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> Dr. Joe Duarte's Market I.Q., by Dr. Joe Duarte
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post Sep 22 2011, 04:09 PM
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September 19 , 2011, 08:00 EST Dr. Joe Duarte's Market I.Q.


The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors


Market Volatility Moves Back Into The Spotlight
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U.S. stock index futures were falling in early Monday trading. It's all about Europe, the Economy, and the Election again.

Today's Economic Calendar

News For Thought:

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

It's good to be in Congress. Members of Congress pull in millions of dollars in extra income every year from private 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 received millions of dollars from a chain of restaurants to a Missouri senator who reported a $280 gain from selling chestnuts. During 2006, 75 senators and representatives reported outside income from private-sector jobs and companies, totaling at least $7.8 million."

And it's not just a Republican situation as some may think. The Journal added: "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 2010 from farmland and rental property in Lake Jackson, Texas. A Republican House member brought in more than $1 million from a business arrangement with Lloyd's, the London insurance market. And Rep. Nancy Pelosi (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: "One lawmaker, Rep. John Fleming (R., La.), reported that he received more than $6.3 million last year from dozens of Subway restaurants, UPS Store franchises and real-estate partnerships. In lieu of a salary, he takes profits from his companies at the end of the year. One Subway franchise company produced more than $5 million in income last year, according to his financial-disclosure form." We wonder if these legislators are going to go along with Mr. Obama's millionaire tax.

Market Volatility Moves Back Into The Spotlight
Europe, The Election, And The Economy Remain The Three Big Worries

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

Europe

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

Europe's problems are much deeper on many levels, especialy with regard to ethnicity and nationalism. But that's not what's likely to hit the continent with a tour de force in the next few days to weeks. What's going to hit Europe, if that's the way things actually happen, is the fact that European banks lend out multiples of the amount of money that they have in their vaults on a regular basis. That means that at any one time, major European banks may actually have no money to lend unless they borrow it from someone else. And lately few have been willing lenders, knowing that their chances of getting paid, even on an overnight loan, are not guaranteed.

That's why when U.S. Treasury Secretary went there last week, he brought a message that actually made some sense. Europe does need to come up with one mechanism of running its monetary and financial policy. Europe needs a real Federal Reserve type central bank, not just a figure head like the ECB. But Europe's leaders blew Geithner off noting 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 was conceptually correct. So in effect, Europe's rebuttal of Geithner confirmed the fact that Europe is in trouble and that they are more than likely either unwilling or unable to put together or execute any kind of significant or cohesive monetary and fiscal policy as a single unit. That's not a good thing when your big banks have empty vaults on a regular basis.

The Election

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

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

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

More important for Mr. Obama is the fact that as the cycle evolves, his poll numbers are starting to fall dangerously close to levels where his re-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 way that will offset the current levels of high unemployment. Government policy remains way too fractured and helter skelter to impart any confidence onto the average business owner and to warrant any significant risk taking.

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

Yet, the road to fixing the problem for Europe may take years. The steps that need to be taken in order to coordinate fiscal and monetary policy to the point where it would operate as smoothly, yes we said smoothly, as it does in the U.S. would require major legislation, changes in treaties, and extremely complex negotiations between nations whose 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 single authority, no single set of enforced rules, and no arbiter besides another summit. When the American system suffered a crisis, the Fed and Treasury could buy time for a broadly functional system to fix itself. The structures that could carry Europe through a crisis have yet to be built."

The Markets

Against the background of a vulnerable Europe, a U.S. president that is in trouble, and an economy on the verge of another significant contraction, the S & P 500 was outstanding last week, delivering five 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 was that it closed above 1200. Where the index ran into trouble was at its 50-day moving average.



Chart Courtesy of StockCharts.com


The market's breadth, as measured by the Nasdaq Advance Decline line (NAAD) is trying to improve, but is still suspect, as it seems to be tracing lower lows and lower highs. With the S & P 500 showing a distinct bottom and pushing against key resistance levels, this is a bit of a divergence.



Chart Courtesy of StockCharts.com


Conclusion

The economy is in trouble. Europe is increasingly volatile. And the Election season is about to heat up. That's why the market is so volatile as traders are handicapping what will happen over the next 6-12 months.

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

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

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

When you understand the big picture, the next step is how to survive and profit from what lies ahead. That's why we recommend: "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 



Market Moves
Netflix Decline (Nasdaq: NFLX) Is Perfect Lesson In Momentum Investing

Shares of momentum darling Netflix (Nasdaq: NFLX) came to a predictable fall.



Chart Courtesy of StockCharts.com


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

A momentum stock is one whose rise defies gravity. The company usually has a ground breaking concept and or business model. Sometimes it has both. 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 a series of nice earnings report. The company continues to guide higher and the stock continues to rise. At some point, there is a small hiccup and 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've said here multiple times. All momentum runs end in an ugly way. And that's what happened to Netflix.

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

Then came the lower highs and the lower lows until the stock broke below its 200-day moving average. Then came the stumble. The company started to finesse its business model trying to cut out its DVD rental business and become an exclusive online business. Then customers got upset. Then came the earnings warning and the final crash.

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

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

For more details on how analyze intermarket relationships and how to use technical analysis in your daily portfolio managmement buy "Market Timing For Dummies" and "Trading Futures for Dummies." Visit our bookstore.
 





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