Will the market hold, or will it roll over. The markets made a comeback during the last hour of trading, with the DOW making the biggest reversal. Mega caps outperformed the broader stocks and the DOW ended up 1.26%, and the S&P ended up 1.1%

All three indices bounced off the support levels of May 25th, with the DOW bouncing off 9800, but the quality of the rebound was mixed. Volume on both the NASDAQ and the NYSE increased, which is a positive sign. You always want expanding volume in a “recovery rally.” Volume on the NYSE was up 13% and the NASDAQ was up 20% from Monday.

Internally demand on the NYSE was stronger with 74% Up Volume and breadth 1.5 to 1 positive. On the NASDAQ, however, Down Volume was 65% and breadth was 1.5 to 1 negative. Therefore, we got somewhat mixed signals and we usually get a more definitive “bounce” off a sustainable rally.

There is even speculation that the President’s Working Group on Financial Markets, established by executive order by Ronald Reagan, better known as the “Plunge Protection Team,” may have had a hand in the turnaround. This is because of the unusual volume and strong reversal and subsequent rally in the last hour of the day WITHOUT any positive news. If true, it was done at the end of the day, right at a support level for maximum effect and to make people take notice.

Bottom line, whatever the reason for the increase in buying, prices dropped enough to generate interest. What does this mean for you as an investor? Watch for the ability for the markets to follow through on the advance yesterday. Especially with the markets move up and bump up against overhead supply.

This would be 9950 to 10,000 on the DOW, 2190-2220 for the NASDAQ, and 1065-1070 on the S&P. If we break through these resistance levels, it means demand is strong and this rally is for real. I have attached a graph of the DOW for you to look at and see if you can see what I am talking about.

What am I doing. I have some US equity, but have a lot of cash. I am being more conservative for the moment until the market gives more clarity. Sometimes, when you are unsure, doing nothing (sitting in the money market) is the best thing, and is actually doing something, preserving principle.

I have

Keep studying,

Dan Stewart CFA®

Last night European countries announce last night (on 6/7/2010) they would actually began implementing austerity measures (cuts). Germany, England, and even France,

European growth is going to be hurt significantly, but this should defend the Euro from further decline. The problem, if the Euro gets stronger relative to other currencies, it will hurt their exports and worldwide demand for their products.

The EU is collectively the biggest market in the world, slightly bigger than the US economy. This will effect growth worldwide, both is Asia and the US. In fact, 30-40% of the earnings of many S&P companies are derived from Europe.

Therefore the risk of deflation has increased somewhat if the European governments continue to follow through with their statements. But they are doing the right thing. They are causing short term pain for hopefully long term gain.

The Germans knew what the end game would be if they simply kept printing money and borrowing. They remember the Weimar Republic with hyperinflation that crushed their economy. They finally stood up and said no more. All the other European union countries followed suit.

Geithner and the US government was opposed. Why? Because now we are virtually the only country who is continuing this “spend your way to economic growth.” Before, when everyone was doing it, they could focus the attention on Greece, or Europe, or even blend in with the crowd. Now we stick out like a sore thumb.

I believe even the mainstream media will now start picking up on this and pick on our enormous spending.

Enough politics, now to investments. What does this mean. It means the Euro should reverse and start to stabilize. At least the risk of the Euro increasing relative to the dollar has increased significantly.

Therefore, early today, I unwound my double short Euro trade for a handsome profit. The charts I have attached shows how the Euro looks to be bottoming and could be a reversal. Even if it doesn’t, that’s ok, the fundamental risk profile has changed. I will take my money and walk away.

I am, however, still short European stocks, and they should still be in for a really tough road. They were down again today and the trend should continue. E-mail me if you have any questions.

Keep studying,

Dan Stewart CFA®

Over the weekend, the G-20 Nations got together to discuss the world financial situation. All the European Union countries made 180 degree about face! They said they were all going to collectively start cutting drastically implementing austerity plans.

Among the 4 disagreeing were the United States and Great Britain. This really flushes us out in the open and shows our true colors. We do not want to cause pain and make the tough decisions needed for our future generations and our economy as a whole over the next decade.

However, this is not a political tirade, this is about how to make money or avoid losing it. What does this mean for Europe and her companies. Well, all this cutting will slow their growth significantly. Also, their cutting spending should be bullish for the Euro, which will make their exports more expensive. This is also a bearish sign for her stocks.

Therefore, due to the increased risk over in Europe, I would stay away completely away from investing in Europe at all, unless your short, I am. I believe the risk of deflation has just increase some, especially in the shorter term.

For those of you who love technical analysis and graph, I have attached a chart of the EuroStocks 50 Index, a large cap group of big European companies.

As you can see, it broke through a trend line around 1/22/10 and had a significant pullback. It rallied back to its former 2010 highs and peaked out and closed just below 2950 on 4/16/2010. You can see it made a double top, then quickly sold off and is currently breaking through a support line. If it breaks through support, all bets are off.

Therefore, from a fundamental analysis, Europe is slowing already and is now going to have drastic cuts to further slow their growth. In fact, they are heading for a double dip recession quickly.

From a technical standpoint, it doesn’t look good either. In fact, I could have added another long term bear trendline from the top left from the May 08 top down toward today and you could argue that this was an intense rally in a secular long term bear market.

I do not know which way exactly it will play out. I just know when I measure what is happening while it is happening, and get confirmation, then make adjustments accordingly, I am much better off. I will not be right on every trade/investment, but from a risk/reward profile, I am way ahead of the game. It is also a lot less painful not having these wild, wild swings in your portfolio.

In short, for Europe, the risk don’t merit possible gains you might get. My advice, hold a lot of cash, bonds, and a few American stocks till we get some more clarity, or get a significant selloff that makes prices much more attractive and the risk profile more palatable.

These are my thoughts for the day. Let me know yours.

Keep studying,

Dan Stewart CFA®

I just wanted to clarify a few things for those of you who are interested in price oil, whether long or short. First of all, at the top level you have ETFs (exchange traded funds) and ETNs (exchange traded notes). They are both meant to replicate an index, sector, or price of an asset or commodity. In this case, I am talking about the price of oil, a commodity.

The main difference between them is their tax structure. Oil ETNs are taxed like a stock, where the holding period determines short-term or long-term capital gain tax treatment. You, as an investor, can control the holding period for preferential tax treatment if you still think there is upside. But remember, when it is time to sell, it is time to sell, regardless of the taxes, whether you have a gain or loss in that particular trade, etc.. When it is time to sell, it is time to sell, regardless!!

Oil ETFs, on the other hand, are set up as a partnership and issue K-1s. Gains are taxed at 60% long-term and 40% short-term regardless of how long you held the fund. It is based on the gains & losses of the underlying futures contracts. That means you might be liable for taxes even if you have not sold the fund.

Therefore, it would seem that ETNs would be better, right. Well, not necessarily. The other difference is that an ETN is a note, issued and backed by a company. The credit worthiness of the company can and probably will affect the price (and the ability to pay it back). Even though they are traded in the open market, the issuing company’s financial strength can be an issue.

Conversely, oil ETFs are backed by the underlying futures contracts (the securities held inside the ETF). They are bought and sold in the open market, or can be “redeemed” by the “Authorized Participant” (like a market maker) of the Issuer. This is meant to keep them in line with their “NAV.”

Now down to the investment in the commodity price of oil itself. Because they are based upon monthly futures contracts, your intentions are important and will help determine the vehicle you choose. Namely, the time frame you think you will be investing will determine which ETF or ETN to use.

Hopefully without getting to complicated, futures contracts are rolled forward each month, and due to supply and demand expectations, will either have “contango” or normal “backwardation,” technical terms that determine whether expected future prices will go up or down. In the futures markets, you can either buy/long or sell/short a contract 1 month out and keep “rolling” contract forward, or go out months in advance to hopefully pick the most advantageous contract to minimize contango or maximize backwardation. There are proprietary yield indexes to help find the “best” contract.

If you believe the price of oil will go up, then you want to go “long” oil. If you are looking at the short-term or trading, there are two funds available. The first is “OIL,” the iPath S&P Crude Oil Total Return Index, which is an ETN backed by Barclays. The second is “USO,” United States Oil Fund LP, an ETF. Both are meant to track the spot (current) price of oil closely.

For longer-term investors, “DBO,” the Powershares DB Oil ETF is worth looking at, another is “OLO,” Powershares DB Crude Oil ETN backed by Deutsche Bank. They both employ the Deutsche Bank Optimum Yield Index to select the best contract. Lastly, “USL,” United States Oil Fund LP, an ETF, also employs a monthly roll strategy but it holds all the contracts for the next 12 months. All 3 of these funds will not be quite as correlated to the spot price of oil, and theoretically, will be a little “smoother.”

If you think oil is going to go down, then you want to “short’ oil. This can be done with “SZO.” the Powershares DB Crude Oil Short ETN, or the “DNO,” the United States Oil Fund, LP ETF, both attempt to move inversely 1 to 1 with the price of oil.

For a double inverse, you have the “DTO,” Powershares DB Crude Oil Double Short ETN or the “SCO,” Proshares UltraShort DJ-UBS Crude Oil. DTO resets monthly just like all the Powershares, but SCO resets daily. Therefore, for a very short-term trader, SCO might be more appropriate. Someone wanting to hedge may consider DTO.

Volume is always a consideration for any ETF or ETN you invest in, so always make sure there is enough liquidity for you. I know this was long winded, but to many people think all ETFs (or ETNs) are the same. That is almost like saying all stocks are the same. I think this is enough to think about for today.

I have attached a graph of the iPath S&P GSCI Oil Trust Index ETN. As you can see, it bounce off it lower support level and is currently breaking through the next level of support (which can become resistance). Oil looks very bullish at the moment. Well, those are my thoughts for the day.

Keep studying,
Dan Stewart CFA®

Today I have been very busy watching the markets all day. Began up on high volume, then quickly sold off and seesawed its way up throughout the day. I was getting a block trade ready for Oil, but just as I getting ready to pull the trigger at 1:30 our time, the markets took off led by, you guessed it, Energy. And Financials.

I try to never chase a trade, and put in a limit order at the lower/bid price. It didn’t take, and the market moved away from me and went up a penny. So I moved my trade up another penny with another limit order.

Even though pennies don’t seem to count for a lot, on a lower priced ETF that is a leveraged ETF, or double the movement, it does count. Besides, if you don’t have discipline, you are a white belt playing with black belts, and you might as well go to Las Vegas and at least have some fun. I do this for a living and I do not gamble.

I will regroup tomorrow and see where the various energy prices, crude prices, etc. are, and then see if I want to execute the trade or let it come to me. I definitely prefer the latter. The graph today is an updated graph on the price of Crude, and it has bounced right off the green support line I drew.

Oh well, at least my QQQQ Nasdaq 100 trade worked out well today.

Keep studying,
Dan Stewart CFA®

I am keeping an eye out for the price of oil spiking up. Not because of anything to do with the Gulf oil spill & BP. It has nothing to do with the supply & demand for oil. In fact, there is plenty of oil above and below ground. There is plenty of supply, especially with economies slowing down in most regions of the world and using less.

This is about politics. If you have been paying attention, the Israelis commandos boarded a flotilla headed to Gaza with “relief supplies” and killed approximately 10 activist

The problem is the Israelis already allow supplies (everything except terrorist & guns) to enter Gaza. So does Egypt. So why was the flotilla needed by Arab pro-Gaza activist trying to help the Palestinians in the first place? Also, the commandos actually had paintball rifles plus real sidearms and were just trying to intimidate the convoy.

Some of the activist grabbed some of the Israeli soldiers and shot them. That is when the Israelis soldiers opened fire & defended themselves. You DON’T hear that part on the mainstream media. Our military sources tell us that is exactly what happened.Now, pro-Palestinian activists said they would test Israel’s blockade of the Gaza Strip with another ship.

This coupled with the Iranian nuclear program makes the Middle East a very dangerous place. Iran’s program is coming to fruition and they will have nuclear capability along with the delivery system SOON. No one is stopping them, leaving the Israelis isolated and alone. We are sure not defending our most loyal allies.

My personal belief is that they will defend themselves and even make a proactive, pre-emptive strike against Iran. Israel has done this numerous times in the past and every time they were threatened seriously by any of the Arab countries.

If this happens, it will probably cause the Straits of Hormuz, in which 90% of the world’s oil passes & shipped through, to close down. If this happens, oil will skyrocket.

To make matters worse, Obama just announced today that he is closing ALL offshore drilling projects. All this seems to be a “perfect storm” for oil.

From a technical standpoint, oil is back where it was in 2008, in the midst of the financial crisis. I am not saying this will happen, but it is quite likely. Therefore, you should have a trade “in the shoot” ready to execute in case this scenario plays out as I have described.

Keep studying,

Dan Stewart CFA®

As I stated yesterday, what the markets are doing and how they are acting is more important than what you think they should be doing. I also stated that as they go down, correlations get closer together and the benefits of diversification go away. Simply put, they go down together. So just when you need “diversification” it is not there to save you. Therefore, it is more about when to be in and when to be out, than what to be in. Especially in the mid to short term. This is difficult task, even for professionals.

We have had a over a 10% correction (the definition of a correction), and yesterday showed some signs of resumed optimism. Most of the economic data is still positive, especially the earnings. Technically, we had a 90% Upside Day on both exchanges with 96% Up Volume on the NYSE, and 93% Up Volume on the NASDAQ. Also, the “breadth of the market” was strong with Advancers over Decliners of 11 to 1 on the NYSE, and 7 to 1 on the NASDAQ. The only negative was that volume was below its 30 day moving average. All of the short term indicators are “oversold” and are currently turning positive.

Remember, when it is time to buy, it won’t feel right and you will be scared. But again, the short term indicators have turned positive, and yesterday Jim Cramer said he “doubted this rally” which makes me want to buy even more. Usually, he is a great contra indicator.

I have been holding a lot of cash and bonds along with US stocks. Today, I have deployed 5% of our cash into equities, namely Nasdaq stocks. What do we need for the market to resume its uptrend? An increase in volume coupled with expanding demand would be nice. This is why I am only deploying 5% of clients (and my own) money.

I want to monitor the follow through early next week, and would make changes if necessary. I have attached a graph of all 3 major indices, the DOW (Yellow), the S&P 500 (White), & the Nasdaq (Red) overlaid so you can see how correlated they are. I Also, you can see the early reversal at the current time (right end).

You will never be right all the time or even close, but if you can statistically stack the odds in your favor, you will be right far more than you are wrong. More importantly, this is the best way I know how to manage risk.

Keep studying,
Dan Stewart CFA®

Today I am looking at the broad indices. As I told listeners over 3-4 weeks ago, we were due for a pullback, but most of the economic data was still positive in the U.S. The wildcard was, and still is, Europe, with Japan a little further down the road.

In any event, we had our over 10% pullback (actually 12-14% depending upon the index), which is the definition of a “correction” or “retrenchment” as professionals like to call it. I call it going down.

However, thus far we are still in a secular bull market and I would like to see some follow through tomorrow to confirm what I think is true, before I commit more capital as I had some assets on the sidelines in cash.

It doesn’t matter what I think, it is more important what the market it telling me. Moreover, the market doesn’t care what I think, I wish it did. So I have to measure what is actually happening in the markets to determine risk.

Today, I will not be as long winded as yesterday, but all three major indices are showing resilience, and the Nasdaq is showing the most strength. It broke through a bottom trend line a few days ago but is almost back to it. It is currently bouncing off a support line with increasing buying volume on a wide array of stocks or sectors (“breadth of the market”) which is a very positive sign. Again, I want to see some follow through tomorrow.

Keep studying,
Dan Stewart CFA®

For my blog today, I thought I would post a response to an e-mail I received from a loyal listener. Below are his questions, then my response.

Hi Dan,

I have a question about the reliability of the ETF SLV. I have been wanting to add Silver plays into my portfolio and I hear you mention SLV on your show. However, the more I research it, it sounds like there is a sizeable crowd out there that warns against SLV (and GLD) because their reasoning says its not a “real” play on Silver, rather a play on a bunch of paper that does not really guarantee the ETF holds the actual commodity of silver. I’m confused and to the point to where I don’t know who to believe.

Also I heard you mention CEF on the show as a quick Gold + Silver play for those who own neither. That would be me. But in researching that I am seeing that it’s a tax-nightmare for taxable trading accounts and best for a tax-deferred account. I want to get into both Gold and Silver soon, but I’m not sure I want to be in for a tax debacle of my own creation by buying CEF.

What are your thoughts? Anything you can say would be greatly appreciated.

________________________

Both SLV and GLD are supposed to be backed by the actual commodity/metal. As more people invest, they have to go out & buy and store the physical metal. Can there be a “squeeze” and the fund not be able to buy and take delivery of the metal due to too much leverage worldwide of paper assets backed by gold/silver and a shortage of the physical metal, probably. But that is another reason to be bullish.

This doesn’t mean the price of the ETFs won’t go up. When you think there will be problems with delivery, that is when you might consider selling your “paper” gold & silver, and keep the physical metal you own. Another alternative is to buy the mining shares, GDX, but again, that is “paper” backed by the assets of mining companies just like any stock or ETF, and most companies use leverage or borrow.

The point I am trying to make is that with any stock or ETF (“paper” equity), you are buying part ownership of the assets of the company. The stock certificate is simply the contract and evidence of ownership of the buildings & assets of the company, just like the physical metals are the assets backing these ETFs. Could management of the companies mismanage the assets they are charged to operate, sure.

You have this risk with ANY stock or bond that you own, bonds are just more senior in pecking order in the event of bankruptcy. Only when you hold the physical asset yourself do you not have to worry about mismanagement. But then you have to worry about holding & storage cost (hiding it), insurance cost, theft, high spread when bought and sold etc..

This is why it is not about any one investment, because there is not one perfect investment. It is about overall portfolio construction and how the entire portfolio correlates and interacts with all the other assets in the portfolio. Therefore, you do not want to be too heavy in any one asset. Every person I know that is over worried about an individual stock has too much. You should never invest/purchase more that 6-8% in any one stock period, or 15-20% of an ETF.

This way you will only have “systematic” or market risk and can diversify away from “unsystematic” or company specific risk. Now the question becomes, how do you handle systematic or overall market risk.

That is why 1/2 my research is not about the fundamentals of the companies or sectors (the other 1/2 is), but what the investors are doing, the demand and supply of stocks. Even though Modern Portfolio Theory tells you it is all about your risk tolerance, I disagree. It is HOW MUCH RISK IS IN THE MARKET! When the market has a lot of risk, I want to be out or hedged. When the market is relatively safe, that is when I want to “take risk” or own equities.

Every asset can have only 2 of 3 qualities – growth, safety, & liquidity. You want all 3, but there is not a public investment that has all 3. That is why it is important to have different assets, some that have high growth potential & liquid, but has risk and doesn’t have guarantees/safety (stock).

Then you can have an asset that has a high degree of safety and the potential for growth, but is not liquid and you lock your money up for a time period (structured notes & bonds). Lastly, you can have an asset with safety & liquidity, but without growth potential (money markets & short term notes).

Therefore, you want various assets so you have the enough safety, you have enough growth, and you have enough liquidity when you need it.

Sorry about the long winded response, but I though it important for you to understand. It is NOT about any individual investment, but the overall portfolio.

Now, for your Central Fund of Canada “CEF” question. Yes the accounting is slightly different and you will get the proper forms after year end by the company. My taxes are already a “nightmare,” so one additional minor thing is not going to sway me away from a good investment.

The one good thing I like is that it is Canadian, therefore, outside the jurisdiction of the US regulators. It might actually provide some diversity within the Gold & Silver sector. Therefore, you could have some GLD, SLV, and CEF, as well as some mining shares and GDX Gold Miners ETF.

Good questions, and keep studying,
Dan Stewart CFA®

Today I am looking at the Central Fund of Canada, ticker CEF, a closed end (commodity) fund that invest primarily in Gold & Silver.  In fact, the fund has to be invested 90% of its net assets in gold & silver, and at least 85% must be in the form of gold & silver physical bullion. This is one great way to get exposure to a combination of Gold & Silver that is backed by the actual bullion without you actually having to store it.

In my opinion, Gold has established a new support level at $1165 per ounce, and is currently at $1197.5 per ounce. Silver has support at 17.67 per ounce, which is where Silver is currently. It is also bouncing off a trend line which is what I like to see. I like to see a support line in very close proximity to  a bottom trend line.

I have been looking for a good entry point for Silver but it got away from me and went well into the $19s. I do not chase an investment if it gets away from me. I will get my chance again if I am patient. Silver has pulled back while Gold held up because it is an industrial metal as well as a currency, so it sold off with these fears of a global slowdown. I agree with the global slowdown, but do not agree with the corresponding percentage pullback in Silver.

Here is my thinking. First, as an industrial metal, they are using up silver as fast as they can pull it out of the ground. There are no significant stockpiles anywhere. Second, as an safe, non-fiat currency store of value, people around the world will start purchasing silver as gold becomes more expensive per ounce. This is especially true for small investors who cannot afford to buy ounces at a time and the spreads to purchase become wider the smaller increments you purchase.

In addition, the “average historical ratio” between Gold & Silver over time has been  15 to 1. Why, because they mine and pull out of the ground 15 times more silver than gold. Simple supply and demand. However, at current relative prices, that ratio is over 67 to 1.

Therefore, on a relative basis, Silver is “cheaper.” In any event, I have already blogger about SLV, the Silver ETF, which is a pure silver play. It may be a better investment for you if you already own gold, but do not own silver.

CEF is a simple, broad way to get exposure to both Gold and Silver if you currently have neither. Technically, it bounced hard off a support and a bottom trend line at $14.07 and is currently at $14.74 (see graphs). Also, volume has been increasing, which is also a good sign in an uptrend. It means more buyers are coming into the security.

This is what I think, let me know what you think.

Keep studying,

Dan Stewart CFA®

Today I am looking at the Central Fund of Canada, ticker CEF, a closed end (commodity) fund that invest primarily in Gold & Silver.  In fact, the fund has to be invested 90% of its net assets in gold & silver, and at least 85% must be in the form of gold & silver physical bullion. This is one great way to get exposure to a combination of Gold & Silver that is backed by the actual bullion without you actually having to store it.

In my opinion, Gold has established a new support level at $1165 per ounce, and is currently at $1197.5 per ounce. Silver has support at 17.67 per ounce, which is where Silver is currently. It is also bouncing off a trend line which is what I like to see. I like to see a support line in very close proximity to  a bottom trend line.

I have been looking for a good entry point for Silver but it got away from me and went well into the $19s. I do not chase an investment if it gets away from me. I will get my chance again if I am patient. Silver has pulled back while Gold held up because it is an industrial metal as well as a currency, so it sold off with these fears of a global slowdown. I agree with the global slowdown, but do not agree with the corresponding percentage pullback in Silver.

Here is my thinking. First, as an industrial metal, they are using up silver as fast as they can pull it out of the ground. There are no significant stockpiles anywhere. Second, as an safe, non-fiat currency store of value, people around the world will start purchasing silver as gold becomes more expensive per ounce. This is especially true for small investors who cannot afford to buy ounces at a time and the spreads to purchase become wider the smaller increments you purchase.

In addition, the “average historical ratio” between Gold & Silver over time has been  15 to 1. Why, because they mine and pull out of the ground 15 times more silver than gold. Simple supply and demand. However, at current relative prices, that ratio is over 67 to 1.

Therefore, on a relative basis, Silver is “cheaper.” In any event, I have already blogger about SLV, the Silver ETF, which is a pure silver play. It may be a better investment for you if you already own gold, but do not own silver.

CEF is a simple, broad way to get exposure to both Gold and Silver if you currently have neither. Technically, it bounced hard off a support and a bottom trend line at $14.07 and is currently at $14.74 (see graphs). Also, volume has been increasing, which is also a good sign in an uptrend. It means more buyers are coming into the security.

Dan Stewart CFA®