Trading Opportunities: Why Nothing Looks Great at this Time

It’s a crazy trading environment out there. Whether you are in bank stocks, gold stocks, silver stocks, or even cyclical stocks, the stock market risk is high at this time, as we just completed a volatile week of trading.

The European debt crisis is keeping buyers on the sidelines and waiting for something magical to happen. The economic recovery is showing improvement here, but, with a high unemployment rate and declining home prices, it will continue to be a difficult path.

On the charts, the blue-chip Dow Jones Industrial Average breached below 12,000 and its 200-day moving average (MA) last Wednesday, but has managed to hold in positive territory for the year.

The NASDAQ and S&P 500 broke below their respective 200-day MAs and are back to the loss column. The S&P 500 is holding just above its 50-day MA of around 1,200.

The stock market risk is high especially since the charts continue to show a bearish “death cross,” with the 50-day MA below the 200-day MA. The stock indices need to hold at the critical 50-day MA; otherwise, there could be downside moves.

The light volume on up days is a red flag and indicates stock market risk. The buying has been associated with light volume, which does not support mass market participation. The end result is a bearish divergence forming between price and volume, and adds to the stock market risk.

An interesting fact is that the key stock indices have peaked on three successive upward moves, but the tops of the peak have been lower.

There is also stock market risk with the moving average convergence/divergence (MACD) indicator, which appears to be topping. The MACD on the NASDAQ looks the worst, with a minor sell signal emerging.

The NASDAQ could drift down towards the 2,400 level, which we last saw at the start of October, if sustained buying support fails to emerge.

In the commodities area, copper appears to have found some legs after its recent slide. Copper is playing off the prospects for the global economies after a bullish double bottom.

I continue to recommend adding some gold to your holdings as a counter to the stock market risk. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00 and we believe the spot price of gold could take a run at $2,000 in 2012 should the global economies and stock market risk continue.

Silver is a trading commodity based on the economic recovery and demand for electronics and industrial applications. A strong break above $35.00 would be positive and could drive a rally to around $40.00.

The December WTI Oil remains bullish—breaking above $100.00 on November 16 after data showed a decline in U.S. oil supplies. The problem is that higher oil means higher gasoline prices, which could ultimately impact consumer spending and the stock market risk.

Whatever you are trading, the key is prudence; do not over-commit to any one area.

Given the risk, make sure you are hedged via put options, which you can read about in Protect Your Money Made From the Rally (PC103111).

Do you want to play China-listed stocks with less risk? Read How to Play China with Less Risk

Gold Stocks: There’s Value in Them There Hills

For years, I’ve been a bull on gold mining stocks, but also precious metals stocks in general.

Gold mining stocks and precious metals stocks did not perform very well last year (compared to recent years), but that doesn’t mean there is no value in them. Usually, when a sector like this is beaten down or forgotten by the market in general, value players come in and buy it up (myself, when gold bullion prices dip, I try my best to buy gold-related investment to average down my overall investment cost).

Analysts who follow the mining sector and who have earnings forecasts for these gold mining stocks typically value them as if the price of gold bullion was trading well below its current level. This means that, not only are the gold mining stocks cheap, they are also trading on the assumption that the price of gold bullion will fall to within the range of $1,200-$1,500 an ounce in a few years. Why buy gold bullion when you can buy a quality gold mining stocks at a discount to the price of gold bullion?

It’s been a frustrating time for investors of the gold mining stocks, but if the value players are hesitant to jump in feet first, there are other players who will.

Pan American Silver Corp. (NASDAQ/PAAS), the world’s second-largest primary silver miner, has just offered $1.5 billion in combined cash and stock deal to acquire Minefinders Corp. Ltd. (ASE/MFN), a medium-sized silver producer whose primary assets reside in Mexico. The price tag is a 36% premium to where Minefinders traded last Friday.

This, in my opinion, is just one of the many mining deals that will take place in 2012. The larger mining companies like Barrick Gold Corporation (NYSE/ABX), sitting on $3.0 billion in cash, Newmont Mining Corporation (NYSE/NEM), with over $1.0 billion in cash, and Goldcorp Inc. (NYSE/GG), with almost $1.5 billion in cash, are always searching for ways to grow their businesses.

It is a very attractive proposition for the large miners to buy quality junior and medium-sized gold mining companies, who are trading very cheap in terms of the price of gold bullion today. If the large gold mining companies believe the price of gold bullion will trade much higher, then the acquisitions become even more inexpensive and the value of gold mining stocks that much more attractive.

Be careful, dear reader; the wheat truly needs to be separated from the chaff. There are many promising junior gold mining stocks that will, in the end, offer up just that; promises. The companies that have proven assets, in my opinion, will earn a rich premium for their gold mining stocks in a buyout as the large firms look to improve their growth rates.

In 2012, if the value players in the gold mining industry don’t buy the gold mining stocks aggressively, the large gold mining companies flush with cash will. This will spur other hedge funds and asset managers to take a look at the mining sector more carefully and, in my opinion, will cause a stampede into the gold mining stocks, driving their prices much higher.

Sometimes patience is required in a market. But if there is one thing I’ve learned, it’s that value has always produced winners in the end.

Michael’s Personal Notes:

Another startling statistic that gave me pause: government benefits are now required for nearly half of Americans.

In the latest census data, covering the period of the second half of 2010, 48.6% of Americans received social security, unemployment insurance or another type of government benefit payout (Source: Wall Street Journal).

This past recession has hit harder than most. Only seven percent of Americans who lost their jobs during this recession have attained their previous financial position (Source: Rutgers University).

Without government assistance, imagine where we would be. The fact that the government has to help so many people illustrates the damage that this great recession has caused America and shows how far we still need to climb to get ourselves back to where we once were.

Researching these statistics gave me an idea. What if we removed government benefits (government transfer payments) from personal income to see how the average working American is doing?

This is a more pure form of the data, because it calculates income from work—the jobs market—with government assistance excluded.

To give us some perspective, let’s go back to the 1960s and look at personal income excluding government transfer payments. During this period of economic growth, this measure gained anywhere from 10% to 25%—people enjoyed strong personal income growth in a strong jobs market.

How did people do during recent recessions? In the late 1970s recession, the personal income growth rate slowed to just six percent. In the recession of the late 1980s and early 1990s, the personal growth rate dropped to merely three percent, while the recession that visited us in the early 2000s saw a personal income growth rate of five percent in a very difficult jobs market.

How about today and since 2008? Here comes the shock-and-awe part. Not in 50 years has this statistic once showed negative personal income growth, despite having experienced four recessions in that span. Is it different this time? You bet.

In the middle of 2011, real personal income excluding government transfer payments fell 5.1%. Currently it stands at negative 3.6%. Translated, salaries for the average worker are 3.6% lower than they were in 2008. What jobs market?

So, dear reader, not only are close to half of Americas receiving some form of government benefit, but also real personal incomes for those working is actually falling, which means that the average working American is being squeezed by inflation (through higher food and gas prices), while purchasing power is being further eroded by salaries that are below 2008 levels in a stagnant jobs market.

In case we dare to look outside, this is 2012. So I ask, where is the growth in consumer spending going to come from if the average American is witnessing the first post-recession decline in personal income in 50 years?

Where the Market Stands; Where it’s Headed:

Joe Granville came out yesterday and said that the stock market is going to dive 4,000 points this year. (Can you believe he is past 80 years of age?) I’ve been reading other reports that say the bottom is about to fall out of stocks, because the market is oversold and volume is thin.

But when I look at the number of stock market advisors who are bullish vs. bearish (a reliable stock market indicator I follow), it’s not a frightening spread just yet.

We are in a bear market rally in stocks that started in March of 2009. This bear market rally has further upside potential.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

By Michael Lombardi, MBA for Profit Confidential

Stock Market & Gold: An Opportunity Like We’ve Never Seen Before?

By Michael Lombardi, MBA

I’m so excited this morning; I can hardly control my excitement.

Being the type of person who looks at the glass half-full as opposed to half-empty, I see yesterday’s sell-off in most investment categories as presenting investors with huge opportunities for profit.

Let’s start with the stock market: Since August, there have been five breakdowns by the Dow Jones Industrial Average to the 10,500 level. Subsequent to each of the downside moves, the stock market has rallied. As of last night’s close, the Dow Jones Industrials are selling at only 12.2 times this year’s earnings! The Dow Jones Industrials offer a dividend yield today of 2.9%—trumping most other forms of investment in respect to income.

The stock market is severely oversold; there is great value in stocks.

Moving to precious metals, the big correction in gold and silver I have been predicting and warning about is on! Finally, gold’s back under $1,700 an ounce. Finally, silver is back under $33.00 an ounce.

If you believe that the world’s financial problems will go away, if you believe that the U.S. will get out from under its mountain of debt, sell your gold.

On the other hand, if you recognize that gold bullion has risen $397.00 an ounce in the past 12 months (31%) and investors are finally taking some profits off the table, if you believe that the world’s economic problems will only get worse, that the U.S. will continue piling on the debt, that U.S. dollars will continue to be printed at a rate that spurs inflation (all the stuff I believe), then you might want to take this opportunity to buy more gold investments (like I am).

Global Stocks Enter Bear Market,” said the headline on a Bloomberg news story yesterday. Investors are panicking again and stock advisors are at the most bearish level in months. When you see this amount of negativity, stocks usually go the other way and climb the wall of worry higher. Stock market rallies end when investors are most optimistic, not when they are as pessimistic as they are today.

Michael’s Personal Notes:

Shares of Warren Buffett’s Berkshire Hathaway Inc. (NYSE/BRK-A) are trading at $100,000 for the first time since the beginning of 2010. I believe there are two reasons this is happening and I don’t believe the price action of Berkshire stock is indicative of the future of general stock prices.

First of all, the company’s reinsurance units have taken a hit. Japan’s earthquake in March and the U.S. windstorms this year have resulted in Berkshire Hathaway Reinsurance Group taking a loss in the first half of 2011.

Secondly, as the company has grown so much, it’s just getting tougher to make deals with big returns. Most of Buffett’s bets have been secure ones: buying preferred shares of big companies and getting a small of amount of warrants as a bonus. The bigger Berkshire has become, the more difficult it has become to make deals where the eventual returns are substantial. Berkshire will be hard pressed to find a deal like Coca-Cola again.

Where the Market Stands; Where it’s Headed:

Despite yesterday’s sell-off in stocks, I believe we continue to be in a bear market rally in stocks that started in March of 2009. Yes, the rally has been long and is getting tired, but I believe the bear market rally has more upside potential left.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.