On a recent CNBC Fast Money episode, Chartists Louise Yamada predicted an S&P 500 bottom of 400 to 600. This coincides with the analysis so far.

F. Secular Bear Market, Cyclical Bull Market

Television Personal Financial Advisor Suze Orman predicted in 2004 that in 2000, we started a Secular Bear Market (long term Bear Market of around fifteen years), and around 2003, we started a cyclical Bull market (short term market lasting around two to four years), that would eventually end, and hit near the lows of 2002.

Her prediction was accurate.

If her prediction continues, we will continue the Bear Market until around the year 2015 or so.

G. Major Demographic Shift Ahead

In 2010, there will be a major demographic shift as the first Baby Boomers reach 65 years of age, and may retire and take more money out of the stock market. More Baby Boomers will do the same in the years following 2010.

This may put pressure on the U.S. stock market and may be in line with the long term Secular Bear Market theory starting in 2000 and ending around 2015.

Five Month S&P 500 Stock Chart

Sixteen Year S&P 500 Chart

Stock Trading Ideas after Stock Market Drop Today

The S&P 500 went down 52.54 points today, to close at 806.58, a drop of 6.12%.

The S&P 500 broke below previous support of around 839 and 818.

We previously wrote what could happen if the S&P 500 breaks below 839, or even if the S&P 500 breaks 768.

This can be a very scary market, but for traders, this can be a great market. Traders like volatility. For many years, the US Stock Market had been trading at below average volatility, and it was just a matter of time before the stock market reversed itself and entered a high volatility phase. We are currently experiencing this high volatility.

Using SPY as Trading Vehicle

One trading vehicle is to go long (profit when stock goes up in price) or short (profit when stock goes down in price) the SPY, the S&P 500 ETF

The SPY attempts to mimic the S&P 500 index, but it is not a perfect match. In general, the SPY is currently at $81.50, and the S&P 500 ($SPX) is at 806.58, an approximate ratio of 1 to 10.

Using Inverse ETFs to Trade

Alternatively, you can use the inverse ETFs at Proshares.com.

Some of the products include:

1. SH: ETF that goes up 1x if the S&P 500 goes down 1x, and ETF that goes down 1x if the S&P 500 goes up 1x.
   
2. SDS: ETF that goes up 2x if the S&P 500 goes down 2x, and ETF that goes down 2x if the S&P 500 goes up 2x.
   

So rather than shorting the SPY, you can go long on the SH. Of course, the behavior and value of SH differ from SPY.

Trading Ideas After Stock Market Drop Today



The S&P 500 broke below previous support of 839 and 818 (on an intraday basis), and it appears as if we are in a breakdown and the SPY is trying to find a trading range.

We expect the upper band of the trading range to be previous support at around 839. It is known that what was once support now becomes resistance.

On the downside, it appears that 768 appears to be the next major bottom. This 768 bottom was reached October 10, 2002, 6 years ago, in a major bottom after the 2000-2002 Bear Market.

So if the S&P 500 ever reaches 768, we do not expect it to break through 768 right away. It should respect the 768 major support at least once.

So how can we formulate a possible trading plan?

A) First Trading Idea: Short SPY here

This plan refers to trade A) in the chart above.

We know upper resistance on SPY is around $83.50. And since the SPY recently broke down below this (ideally, with high volume), the short term trend appears to be down. In fact, it is possible that the SPY can shortly re-test resistance at $83.50 before continuing down.

The first trading idea is to short the SPY (or go long on the SH), around these levels.

Where is a possible bottom?

As we discussed earlier, $76.80 is a good target on the downside, and a single re-test of the October 10, 2002 lows should be in order. This is a major bottom.



We can cover the short near this area.

B) Second Trading Idea: Go Long SPY at $76.80

Since we expect at least a single re-test of the $76.80 levels, we can cover our previous short, and then go long SPY.

Where can we cover? We do not know how far the rally can last, but the resistance area of $81.80 to $83.90 area would be good bets.

C) Third Trading Idea: Short SPY after rally to $82

Once the rally runs out of steam, we can sell our previous SPY long position, and go short for the estimated re-test of the SPY low of $76.80.

We do not know whether the re-test at $76.80 will succeed or not, so it is best to cover the short around this area.

D) Fourth Trading Idea: If SPY breaks $76.80 to the downside, Short SPY!

If the SPY finally breaks the major support of $76.80 to the downside, it is time to short SPY because this would be a very bad scenario for the market, but an opportunity for you to profit.

Use Limit Orders, Stop Orders and Trailing Stops

This is a very fast moving market. If you cannot monitor the stocks every moment of the day, you can use limit orders, stop orders and trailing stops.

Today SPY is at $81.50. Let's say during this time, you put in a Limit Order to Buy at $76.80 (good for 60 days).

SPY starts going down (your order has not been executed at this time) but has not reached $76.80. Then several days from now, SPY reaches $76.80.

After purchasing SPY at $76.80, you then put in a Stop Order to Sell at $75. You expect SPY to bounce at $76.80 and go higher. If this happens, this is good, and you eventually take your profit.

But there are times when you are wrong. SPY could continue falling below $76.80 and when it hits $75, your SPY order to Sell will be active.

Is it possible that SPY reaches $75, hit your stop order to sell, then start climbing upwards again? Yes, this can happen. But it is good to remain disciplined, and stick to the rules.

You can also use Trailing Stops as a technique to limit losses, and to protect profits.

Let us Monitor the Situation

Of course, we should monitor the situation at each stage, and we should remain disciplined.

Today's SPY Chart

Today's S&P 500 Chart ($SPX)

Dire Consequences if Stock Market S&P 500 Breaks Below 768.

Monday, November 17, 2008: The S&P 500 is at 850.

The Stock Market as represented by the S&P 500 has been holding the support level of 839 successfully.

Looking forward, what if we break below 839?



The next major support is at 768, which was established 6 years ago on October 10, 2002, and the stock market is most likely going to bounce around this major support area.

But can we think the unthinkable?

What if the S&P 500 Breaks the 768 Level?

If the S&P 500 Breaks 768, the Stock Market is in big trouble, as there is no solid support until the level of 500 on the S&P 500, a drop of 35% from 768, a drop of 41% from 850.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

View from a 60 Year Chart



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 500, which coincides with the predicted long term support level above.

Today's 15 Year Chart

3 Year Chart of the S&P 500 Index

What if S&P 500 Breaks Below 839? 60, 40 and 10 Year Chart View

Wednesday, November 12, 2008: The Stock Market as Represented by the S&P 500 Index went down 5.19% to close at 852.30.

Many people are concerned.

The most recent support area is 839.80 established on October 10, 2008. The S&P 500 could go down near this area and "test" support there.

The S&P 500 could successfully test and then bounce up.

Or, the S&P 500 could fail there, and go below 839.80.

Breaking below 839.80

If we break down below 839.80, the next major support was set on October 10, 2002, at 768.30. We could potentially reach there, and when we test, we could either bounce and form a very strong multi year double bottom (bullish), or we could break and fall much further down.



The Ten Year Chart Above shows the current S&P 500 value and the 6 year support of 768.30.

40 Year and 60 Year View



If we look at the longer term view, we notice that longer 40 year trend line from 1974 to 2008, shows that current support is around 800 on the S&P 500. The 40 Year Trend Line started around the major bottom of the great bear market of the early 1970s and continues today.

If we look at the 60 year chart since 1955, we notice a much lower support level of 400 on the S&P 500.

Watch the Tests

Let us observe how the stock market behaves at each major test point.

Today's Long Chart

Decade Chart

Possible Personal Finance Plan

The current times are very uncertain with talk of recession in the United States, and the stock market falling 40% since the peak late in 2007.

What can we do now?

Here is one possible suggestion. Of course, please consult your financial planner if you have one.

Create a Safety Net

1. Make sure you have at least a 6 month emergency cash reserve. You can find an FDIC insured high interest online savings account at SavingsAccount.com and find reputable companies such as HSBC.
   
2. Make sure you have enough health insurance and other types of insurance that you may need.
   

401k and Retirement Accounts

1. Continue putting money in your 401k or Retirement Accounts, especially if your company matches your contribution.
   
2. If you have many years/decades before you need your retirement money, then putting money in your 401k when the stock market is low is good, because that means you will be buying more shares with your money.
   
3. Do not trade in your 401k or IRA retirement account.
   
4. If you do not want to spend too much time managing your 401k, and if your plan offers a Target Date Mutual fund, which automatically adjusts risk based on when you plan to retire, research this fund. You can also check Morningstar and see if your Target Date Mutual Fund is a four or five star morningstar rated fund.
   
5. You should adjust your equity and bond portion of your portfolio based on your age and when you plan to retire. The closer you are to retirement, the less should be put in stock equity, and more in bonds.
   
6. If you do not want to use a Target Date Mutual Fund, you can allocate the different funds yourself. If you wish to have a 70% stocks, 30% bonds allocation, you could do:
   
   1. 30% Bond Fund
      
   2. 25% Large Cap US index
      
   3. 10% Mid Cap US Index
      
   4. 10% Small Cap US Index
      
   5. 25% International US Index
      
   
   
7. You can rebalance your portfolio once a year. Some 401k plans offer this as an option.
   
8. Do not put in too much money in your company stock in your 401k. That is too much risk. Put no more than 10% of your 401k in your own company stock.
   

Before Investing in a Discretionary Taxable Portfolio

1. Establish the Safety Net First
   
2. If you have high interest credit card debt, consider paying it off aggressively. If the online savings account returns 3% and you have credit card debt at 10%, then paying off your credit card at 10% is a risk-free return of 10%. If your credit card debt interest rate (and you are carrying a balance) is greater than the return you get in an online savings account, consider paying off the credit card first. If the return you get on an online savings account (let's say 3%) is greater than your credit card debt rate (example: 1.5%), you can pay off your credit card more conservatively, and keep the extra money in the FDIC insured online savings account.
   
3. Look around for high rate CD specials. Banks want to borrow money from consumers in this environment.
   
4. With the Fed Funds rate at extremely low levels, watch out for any low interest rate specials, especially those credit card life of balance offers. Beware of the transaction fees, and make sure that the interest rate does not increase after some time. Late fees could invalidate the special credit card offer. Also, make sure there is no balance on that credit card where you use the credit card special offer, because your payments will pay off the lower interest rate first before the high interest rate. This is bad for you, and good for the credit card company.
   
5. If you have multiple incomes in your household, it is best if the income producing individuals not work at the same company. What would be bad is if a company starts to downsize, and both members of the household are part of the same company. This is not good.
   
6. Decide how you are going to use the money in your discretionary taxable portfolio. If you need the money within five years, it might be best not to put the money in stocks/stock mutual funds.
   
7. If you do not own residential property (home, townhouse, condominium), consider preparing yourself for a purchase within the next five years. This down payment money should not be in the stock market (if you plan to use it within five years).
   
8. Check your credit score and make sure there are no mistakes in your credit report.
   
9. If you have done all of the above and need discretionary money six years or later from now, then you can consider starting a discretionary stock (and bonds) portfolio.
   
10. Do your research, research on the internet, buy or borrow some (up to date and reputable) financial books.
    
11. If investing for your child's education, do your research and consider some of the 529 plans around.
    

Managing your Discretionary Portfolio

1. Determine your asset allocation model. Do you want to have 80% stocks and 20% bonds?
   
2. If you do not want to spend too much time managing your portfolio, consider a portfolio of index mutual funds, or Exchange Traded Funds (ETFs).
   
3. If you have an interest and the time to invest in individual stocks, make sure you do your research.
   
4. You can do a combination of the above using the Index Mutual Fund method and then buy a few individual stocks, for the Core-And-Explore method.
   
5. Diversify your Portfolio.
   
6. Does your Portfolio have too much risk?
   
7. How many stocks should you own in the Portfolio?
   
8. For individual stocks (or very specific focused ETFs), make sure you know how to cut your losses.
   
9. If you want to put money in regular intervals, consider buying mutual funds, and automatically investing in more shares of the fund.
   
10. Continue Research including these financial websites.
    
11. Consider using the same plan you are using in your 401k and Retirement Accounts. Your Target Dates may differ: 401k/Retirement when you retire, your Discretionary Portfolio when you plan to withdraw all the money.
    
    

Time for a Rally to the 50 Day Moving Average of 1130?

On Tuesday, October 28, 2008 the S&P 500 had a very good day, going up 10.79% from an open of 848.92 to close at 940.51.

In a previous blog, we also speculated the S&P would re-test the previous lows.



On October 17, it appears as if we hit an intra-day low which is almost as low as the low on October 10. If we look at the SPY, the S&P 500 ETF, the SPY did successfully test the low on October 10.

The 50 Day moving average on the $SPX is 1130, and the closing price on Tuesday, October 28, is around 940. The S&P 500 is around 20% below the 50 day moving average, which is an overextended amount.

There will be a time when we do rally, and the S&P 500 will approach the 50 day moving average.

Is now the time for a tradable rally?

Today's Stock Chart

Stock Market Breakdown from Symmetrical Triangle?

In our last blog entry, the S&P 500 appeared to be in a Wedge/Symmetrical Triangle.

However, as with most patterns, we need confirmation (strong breakout with high volume above upper trend line), and the (ongoing) pattern did not turn out to be a bullish one.

However, if we generically call the pattern a symmetrical triangle, the interpretation would be a triangle, that could break either way (up or down). This pattern will require confirmation as well, with a breakout above the upper trend line, or a breakdown below the lower trend line, with volume.

Let us see how much volume there will be in the possible breakdown this morning (Futures are down very big before the market opens).

Today's S&P 500 Stock Chart

Possible Bullish Bottom Triangle Wedge Pattern on S&P 500 Stock Market?

Looking at the S&P 500 Stock Chart, we noticed that the S&P 500 ($SPX) may be within a bullish Bottom Triangle Wedge Pattern.

According to the Trending123 website, a Bottom Triangle/Wedge is a possible bullish reversal pattern.

"These patterns have two converging trend lines. The pattern will display two highs touching the upper trend line and two lows touching the lower trend line.

This pattern is confirmed when the price breaks upward out of the Triangle/Wedge formation to close above the upper trend line.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge."

As the website suggests, the reversal won't occur after a successful breakout with good volume above the upper trend line of the Triangle/Wedge Pattern.

As of Wednesday, October 22, 2008, we are at the bottom end of the triangle, and if the pattern holds, we may eventually get a breakout on the upside.

But as with all patterns, patterns are not guarantees and patterns can fail.

For more details of the Bottom Triangle Wedge Pattern, see the Trending123 Article on this.


Today's S&P 500 Stock Chart

Enjoy the Rally But We Will Revisit the Stock Market Lows

We have had a very volatile three day period, and it does look like we have put in a bottom after a classic, stock market capitulation.

1. Thursday, October 9, 2008: S&P 500 opens at 988.42, and falls to 909.92 for a loss of almost 8%, a major drop.
   
2. After market, Thursday, October 9, Before Market on Friday, October 10: Great fear, and the sky seemed to be falling.
   
3. Friday, October 10: Market opens with a gap down from the previous close and opens at 902.31. Market falls intraday to a low of 839.80 (loss of almost 7%) but recovers and closes at 899.22.
   
4. Monday, October 13: Market finishes capitulation as there is a massive rally, opening at 912.75 and closing at 1003.35, for a gain of almost 10%
   

Expect Rally for now But We Will Re-Test Stock Market Lows



We had been in extreme oversold conditions and we appear to have had a classic stock market capitulation.

We can expect the rally to continue for a while. We speculate that the rally range may reach resistance at 1077 (previous 61.8% retracement from 2002-2003 Bear Market low of 768 to top of 1576) to around 1200 or so (near other resistance).



The S&P 500 around the 1265 area is also the resistance level set during 2003.

If we look at the longer term six year view, we notice that there is a lot of congestion from 2003 to 2006. With the S&P currently at around 1003, this means that most people who bought stocks after 2003 are under water. With the recent stock market capitulation, many individuals and hedge funds and institutional investors have sold much of their stocks and may choose to unload those that they failed to unload around this resistance area.

Re-Test The Lows

Stock market bottoms do not often occur in a V shaped bottom. We expect the S&P 500 to test the S&P low of around 839. We will not know whether this bottom will hold, or whether we will start a new lower trading range.

But with the S&P Bear Market Low from the Great Dot Com Bubble at 768 (2002 to 2003), maybe the market might eventually re-test those lows too?

Let us wait and see what happens at each support or resistance level.

Today's S&P 500 Chart

Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.


Stock Chart



Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.

Time for a Stock Market Short Covering Rally?

The Stock Market as represented by the S&P 500 has been going down for sometime and the S&P 500 is now at 970.97.

Is it time for a (short covering) rally?

The current levels appear to be low enough for some bargain hunters to step in, and the shorts to start covering, starting a rally.

1. The S&P 500 (as of close of Wednesday, October 8) when displayed on a Point and Figure Chart , shows a Bullish Pattern, the Long Tail Down. (BULLISH)
   
2. The Stocks above 50 Day Moving Average is an extremely low 1.20% (BULLISH)
   
3. The Stocks above the 200 Day Moving Average is an extremely low 4.20% (BULLISH)
   
4. The New High Low Index ($RHSPX) is a very low 0! (BULLISH)
   
5. The Ratio of Stocks Above 200 day Moving Average to Stocks Above 50 Day Moving Average spiked to a very high 3.5 (BULLISH)
   
6. The S&P 500 is overextended from the 52 week high and is down around 38%. This is a rare occasion and one year forward returns at these levels have been market beating returns. We have not been at these levels since the great bottom of 1974. The over extension is even worse than the bottoms in 2001-2003, 1987, and 1970. (BULLISH)
   

Maybe it is time to trade or accumulate stocks or equities for the long term?

One Year Forward Return on S&P 500 Stock Market Looks Historically Positive From Here

The Stock Market as represented by the S&P 500 Index had a bad day, going down 60.66 points to 996.23 for a loss of 5.74%.

Historically, today is a unique day.

Previously, this blog made a study of the S&P 500 from 1950 to March 2008 and looked at the one year forward annual return based on the S&P 500 index in relation to the 52 week high and 52 week low.

We calculated a special value called HOLU which maximizes the distance away from the 52 week high, and minimizes the distance from the 52 week low.

From 1950 to March 2008, there are only 59 trading days where the HOLU value exceeded 30%. And the average one year forward return during those 59 days was a market beating 22.13%.

Today's HOLU Value is 36.79%, with the 52 week S&P 500 low of 996.23, and the 52 week high of 1576.09.

The highest HOLU value during this period was 44.11% on October 3, 1974.

The longest time period where the HOLU value remained above 30% was from August 14, 1974 to October 9, 1974 with the exception of two days in this period where the HOLU briefly went under 30%.

Time to Accumulate?

Based on this, now might be a good time to be a contrarian and start accumulating index funds or ETFs.

However, the market could still go lower and possibly approach the record 44.11% HOLU value on October 3, 1974.

But for the true long term investor, having a cost basis around this level or lower could be a profitable move.

Today's S&P 500

Time to Start Accumulating? Where's the Bottom after Today's Massive Drop

Today was not a good day in the stock market, as the S&P 500 went down -8.8% from 1213.27 to 1106.42 (-106.85). The market broke below the previous low of around 1133.

Where's the Bottom?

Based on Previous Chart analysis, there could be a good chance that the bottom of 1070-1077 could hold. If the market easily breaks through this level, the market would truly be in trouble.

But we believe that the 1070-1077 level could hold.

If the market does get there, we will not necessarily go straight up. The Bottoming process takes time. In fact, we believe we could have a very volatile, very violent trading range, and we could even have a bear market rally all the way up to 1270, 1330 or even 1387 before re-testing the low.



The average bear market decline is said to be around 30%, and we are currently around 30% below the recent high of 1576.

1077 is also the 61.8% retracement from the 2002 low of 768.63.

Should we get back in the market?

While the market needs time to recover, it is possible that we are near the bottom.

It is difficult to time the bottom, but there are some possibilities:

1. It might be time to start slowly accumulating some index funds. One can invest a little bit at a time over the next year or so. Over the long term (10 years), people could say that this could be a valuable buying opportunity. However, we may have to withstand the great volatility ahead.
   
2. Start looking over potential buys for the long term. While it is not wise to try to catch a falling knife, keep stocks on your watch list.
   
3. Make sure you are not taking too much risk in your discretionary portfolio.
   
4. It might be time to review your goals. What do you want to do with the money you are investing? And when do you need it by?
   
5. Remember to diversify.
   
6. What sectors would be good to own at this time? Cash rich companies? Consumer Staples? Determine your strategy.
   

Today's Chart

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

Crude Oil and Natural Gas Chart, Support and Trendlines

The Chart above shows Crude oil support levels at $100 a barrel and $87.71 a barrel. The 50% and 61.8% retracement from the three year lows matches horizontal resistance, which is good validation.

The bottom chart shows the ratio of Crude Oil to Natural Gas. We see the trend line of this ratio. If the ratio of Crude Oil to Natural goes back to trendline (around 12:1), then that means either Crude Oil continues to drop or Natural Gas increases or a combination of both.

Today's Chart

Pipelines from Alaska; Sarah Palin and Energy Independence; Profit from this

While reading a New York Times article on recent Republican VP Selection Sarah Palin of Alaska, I discover this:

Her intense pursuit of a pipeline to deliver natural gas from the North Slope of Alaska to market in the Lower 48 led to what her administration has claimed as a major triumph: the Legislature this summer approved her plan to give a $500 million subsidy to TransCanada, a Canadian company, to help build the project.

I discover TransCanada is trading in the US as TRP.

TransCanada is $22 billion Canadian Company focusing on Pipelines and Energy.

There is a lot of natural resources in Alaska (even if there is controversy regarding drilling there). There is also a trend where the U.S. is trying its best to not have to depend on foreign oil.

These trends are good for Pipeline companies such as TransCanada, because eventually, Natural Gas and other resources could be marketed to the lower 48 states.

TRP has a forward PE of 16.58, and a yield of around 3.70%.

Chinese Demographic: Lonely Young Tech Savvy People Looking for Friends, Fun, and Games Online

Pearl Research Calls them the "Phoenix Generation". These people are China's 16 to 30 year olds who have $135 billion in spending power.

These young people have grown up during China's economic boom, and they are very tech savvy.

Many of these young people are also lonely. Because of China's one child per family policy, these people have no brothers and sisters and are looking for friends. Since Chinese don't normally organize around sports or church, China's Phoenix Generation uses the Web and Social Networks to Fill that void.

According to a joint study by advertising companies JWT and IAC, 16 to 25 year olds in China:

1. Using the Internet to make friends: China, about 75 percent; U.S. 30 percent.
   
2. Going online to find, share opinions: China, about 75 percent; U.S., 43 percent.
   
3. Expressing personal opinions or writing about themselves online: China, 72 percent; U.S., 56 percent
   

Many ideas above from this article.

Profit from this

Chinese Social Networking would be one way to play this.

Chinese Online Games

However a more interesting way is through Chinese Online Games especially MMORPG, Massively Multi player Online Role Playing Games such as Activision-Blizzard's (ATVI) very popular World of Warcraft game.

Many people around the world, especially, East Asians and Chinese, have taken these online games and MMORPGs to a new level.

1. Activision Blizzard (ATVI): Aside from making the popular Guitar Hero and Call of Duty Games, ATVI also owns the World of Warcraft MMORPG franchise. As of 2008, World of Warcraft has a subscriber base of 16 million.
   
2. Shanda Interactive (SNDA): Chinese Online Game Company. They too have MMORPGs.
   
3. The9 Limited (NCTY): Chinse Online Game Company. They have MMORPGs games as well, and they are allowed to operate World of Warcraft in China.
   
4. Perfect World (PWRD): Another Chinese Online Game Company that provides MMORPG (and other) games.
   
5. Giant Interactive (GA): Chinese Online Game Company including MMORPG games.
   
6. NetEase (NTES): Chinese company has an Online Game Service, Advertising services, and Wireless value Added Service Departments.
   

Stock Performance Now

Stock Performance: Aug. 11, 2008 to Aug. 22, 2008

1. SPY (S&P 500 ETF): -0.81%
   
2. QQQQ (Nasdaq ETF): -0.54%
   
3. ATVI: +2.88%
   
4. NCTY: -13.35%
   
5. SNDA: +13.81%
   
6. GA: +5.92%
   
7. PWRD: +0.92%
   
8. NTES: +17.54%
   

Time for Healthcare Information System Stocks?

For some time now, I have been watching Healthcare Information System stocks. All around the world, there is a trend towards digitizing medical and patient information. Healthcare Information System companies have a bright future.

However over the last three years, the stock price of several of the companies I have been watching have gone nowhere.

Over the last 6 days (August 5, 2008 to August 12, 2008), I've noticed good performance from these stocks:

1. SPY (S&P 500 ETF): +0.77%
   
2. IWM (Russell 2000 ETF): +3.27%
   
3. IYH (Healthcare ETF): +1.33%
   
4. QSII (Quality Systems): +24.2%
   
5. MDRX (Allscripts): +26.69%
   
6. CERN (Cerner): +4.11%
   

Over the last 97 Days (March 27, 2008 to August 12, 2008), the performance has been similar:

1. SPY: -2.1%
   
2. IWM: +7.56%
   
3. IYH: +7.06%
   
4. QSII: +30.36%
   
5. MDRX: +73.4%
   
6. CERN: +21.3%
   

The Three Companies, QSII, MDRX, and CERN have been outperforming recently.

Stock Performance Comparison

Quality Systems (QSII)

Market Cap: $1.1 B
Forward PE: 19.57
5 Yr Est Growth: 20%
PEG: 0.98 (less than 1 is low!)

Allscripts (MDRX)

Market Cap: $890 M
Forward PE: 20.95
5 Yr Est Growth: 22.27%
PEG: 0.94

Cerner (CERN)

Market Cap: $3.78 B
Forward PE: 18.09
5 Yr Est Growth: 23.66%
PEG: 0.76



With a long term future, these stocks are the growth stocks of the future, and maybe these stocks will finally break out and do something over the next few years.

Two More Quality Growth Stocks from Screen (CELG, MR)

I recently ran a Growth Screen and found two stocks at the top of the screen.

1. Celgene (CELG): Biotech company has a forward PE of 33 and a 5 year estimated growth of 35.79%, for a low PEG of 0.92. Stock is near very near its 52 week high or has just broken above recent high.
   
2. Mindray Medical (MR): Chinese Medical Device Company that operates in three segments: Patient Monitoring and Life Support, In-Vitro Diagnostic Products, and Medical Imaging Systems. It has a forward PE of 28 and a 5 year estimated growth rate of 39% for a low PEG of 0.72. The stock which has been public for less than 2 years, is near or has passed its all time high.
   

Two Stocks on My Screen in a Bad Market (OSIP, ISYS)

I recently ran one of my stock screens, looking for new ideas.

In this market, I managed to find two interesting companies.

1. Integral Systems (ISYS) builds satellite ground systems and equipment for command and control, integration and test, data processing and simulation. The stock is near its 52 week high despite the bad market. The company has a forward PE of 19, and a 5 year estimated growth rate of 22.5% for a PEG of 0.85 which is very good, having a PEG of less than 1.
   
2. OSI Pharmaceuticals (OSIP) is a biotech company that discovers, develops, and commercializes molecular targeted therapies for oncology, diabetes and obesity. Its flagship product is Tarceva, used to treat advanced non-small cell lung cancer, as well as other forms of cancer such as pancreatic cancer. OSIP has a forward PE of 18.4, and a 5 year estimated growth estimate of 34%. It has a PEG of around 0.5, which is very low. The stock is near its 52 week high despite the bad market.
   

French Utility companies Suez and Gaz De France (GAZ.PA) Merge Creating Europe's 2nd Largest Electricity and Gas Group

French Utility Companies Suez (formerly SZEZY) and Gaz De France (GAZ.PA in France) have merged to form Europe's 2nd largest Electricity and Gas Group. French Nuclear Power Group EDF (EDF.PA) is the first.

The new company is GDF Suez (GDFZY.pk is the United States ADR).

Suez had been known as a good French Utility with good exposure to Water and Waste Management. However, the merger agreement says there will be a spinoff of 65 percent of Suez's water and waste management arm through a market listing.

With the merger, Eruope's natural gas sector will be firmly dominated by a handful of players including Gazprom of Russia, E.ON of Germany, Eni of Italy, Gasunie of the Netherlands and Norsk-Hydro of Norway.

The longer term stock chart of the original GAZ.PA looks good as the stock has gone steadily up since the 2005 IPO. The stock as of July 30, 2008, is also above the 200 day moving average.

Much Time is Needed Before Housing Can Recover

According to a recent Realtor.com survey, the top two obstacles to owning a home are (1) High Home Prices and (2) High Down Payments.

High Home Prices

Despite Home Prices continuing to fall, home prices are still too high.

Here's the Standard and Poors (S&P) Case-Shiller 10 City Composite Index since 1987:



Notice the dark blue line and the parabolic pattern reminiscent of the 2000-2002 Bubble.

The magenta line is the one year moving average of the Composite 10 index. If the Composite 10 index is above the One Year Moving Average, Housing Prices are in a Bull Market. If the Composite 10 Index is below the One Year Moving Average, Housing Prices are in a Bear Market. This is currently the case.

Still Unaffordable

According to a study looking at California Home Prices, many counties have incomes that are 50% of the income needed to afford the median priced home.

Previously, before the recent Credit Crunch, people were able to "afford" the homes based on loose underwriting standards, exotic mortgages, low promotional interest rates, and other adjustments. We are now experiencing the downside to this trend.

High Down Payments an Obstacle

Because of the recent Credit Crunch, Lenders have tightened lending standards. According to some, many people are trying to get financing, but they can't. Higher down payments are needed to buy homes now.

But how can these people afford the down payments when gas prices remain high, food prices remain high, the stock market is in a downtrend.

When combined with home prices remaining high and unaffordable, it will take some time before the housing market recovers.

Housing Annual Returns



According to Robert Shiller, author of Irrational Exuberance, and the Shiller in the Case-Shiller Index, from 1890 to 2007, the return on residential real estate was just about zero after inflation. Since 1987, it's been about 6 percent.

Robert Shiller also makes the case that if residential real estate returned 10 percent per year, houses would remain incredibly unaffordable.

In the Original Case-Shiller Composite 10 Index Chart above, there are two lines assuming 3% or 4% annual growth since 1987.

Future Housing Boom?

Is there hope for the future? Is there a future housing boom?

The stock market and the economy will eventually recover. Foreign investors, taking advantage of the cheap dollar, could start investing in U.S. properties.

Demographics will fuel the Next Housing Boom

But the real boom may be pushed by demographics.

Three major demographic groups include:

1. Baby Boomers (est: 1946-1964; 44 to 62 years old): 70 million
   
2. Generation X (est: 1965-1979: 29 to 43 years old): 17 million
   
3. Generation Y (est: 1979-1994: 14 to 29 years old): 60 million
   

As you can see, Generation Y comes close to the large Baby Boomer Demographic.

One of the major booms since 1890 (according to Yale Economist Robert Shiller), occurred after World War II as the demand for homes increased. This boom coincided with the boom of the Baby Boomer Generation.



Now, Generation Y, 2nd in size to the Baby Boomer Demographic, is going to be the right age to start families and buy homes. This might be an event similar to the era right after World War II when the Baby Boomers were growing up.

If we estimate that Generation Y would start buying homes between 26-29 years of age, then that would mean that greater number of Generation Y would be of age within around eight years from now.

After a lengthy period of time for the economy to recover, and for housing prices to stabilize or decline to a more stable and affordable level, there could be a future housing boom as Generation Y starts to buy homes.

Are Large Cap Consumer Staple and Health Care Stocks Really Recession Proof?

A recent poster on this blog commented on the "Anti-Recession Stocks that can survive a US Slowdown" blog post. The poster said:

Well you were most certainly wrong. Too bad folks like you can't get out of the mindset that just because a company is big and been around a while doesn't mean it's stock will do well.

Let's evaluate the stocks chosen in the previous blog entry to see whether or not the stock selection was wrong. The assumption is that large consumer staple and health care stocks tend to survive slowdowns and recessions.

Assumption: Sector Rotation

But first, let us look at an assumption. Let us assume that a portfolio is 100% in stocks, and whether the market goes down or up, the portfolio manager (you) has to remain 100% invested. In this case, we have to either hold the stocks we currently own, or we have to rotate into other stocks.

Many professional money managers have to do the same. They are supposed to maintain a percentage of their fund in equities, and when the market goes down, they could rotate stocks from one sector to another.

The Slowdown/Recession playbook tells us to rotate into large cap consumer staples and health care stocks as a safer investment to ride out the slowdown or recession.

With this assumption in mind, six stocks were selected in the previous blog post that were "anti-recession." Most are large cap, consumer staple or healthcare stocks, except one, Sun Healthcare (SUNH) which is a small cap health care stock.

Performance of the Stocks

From January 7, 2008 (around the time the previous blog entry was written) to today, July 15, 2008, here is the performance of the stocks:

1. SPY (S&P 500 ETF): -13.47%
   
2. PG (Procter and Gamble): -10.27%
   
3. UL (Unilever): -25.97%
   
4. MO (Altria): -11%
   
5. GILD (Gilead): +15.28%
   
6. SUNH (Sun Healthcare): -17.71%
   
7. PEP (Pepsi): -14.2%
   

All of the results above do not include dividends. If you include dividends, the performance of the stocks above would be better.

In addition, instead of choosing SUNH, we had chosen it's competitor, Kindred Healthcare (KND), the return during this period of KND would have been +20.16% instead of SUNH's -17.71%

The Results

Period: January 7, 2008 to July 15, 2008:


Average of the Six Anti-Recession Stocks (no dividends): -10.65%
S&P 500 Performance: -13.47%


The Six "anti-recession" stocks outperformed the market by almost 3%. In this difficult bear market, outperforming the market is a good thing.

Check Performance Now

Biotech has been breaking out

Activision Blizzard Merger Completed (ATVID).

The Merger between Game Software Maker Activision (formerly ATVI), maker of the very popular Guitar Hero and Call of Duty, and Blizzard, maker of the popular online role playing game World of Warcraft, has completed.

The new ticker symbol for Activision Blizzard is now ATVID.

The ATVID stock rose 5.44% to $31.77 per share.

As we previously blogged, Activision-Blizzard has a bright future.

Biotech Breakout?

Over the past several trading days, we noticed that there is positive activity in the bio tech sector.

Amgen (AMGN), over the past four trading days has gone from $47 to $50, a gain of around 6%. The stock has broken out above the 200 day moving average too.

Celgene (CELG), over the past four days has gone from $64 to $69, a gain of around 8%. The stock has broken out above previous resistance levels and is solidly above both the 50 and 200 day moving average.

Genentech (DNA), had broken out, but a recent NY Times Article knocked down the stock today. However, on today's CNBC Mad Money Show, Jim Cramer pushes the Genentech stock and is bullish on bio tech at this part of the cycle.

Gilead (GILD) has shown some recent weakness, but the stock is still above the 200 day moving average and is within 9% of the 52 week high.

Expected Stock Market S&P 500 Bottom using Long Term (8 year) View and 50% Retracements

Many people are saying that the Stock Market (as represented by the S&P 500 index) is in Bear Market territory, being down over 20% from it's recent high of 1576 (today, the S&P 500 is at 1261. The annotated chart above is from March 2008, but it still shows important levels).

Where's the bottom?

In technical analysis (analyzing the stock charts), there's a school of thinking that uses Fibonacci Retracements. In nature and in the stock market, the ratios of 61.8%, 50% and 38.2% are important levels. If we take any uptrend or downtrend in the stock market, if we look at the retracement levels (the levels at 61.8%, 50% and 38.2%), these levels often coincide with resistance and support levels.

On March 24, 2000, the S&P 500 hit an intraday high of 1552.87. During that last bear market, the S&P 500 then lost almost 50% of it's value to an intraday low of 768.63 on October 10, 2002.

The most recent high today was set around with an intraday high of 1576 on October 11, 2007.

Over the last several months, the S&P 500 bounced nicely around the 1270 level, which coincides with the 38.2% retracement from the lows of 2002.

Now, it would appear that the S&P 500 could go lower. The 50% retracement from the 2002 S&P 500 lows would be 1172, and 1077 would be the 61.8% retracement.

Looking at the chart above, we also notice a lot of congestion from 2003 to 2006, in the range between 1077 to 1267. This is a good sign that we could find stronger support in this region.

Maybe 1077 could be a good lower target on the S&P 500.

In addition, many sources claim that the average bear market decline is 30%. If this is so, then a 30% decline from 1576 would give us an S&P index value of 1104, very close to the 1077 S&P 500 61.8% Fibonacci Retracement.

The S&P 500 longer term bottom looks to be around 1077 to 1172 based on the scenario above.

Of course, we can monitor the situation of the S&P 500 at each support and resistance level.

Today's S&P 500 Chart, Long Term View

Today's Three Year S&P 500 Chart

Original Article which used the Annotated Chart Above

Should we Blame Speculators for High Gas Prices?

Many politicians and people are blaming speculators for the High Gas Prices. Should we really blame the Speculators?

In a previous episode of Mad Money, Jim Cramer does not mention speculators as one of the reasons for high gas prices.

In an interesting article by a Senior Writer (Jon Briger) at Fortune magazine, the writer makes a case for not blaming the speculators.

Two of his points:

1. 
   If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.
   

   
   

2. 
   There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.
   
   In the past, there have been times when the overwhelming majority of speculators were "longs" betting on higher prices, while their commercial-trader counterparts - i.e. traders working for oil refiners, airlines, and other end-users of oil - were the "shorts" betting prices would fall.
   
   But as New York Mercantile Exchange Chairman James Newsome explained to Stupak's Congressional committee, today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) "actually decreased over the last year," Newsome told the subcommittee, "even at the same time that [oil] prices were increasing."
   

   
   

S&P 500 Trendline, Support and Resistance after Big Drop Today

The S&P 500 ($SPX) went down 38.82 points (-2.94%) to close at 1283.15.

Next support levels are the important 1270 and 1219 levels. (See the horizontal blue lines in chart above). The stock market could bounce on these support levels, or else these support levels could break and then we find new support levels and resistance levels.

Looking at the three year trend line (the blue diagonal trend line), we notice that that from 2005-2008, the blue diagonal trend line was support, establishing a trend. However, in 2008, we notice that the S&P 500 broke down below this trend line and remains below the trendline.

In chart analysis (also known as technical analysis), the usual rule is that support levels which have been breached now become resistance.

So now, the long three year trend line is the upper resistance of the S&P 500.

Let us first see how the S&P 500 behaves at the 1270 level, the first support level.

Today's Stock Chart

Long Term Trends: Part 5: Consumer Debt

Here are some current trends:

1. Gas and Energy Prices remain expensive and may remain expensive in the future.
2. Food Prices remain high and may remain high in the future.
   
3. Consumer Income may not keep up.
   
4. People can no longer use their houses as ATM machines.
   

With consumers being squeezed, what will the consumer (the U.S. Consumer) do? Will they start saving more or will they continue to spend?

This will depend on many factors, such as culture.

In Japan, there is a greater inclination to save compared to Americans.

However, in the United States, the Savings Rates over the last decade is below 4%, a very low personal savings rate. Even during the recession of 2001, the savings rate remains low.

So Americans (and other cultures) still want to spend despite being squeezed by higher gas, energy, and food prices. This means that in order to continue spending, consumers will need to incur more consumer debt.

Ways to play this

Two obvious plays on increasing consumer debt include:

1. Mastercard (MA)
   
2. Visa (V)

Other plays include:

1. American Express (AXP)
   
2. Portfolio Recovery Associates (PRAA) - Engaged in purchase, collection, and management of portfolios of defaulted consumer receivables.
   

Credit Cards Used to Finance Healthcare Procedures

In the July 2008 edition of Consumer Reports, there is an article that details the increasing use of credit card to finance health care procedures. According to the article, $45 billion is spent today, and it could triple to $150 billion in 2015.

Beware of Rising Charge-Offs

Beware of Rising Charge-Offs. In the first quarter 2008, the Big Three all reported rising charge-offs. For example, the Bank of America charge-off rate increase from 4.73% to 5.19 percent.