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Dr. Joe Duarte's Market I.Q.

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Posted 22 September 2011 - 04:09 PM

[img]http://www.joe-duarte.com/images/line_main_top_01.gif[/img]September 19 , 2011, 08:00 EST[img]http://www.joe-duarte.com/images/line_main_top_05.gif[/img][img]http://www.joe-duarte.com/images/000.gif[/img]
Market Volatility Moves BackInto The Spotlight
[img]http://www.joe-duarte.com/images/000.gif[/img][img]http://www.joe-duarte.com/images/pic_04.gif[/img]What'sHot Today:<!-- AddThis Button BEGIN -->

U.S. stock index futures were falling in early Mondaytrading. It's all about Europe, the Economy, and the Election again.

Today'sEconomic Calendar

News For Thought:

Sign of the times: Obama to propose new taxincreases. According to The Wall Street Journal: "Obama willoffer a new plan to reduce the federal deficit by about $3.6 trillionover a decade, almost half of which would come from tax increases,people familiar with the proposal said." AP reported $1.5 trillion innew taxes and as much as $248 billion in Medicare cuts and $72 billionin Medicaid. The president is counting a mythical $1 trillion insavings from troop withdrawals from Afghanistan and Iraq, which at thispoint are not certain, or even close to being detailed.

It's good to be in Congress. Members ofCongress pull in millions of dollars in extra income every year fromprivate businesses and "outside jobs." The Wall Street Journal reports:"In 2010, 68 lawmakers took in such outside income, totaling at least$27.5 million. This ranged from a Louisiana House member who receivedmillions of dollars from a chain of restaurants to a Missouri senatorwho reported a $280 gain from selling chestnuts. During 2006, 75senators and representatives reported outside income fromprivate-sector jobs and companies, totaling at least $7.8 million."

And it's not just a Republican situation as some may think. The Journaladded: "More than a dozen lawmakers in serve on corporate boards.Scores receive money from investments in farms or real-estate holdings,such as Rep. Ron Paul (R., Texas), who made at least $100,001 in 2010from farmland and rental property in Lake Jackson, Texas. A RepublicanHouse member brought in more than $1 million from a businessarrangement with Lloyd's, the London insurance market. And Rep. NancyPelosi (D., Calif.) received with her husband between $5,001 and$15,000 selling grapes from a vineyard they own."

One legislator is a franchise guru. According to The Journal: "Onelawmaker, Rep. John Fleming (R., La.), reported that he received morethan $6.3 million last year from dozens of Subway restaurants, UPSStore franchises and real-estate partnerships. In lieu of a salary, hetakes profits from his companies at the end of the year. One Subwayfranchise company produced more than $5 million in income last year,according to his financial-disclosure form." We wonder if theselegislators are going to go along with Mr. Obama's millionaire tax.
[img]http://www.joe-duarte.com/images/pic_04.gif[/img]Market Volatility Moves Back Into The Spotlight

If the stock market crashes or ralliesto new highs in the next few weeks, it may well do so because of theconfluence of factors of the Thre E's: Europe, The Economy, and TheElection. And events in the last few days will likely be significantcatalysts in what happens next.


We should get to the most acute siuation first. Europe has essentiallybeen exposed for what it is, a loosely knit association of countriesthat don't really like each other very much and whose only real commonbond is the Euro. And despite media coverage that suggests it, the factthat Greece's situation is about to worsen isn't really the reason forany bad things that happen there in the future.

Europe's problems are much deeper on many levels, especialy with regardto ethnicity and nationalism. But that's not what's likely to hit thecontinent with a tour de force in the next few days to weeks. What'sgoing to hit Europe, if that's the way things actually happen, is thefact that European banks lend out multiples of the amount of money thatthey have in their vaults on a regular basis. That means that at anyone time, major European banks may actually have no money to lendunless they borrow it from someone else. And lately few have beenwilling lenders, knowing that their chances of getting paid, even on anovernight loan, are not guaranteed.

That's why when U.S. Treasury Secretary went there last week, hebrought a message that actually made some sense. Europe does need tocome up with one mechanism of running its monetary and financialpolicy. Europe needs a real Federal Reserve type central bank, not justa figure head like the ECB. But Europe's leaders blew Geithner offnoting that the U.S. deficits and the U.S. economy really give Mr.Geithner a position to tell Europe what to do.

They have a point, of sorts. Except that Mr. Geithner, in this case wasconceptually correct. So in effect, Europe's rebuttal of Geithnerconfirmed the fact that Europe is in trouble and that they are morethan likely either unwilling or unable to put together or execute anykind of significant or cohesive monetary and fiscal policy as a singleunit. That's not a good thing when your big banks have empty vaults ona regular basis.

The Election

The biggest news in this section comes from two fronts. And they areinterrelated. First, Mr. Obama is once again calling for higher taxesfrom upper income Americans. This time from those who make more than amillion dollars per year. The details are sketchy, but the effect islikely to be the usual, market volatility.

Along the same lines is the book "Confidence Men" that is due to bereleased on Tuesday, but from which excerpts and reviews paint thepresident, in the words of the author as a "talented amateur" whoseWhite House during the period chronicled in the book was"dysfunctional." Mr. Obama reportedly describes himself as sufferingfrom a "disease" which makes him a "policy wonk" and compares himselfto presidents Carter and Clinton as fellow sufferers of the malady.

Over the weekend, protestors stormed Wall Street ranting against theincome inequality and the lack of jobs in the U.S. This is another signthat the Social Cycle, is progressing from an acquisitor stage, wherethe wealthy rule, to a laborer stage, where the common people exertmore control.

More important for Mr. Obama is the fact that as the cycle evolves, hispoll numbers are starting to fall dangerously close to levels where hisre-election won't just be in doubt but will be impossible.

The Economy

There is no evidence, anywhere, that jobs are being created in any waythat will offset the current levels of high unemployment. Governmentpolicy remains way too fractured and helter skelter to impart anyconfidence onto the average business owner and to warrant anysignificant risk taking.

There are also numerous reports that labor unions and corporations areback to their same old tricks, including bonuses, large expenditures onlobbying of congress, and poor overall management of companies.Meanwhile the potential for larger job losses seems to be on the riseeven as consumer confidence numbers plummet.

Yet, the road to fixing the problem for Europe may take years. Thesteps that need to be taken in order to coordinate fiscal and monetarypolicy to the point where it would operate as smoothly, yes we saidsmoothly, as it does in the U.S. would require major legislation,changes in treaties, and extremely complex negotiations between nationswhose interests are often hugely divergent.

What's the bottom line? Stratfor.com provides an excellent summary:"The European crisis is a crisis precisely because there is no singleauthority, no single set of enforced rules, and no arbiter besidesanother summit. When the American system suffered a crisis, the Fed andTreasury could buy time for a broadly functional system to fix itself.The structures that could carry Europe through a crisis have yet to bebuilt."

The Markets

Against the background of a vulnerable Europe, a U.S. president that isin trouble, and an economy on the verge of another significantcontraction, the S & P 500 was outstanding last week, deliveringfive up days in a row. That's why Monday could be volatile.

The S & P 500 (SPX) did deliver two important milestones last week.One was that it closed above its 20-day moving average. The other wasthat it closed above 1200. Where the index ran into trouble was at its50-day moving average.

Chart Courtesy of StockCharts.com


The economy is in trouble. Europe is increasingly volatile. And theElection season is about to heat up. That's why the market is sovolatile as traders are handicapping what will happen over the next6-12 months.

Some areas of the market are working well enough for the S & P 500to have made what looks to be a long term bottom. Yet, there is enoughweakness remaining to keep the Nasdaq Advance Decline line fromstarting a new confirmatory up trend.

What it means is that this market faces a difficult up hill battle. Ifyou pick the right stocks in the right sectors you have a chance to dofairly well at times. Otherwise, trading, hedging, and monitoring yourportfolio on a frequent basis remain key steps in preserving capitaland eaking out profits.

This remains a two yards and a cloud of dust market.

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Chart Courtesy of StockCharts.com

Talking heads and shocked stockholders are lamenting the crash and burnin shares of Netflix. But the stock provides investors with yet anotherclassic look at the traditional trajectory of a momentum stock.

A momentum stock is one whose rise defies gravity. The company usuallyhas a ground breaking concept and or business model. Sometimes it hasboth. When it does the money rolls in and the growth investors pile on.

The stock gets a nice steady rise and the company starts delivering aseries of nice earnings report. The company continues to guide higherand the stock continues to rise. At some point, there is a small hiccupand shares fall, usually to rise again. Everyone takes a deep breadth,smiles, buys on the dip, and life goes on. Let the good times roll.

That's momentum investing. It's great while it lasts. But, as we'vesaid here multiple times. All momentum runs end in an ugly way. Andthat's what happened to Netflix.

Here is the lesson. There are warnings that should be heeded. Netflixtopped out in July. Up until then, the stock had pulled back to its 20or 50 day moving average where buyers stepped in. In July, the stockdid not recover at these key support levels. That was the key thatsomething had changed.

Then came the lower highs and the lower lows until the stock brokebelow its 200-day moving average. Then came the stumble. The companystarted to finesse its business model trying to cut out its DVD rentalbusiness and become an exclusive online business. Then customers gotupset. Then came the earnings warning and the final crash.

The 20-day moving average has now fallen below its 50-day and 200-daymoving averages. And the 50-day moving average is about break below the200 day line.

The bottom line is that momentum runs always end badly. When you payattention to simple technical analysis and chart reading technique youcan save yourself a whole lot of heartache.

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