Stock Market
Dramatic Drops and Short-Covering Rallies Illustrate How Capital Waves Lead to Profits
[Editor's Note: Capital-wave proponent Shah Gilani practices what he preaches. In his new advisory service The Capital Wave Forecast, Gilani notched triple-digit gains in less than two weeks on each of three recommendations to subscribers: a short play on the euro, a long trade on the VIX, and another short trade on Goldman Sachs Group Inc.]
The Greece rescue package is signed and sealed, but is still far from being delivered. It took three tries, but this time global investors believe the EU got it right. Investors celebrated yesterday (Monday) with a relief rally that touched virtually all of the world's key financial markets – and that served as a strident counterpoint to the near-freefall that gripped the U.S. stock market on Thursday.
So is it finally time to shelve our fears of financial contagion, meaning the financial shocks that start with one nation or market and spark a conflagration that spreads through interdependent entities in plague-like fashion?
Definitely not. In fact, hang onto your hats: We have just entered the brave new world where a butterfly flapping its wings in China can fan a market fire on the other side of the world. There are more contagions to come. But because of forces known as "capital waves," the same heat that burns some investors can also generate substantial profits for those who understand how to position themselves.
To understand how capital waves bring profits, please read on…
Thursday's Wild Stock Market Ride Spotlights 'High-Frequency Trading' as the Latest Worry For Investors
[Editor's Note: During the last nine months, Money Morning has repeatedly warned readers that so-called 'high-frequency trading,' or HFT, was trouble waiting to happen for U.S. investors. On Thursday, events proved us right. Experts say HFT was responsible for a plunge that sent the Dow Jones Industrial Average down nearly 1,000 points late in the trading day.]
Back on April 14, U.S. stocks advanced for the fifth day in a row, causing the U.S. Standard & Poor's 500 Index to close above the 1,200 level for the first time in more than 18 months.
Traders said that a growing confidence in the strength of the U.S. rebound was a key rally catalyst.
But Money Morning's Shah Gilani was worried.
Should Investors Sell in May and Go Away, or Ride the Bull Awhile Longer?
I'm sure you have heard the old saw that it's a smart idea to "sell in May and go away."
That concept is based on the notion that the May-to-November span provides a weak environment for investors. I have already heard the cry go up recently because the major indexes are already up a lot more than anyone expected, and this would seem to be a convenient time to take profits.
Yet like most old market adages, there's not much substance to the concept if you take a good look at history.
Here's Why U.S. Stocks May be Headed Higher
U.S. stocks were back up to their old tricks last week, as volatility waned and financial, industrial and retail stocks waxed. It was a week in which risk was in fashion – until Friday, when the U.S. Securities and Exchange Commission (SEC) hammered Goldman Sachs Group Inc. (NYSE: GS) with fraud charges related to the subprime-mortgage crisis. With that, playing defense was considered offensive.
Leading the way forward were companies that are the ultimate in beta and hopefulness – such as beaten-down bond insurer Ambac Financial Group Inc. (NYSE: ABK), which rose 60%, beaten-down car parts maker American Axle & Manufacturing Holdings Inc. (NYSE: AXL), up 10%, beaten-up retailer Tuesday Morning Corp. (Nasdaq: TUES), up 24%; and beaten shoemaker Crocs (Nasdaq: CROX), up 20%. We're not talking, here, about investors who last year bought the shares of companies that were left for dead; these stocks might actually be worth something in an economic turnaround.
Low Stock Market Volume: It's Even Weaker Than You Think
[Editor's Note: U.S. stocks advanced for the fifth day in a row yesterday (Wednesday), with the Standard & Poor's 500 closing above the 1,200 level for the first time in more than 18 months. Traders cited growing confidence in the U.S. rebound as a key catalyst. But could stocks be vulnerable? Contributing Editor Shah Gilani spotlights a risk that traders are overlooking.]
Conventional investing wisdom tells us that when stocks rally on low stock market volume, traders perceive that lack of widespread participation as an indicator of the market's future vulnerability.
And as torrid as this rally in U.S. stock prices has been, the lack of trading volume has been a consistent cause for concern.
Unfortunately for market bulls, even this well-chronicled concern doesn't tell the whole story. That's because U.S. stock market volume is even worse – actually, much worse – than anyone realizes. And this ultra-low stock market volume should be sending up some serious red flags for investors.
To find out how Wall Street is artificially inflating stock-market volume, read on …
Question of the Week: Overlooked Problems Will Kill the U.S. Bull Market
[Editor's Note: Let's hear your thoughts on next week's Money Morning Question of the Week: How confident are you in the U.S. jobs market? Do you feel that the U.S. employment outlook is getting better, getting worse, or essentially just holding its own? Are you in the job you want to be working in? If not, why not? E-mail your responses to mailbag@moneymappress.com. Don't miss your chance to let your "vote" be heard !]
The U.S. stock market has staged one of its most powerful rallies in history, zooming nearly 70% in the 12 months that followed the March 9, 2009 market low. U.S. stocks soared another 5% during the first three months of 2010 – its best first quarter in a dozen years. But where do we go from here?
Between the New York Stock Exchange continuously reaching new highs, the Dow Jones Industrial Average rising up along its eight-day average, and a rebounding retail sector, there's reason to celebrate what appears to be a market recovery offering investors profit opportunities.
"You can't bury your head in the sand and ignore what's happening," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "If you did that, you've missed a 60%-plus rally in the [Standard & Poor's 500 Index] since early last March. You cannot fail to acknowledge what's happening" in the markets, even though top traders understand that cheap money from the government bailout – and not a well-rounded economic recovery – is most likely behind the torrid run-up in U.S. share prices.
Money Morning Question of the Week: Is this a true bull market? A year from now, are U.S. stocks – as measured by the Standard & Poor's 500 Index – trading higher, lower, or at the same level as they are today?
What follows are some of the most well thought-out responses we received (as well as a previous comment regarding the bull vs. bear market argument posted on our Web site) with many agreeing this bull market is too good to be true.
Fastest Recovery Ever Could Push Corporate Profits to Record Highs in 2010
Sometimes we get a little carried away talking about esoteric subjects like bulls, bears, supply, demand, moving averages and the like. But if you just want to focus on something real, then look at corporate profits. When they're rising from a low, that's good; when they're flat-lining or declining, that's bad. Pretty simple.
Much of the rally of the past year has been in anticipation of a profit recovery. And now that recovery is actually coming in a bit better than bulls expected, which is why they are able to elbow bears so effectively. ISI Group now figures that corporate profits will clock in at +38.8% for the first quarter (year over year) of 2010, then +42.4% in the second quarter, +36.8% in the third quarter and then +30% in the fourth quarter (against harder comparisons). That would put profits in 2010 up a record 36.1% overall.
To read more about how corporate earnings will shape the market click here.
Stock Market Buying Power Hits New Rally High, as Demand Outpaces Supply
Checking in with the volume experts over at Lowry Research Corp., it appears that U.S. stock market buying power hit a new rally high last week, while selling pressure hit a new low.
That reflects the same pattern of expanding demand and contracting supply that has characterized the entire rally out of the March 2009 lows – a rally that's now one year old.
According to Lowry analysts, if you look back over the past eight decades, every major market top has been preceded by a sustained period of rising supply and falling demand as profit-taking becomes increasingly aggressive.
And that's not all. If you look at the six-month stretch that precedes a market top, advance/decline (A/D) lines have always deteriorated for at least six months before a major top. At the moment, by their measures, the U.S. market remains in the first phase of a long-term uptrend, which is the lowest-risk period for new buying after a bear market.
The 10 Keys to Short-Selling Profits
Short sellers took a lot of flak for their alleged role in the stock market meltdown of 2008-2009, getting blamed for artificially depressing stock prices, exaggerating the impact of the bad economic news rolling out of Washington and exacerbating the volatility that intensified the financial panic experienced by investors and the general public.
That last allegation was particularly troublesome to market regulators, especially after stock-market researcher Birinyi Associates traced a sudden sharp rise in stock volatility back to mid-July of 2007, a point coinciding with the repeal of the so-called "uptick rule." The uptick rule was a Depression-era regulation that allowed the short sale of a stock only when the prior trade had resulted in an upward move in its price.
That concern over volatility led to a lot of official posturing as the government struggled to come up with solutions to prevent future market mayhem, the result of which (at least for the time being) was the Securities and Exchange Commission (SEC) Feb. 24 adoption of a new "alternative uptick rule."
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