When the American stock market cannot rally on positive economic news, it’s an ominous sign for investors around the world. And as Tom Dyson explains in this week’s guest essay, things could be about to “get ugly”.
Now is the time to position yourself...
Kind regards,
Frank Hemsley
For The Right Side
Position yourself for further stock market declines
BY TOM DYSON
It’s late November and the U.S. government is borrowing more money than any entity in history has ever borrowed. It is fighting a war against deflation, and it needs this money to pay for a massive stimulus plan...
The newspapers bring news that Asian investors are reluctant to lend any more money. More news comes through that the recession will lower tax receipts at the IRS, the Treasury's main source of capital. Editorials point out how indebted the government is already...
You’d think the prices of U.S. government bonds would have collapsed under these terrible fundamentals and scary news stories. But the opposite happened. Bond prices rose day after day, tracing a relentless path higher...
Treasuries are “acting well,” I wrote at the time. “It implies there’s more strength to come for the Treasury bond market.”
And that’s exactly what happened. The bond market had its most dramatic rally in history as soon as I’d written those words, pushing down yields by 33% in four weeks...
When prices can only fall
When bad news can’t make an investment fall, then you know there aren’t any sellers left. The selling power is exhausted, and the investment can’t fall any farther. It can only rise...
The converse is also true. When a highflying stock announces good news and the stock doesn’t respond, you need to be careful. It’s not acting well. Everyone’s already bought and there’s no one left to support its price. It can only fall...
The Institute of Supply Management monitors activity in the services and manufacturing industries. On 6 July, the institute’s researchers released their service data for June. It was the strongest reading in nine months. This was a far better result than Wall Street expected...
The news made no impression on the stock market. It kept falling, down over 1% after the news.
And there has been more good news. Recent data showed American manufacturing was stronger than expected and the housing market is stabilizing. The S&P 500 was only able to rise a measly 0.4% the day this news came out.
When the Bureau of Labor Statistics released the monthly unemployment report, it showed a large increase in unemployment. This news shook the stock market. It fell almost 3% that day.
The market’s reaction to news is one of my favourite prediction tools. It’s plain to me that right now, the S&P is shrugging off good news and responding dramatically to bad news. After a 44% rise in three months, this action tells me the bulls have exhausted their buying power and sellers have all the chips.
Now look at a chart of the American S&P 500 – that’s the broad index of the US stock market, made up of 500 actively traded large-cap stocks. The market has lost 8% in the past three weeks, after a huge run up, and the trend is clearly turning down.
Good investing,
Tom Dyson
For The Right Side
Editor’s note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world’s best contrarian opportunities. The DailyWealth team writes with a simple belief in mind: You don’t have to take big risks to make big money with your investments.
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ACTION TO TAKE: If the US market falls as Tom believes it will, your share portfolio is likely to be hit. Theo Casey at The Fleet Street Letter realises this and has found a way you can “insure” your portfolio. It’s an investment that rises as the stock market falls. To access this special report today, click here.
MARKET NOTES
Silver’s sell-off is no cause for alarm
BY SHIVVY ARORA
You may be puzzled at silver’s movements over the past two months. Since hitting an impressive high in early June, it’s been trading at a 10-week low. This is due to a fall in industrial metals demand and downward pressure from weaker gold prices.
But don’t hit the panic button just yet.
Despite some sell-offs from investors, silver hasn’t lost its appeal. Like gold, it is a great store of value and inflation hedge. Plus it’s always shown high price volatility. After all, its primary use is as an industrial metal - and global industrial demand is hardly stable.
In today’s chart, we’ve tracked the year-to-date performance of the iShares Silver Trust (ticker: SLV; red line). It’s up 11% since Jan and is still trading above its 200-day moving average (DMA; orange line). This is a good technical sign.
Silver may have had a slow run recently, but should rebound in August
Source: Financial Times
Silver is down by nearly 20% from its 2 June high of $15.7 (circled), but industrial growth typically slows during summer time. Silver’s physical fabrication demand is very likely to rise during a seasonal pick-up in August. And then we should see prices moving higher.
For now, silver’s trading range of $12-$13 from the past week could hold up for the immediate term. Over the next month however, investors will likely anticipate higher silver prices and start to pile in.
Looking ahead, a decline in the US dollar and soaring inflation concerns are big factors that will push silver’s prices higher. Don’t make the mistake of knocking the white metal off your radar.
The Daily Reckoning –Trapped between a rock and a hard place
BY BILL BONNER
Waterford, Ireland
Tuesday, 15 July 2009
“America is beginning to consider a new stimulus program,” said Irish television last night.
It was a rainy day in the Emerald Isle yesterday. The wind was blowing. Rain was coming down. By 7pm... it was time for a pub and a drink. The Irish know what to do in the evening.
“Welcome to Ireland,” said the cab driver this morning. “Don’t you love this summer weather?’
It would have passed for a bad winter in Maryland. Cool.Wet. Disagreeable.
“What happened to that global warming,” asked a colleague. “It was supposed to make Ireland hot and dry... ”
Meanwhile, back in the USA... people were wondering what happened to the stimulus program. It was supposed to stimulate.
Mr. Geithner says it is working. He says it’s “too soon” to begin thinking about another stimulus program. But every time we pick up a paper someone is voicing the need for more stimulus. And the things that really matter in the economy are going in the wrong direction: Jobs are going down. House prices are going down. Consumer prices are going down too.
This from the website Naked Capitalism: “Recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.
“Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancing.
“One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must. “Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements . Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting. “My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained. “The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin.”
We couldn’t figure out who wrote the comments above. But they sound sensible to us. After a night of heavy drinking in the pub and pious reflection in our hotel room... we woke up worried. What if our friend Hugh is right? What if the comments above are right? Heck... what if WE’RE right?
Read on...
To read the Daily Reckoning in full, click here.
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