The discussion regarding WFC was about how the stock could continue to go up despite the fact that bank, in general, are in such an unhealthy position. It is safest for us to assume that any and all bailout money that has gone to the banks is boosting the company's earnings. The improved earnings cannot be expected down the road unless accounting rules are changed or new government money is pumped into the system. Wells Fargo is one of the better run banks and should have a quicker improvement as things turn around.
Bear market are characterized by the periods of 1906-1924, 1929-1932, 1929-1950, 1937-1955 and 1966-1982. The charts below should assist you in visualizing that a bear market doesn't necessarily mean a falling market. The periods of 1906-1924, 1937-1950 and 1966-1982 had the stock market trading in a range. The hardest part of these market periods is that inflation killed the investor more than market declines did. One dollar put in at the beginning of each period would have resulted in it being equal to $1 at the end of the period excluding inflation. If inflation was included then the $1 would be less at the end of the period.
In the book "Crisis Investing" by Douglas Casey he describes an investment strategy where a person breaks up their investment into ten unrelated and highly speculative groups. Of the ten unrelated areas each investment should move in the opposite direction of another investment. For example, gold v. bonds, short selling a stock v. going long a stock. The gold position would be owning the actual gold not gold stocks. When going long a stock it should not be a gold stock if you're already holding the physical gold. Do you have questions about this concept? Post them on the blog and I'll do my best to answer.
All investment terms will be linked to Investopedia for an explanation. If there is a word that isn't clear then be sure to visit Investopedia for more assistance.
These stocks were among those that were up today and likely to be the ones that will fall the most in the coming days or weeks. Keep in mind that you wouldn't place the short sell until you see that the stocks are moving in a downward direction. If you start to lose more than 10% on the trade then you should get out of your short sell. Do not expect to be in these short sell positions more than 2-3 days.
Stocks to consider buying are those that have lost the most today. The following stocks are potential buy candidates:
These stocks were among those that were down the most and have the greatest chance of going up. In this case, you would employ the opposite strategy as short selling. You would wait until you see the price move up before you start to buy the stock.
Finally, listen to or download the following interview "Anatomy of the Bear" on the Financial Sense website. After listening to the interview add your comments or questions to the blog comment section.
In our discussion of the Dogs of the Dow strategy, we discussed that the goal is to buy either the top five or top ten highest yielding stocks of the Dow Jones Industrial Average. After holding these stocks for one year, you would then sell the stocks that are no longer among the top ten highest yielding stocks of the Dow and replace them with companies that are among the new high yielding stocks. The purpose of this exercise has multiple functions:
The current top 10 high yielding stocks are as follows:
Let's see what the performance of these companies will be as time goes on. As was discussed before, taking the very highest yielding stock, GE, may have the most risk of eliminating their dividend, getting kicked off the index or even going out of business. Only time will tell.
So far we've been able to witness the gains and losses in Bank of America (BAC) week after week. Interestingly, in each discussion we've had I have encouraged that we either sell short after large gains in the stock price or go long (buy) BAC when the price has fallen by large amounts. The lesson that should be learned is that excessive moves up or down are never permanent. For this reason, if you happen to be on the right side of a trade then protect your profits. Otherwise you'll end up wishing you sold or bought the stock after the fact. Again, this is very important when you are trading. However, even as I have invested in companies that I thought I would hold for the long term performed better when I sold after a nice gain. As an investor I don't sell short.
As we reviewed the companies that were among the top 10 highest yielding stocks we started to wonder why someone wouldn't by our nation's biggest, best, and most profitable companies. After all, they'll be around forever so what's the risk? As investors and employees, we should always take the perspective that no company is safe. Just look at what happen to Lehman, AIG (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Ask yourself this, two years ago would you have considered that Washington Mutual would no longer exist. This partially explains why investors need to take their profits and move on to the next best alternative.
The question was asked, "How can a person keep track of all the companies that have reached a new 52-low?" My answer is that by setting up a Yahoo!Finance account, you can track almost any set of companies that interest you. While there are over 5000 traded stocks and mutual funds, I focus on those companies that have increased their dividend every year for at least 10 years in a row. This list of companies can be found online at the following link. The list contains about 300 companies and is built on the concept of quality first. Once a list of companies is set up, Yahoo!Finance let's me set up the type of information that I can have show up on the page. I always include the % change from 52-week low. This tells me which companies are closest to the most recent low. Any company at a new low is where my research begins.
IBM is doing what every investor should try to do and that is buy at the lowest possible price. IBM also knows that in August of 2000 JAVA was selling for $257 a share. Now, IBM can buy JAVA for less than $10 a share. But why JAVA and why now? JAVA has patents that are critical for the use of internet communications between many different operating systems. When I say operating systems don't forget that Windows, Mac OS and Linux aren't the only operating systems. New ones are being created everyday with the use of cell phones and portable gaming devices. All of these devices wouldn't work on the web if it wasn't for the java script language. I wouldn't buy JAVA in anticipation of this deal getting done. Instead, I would be interested in IBM once it becomes clear that they are going to purchase JAVA and IBM's price falls significantly.
We do not know how long the market will go up or down. However, not knowing the future doesn't mean we can't take an educated guess as to how far it will go using Dow's Theory. Dow Theory says that the market will likely go up at least 1/3 of the amount of the previous decline. In the most recent instance we're looking at a decline in the stock market from 14,164 down to 6547.05. By dividing the difference by 3 we get 2539.16 (1/3). Adding 2539.16 to 6547.05 gets us to the level of 9086.21.
We now have a tentative upside target of 9086.21. However, Dow Theory also says that both the Industrials and the Transports need to exceed each prior peak in order for the trend to be valid (in this case the trend is up). As of the close of the market today, the Industrials smashed through the prior peak of 7350.94 on February 24th. The Transports barely closed above the prior peak of 2709.90 on February 24th. So far the signs are good that both indices will get close to the next peak which is 3203 for the Transports and 8280 for the Industrials.
Because both indices have gone above prior peaks we should continue to believe the market will generally go higher with some declines to occur along the way.
The good of Dow's Theory is the fact that it attempts to tell investors what the general trend of the market will be. How does the theory do this, by using the movement of the Dow Industrials, Transports and Industrial Production index along with volume indications from the New York Stock Exchange. Also, Dow Theory relies upon historical valuations of the stock market like P/E, dividend yield, book value, earnings and other assorted ways to measure the overall value of the markets.
The bad of Dow's Theory, if it is correct to begin with, is the fact that it can give false and early indications especially at perceived market tops. An example is the top in 1961 was 5 years before the actual top in 1966. Likewise the top in 1999 was 8 years before the actual top in 2007. Also, Dow Theory doesn't tell us about the direction of the market within a long term trend. For this reason, it becomes difficult to "trade" the market using this approach.
The point was made that Dow Theory has been relatively ignore because of its lack of predictive value. While this is open for debate, my research says that it is a reasonable approach as long as it keeps working for me. If it no longer works then I will still use it but I won't rely so heavily upon it. However, if the critics keep ignoring the relative value of Dow's Theory then it makes the use of it more valuable and effective.
Dow's Theory alone won't answer the question of which stocks I will actually buy and sell. It only tells a person the trend. This is the reason why I combine Dow's Theory with my dividend investing approach so that at least if I'm wrong because of my reliance on a theory then I'll be able to collect income until I'm right or sell out if I'm disastrously wrong.
Many market commentators in the media might claim that since we have seen a rise of 20% or more in the stock market then we must be in a bull market. However, I like the conservative view that Dow Theory takes on this issue and that is, a bull market begins when both the Industrials and Transports have exceeded the high of prior peaks. That means a bull market only starts at the 14,164 and 5,492 levels for the Industrials and Transports. This essentially means that both indices could go up over 100% and still be in a bear market as has been demonstrated many time in history.
Because we are in a Bear market rally, the market trend is up until or unless we go below the previous low of March 9th.
As I have learned the hard way, it is far better to be lucky in the stock market competition than smart. However, don't worry about getting lucky. Instead, focus on being informed as much about the history of the market to prepare yourself for the next wave of opportunity without losing money. Our goal is to learn and be ready. The luck will come in due time.
History suggests that the bear market will last 1/3 as long as the previous increase from 1974 to 2007. This means that the market should trade in a wide range until 2018. Around the year 2010 to 2018 we should see rampant inflation.
Losses due to quick trades and short selling is acceptable when you're required to get the highest return possible in the shortest amount of time with money that does not belong to you. However, keep in mind that you're not investing but speculating.
When working in the professional investing arena the only real measure of performance is the amount of percentage change to the entire portfolio, including cash, and not the dollar amount of change.
We're currently experiencing a bear market. As with previous bear market rallies ( 1906-1924, 1929-1933, 1966-1982) they are violent and fast. Bear market rallies tend to get a lot of participants who end up losing any money that they didn't already lose on the first, second or third wave down. Be ready to take advantage of the rally but also be ready to jump out as soon as possible.
To deal with the reality of a bear market rally we need to adapt to the changes taking place. First, even though nothing has materially changed with Citigroup or Bank of America we should be going long (buying) both stocks and using as much leverage as possible. The next upside target for Citigroup is $4.21 while Bank of America is $7.39. Hold these positions unless or until the stocks fall below the $1.02 level for Citigroup or the $3.14 level for BAC. If you're not comfortable with losing money then stay away from these stocks. Other speculative stocks to consider are MS, GS, HIG, GE, HBC, PAY, WFC.
The rational for my stock purchase of HP is that the company has fallen from the high of $77 and has consistently bounced above the $20 level since 2005. If the stock falls below $18 then I will consider selling the stock. However, I have already accounted for the possibility of the price declining to the $8 level. Successful investing requires that you prepare your mind to losing all that you invest. If you make money then you have a problem that most investors would like to have to figure out how to deal with.
When the Dow Transports and Dow Industrials are not going in the same direction then there is the problem of determining what the trend is according to Dow Theory. In circumstances such as these the best thing to do is assume that if the prior trend is down then it is still going to go down until proven otherwise. If the trend was previously going up then it is safest to assume that the trend is still up until proven otherwise.
The next question is, "are there other ways to determine the health of the stock market and economy?" Please visit my blog and look at the indicators on the right hand column. What I have posted is probably 1 out of 100,000 ways to view the markets health and direction. The ones that I have are ones that I feel are reasonable indicators of the general direction of the market but their certainly not foolproof. Only time and more experience will tell if these indicators are of any practical value.
All stock market investing is dealing with investor psychology. For this reason it is helpful to read books that deal with behavioral finance, game theory, Dow theory, market history or stock market psychology. While these topics don't answer the question of which stocks to buy what they do give is insight as to what people are likely to do under conditions of a rising or falling market.
Because there is always the prospect that the stock market will either go up or down you have one of the rare opportunities to enter into a 50/50 transaction. Unlike buying a home for investment, you won't have to fix the plumbing, deal with bad tenants, insure against loss or worry about earthquakes. Unlike starting your own business you don't have worry about the location, the foot traffic, zoning laws, or marketing. The purpose of researching and buying stocks that have increased their dividend every year a minimum of 10 years in a row is so that you can have the income from the stock even if the price declines. Remember, don't worry about the yield of the stock being low like Helmerich and Payne's (HP) 0.90%. Instead, focus on the fact that their earnings could fall 90% and still be able to increase the dividend.
Finally, in order to be sure that this information is accurate you now have to find at least one other source to confirm the information that is on Yahoo!Finance. I like to get my other source information from Morningstar.com, MergentOnline, or Valueline.com. If you only use one source for your information you might not find out that there is a mistake until it is too late.
Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like--anything like--they've performed in the past 17 [years]. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate--repeat, aggregate--would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.
Loomis, Carol. "Mr. Buffett on the Stock Market." Fortune, Nov 22, 1999. p212.
Investors who expect in aggregate, if they expect to get more than six or seven percent a year over the next ten or twenty years, I think they're likely to be disappointed.
Interview of Warren Buffett by Nightly Business Report executive editor Linda O'Bryon. April 28, 2001.
