Fundamentals

The DIA (SPDR Dow Jones Industrial Average ETF), which currently trades a 12 times earnings is historically low for the average. The weak dollar could push earnings higher as most of these companies are growing their international earnings faster than U.S. earnings. This could cause the earning to mislead investors into thinking that earnings are growing when in fact the dollar is just cheaper allowing international companies to boost profits without boosting sales.

Technicals

Looking at the chart above, you can see the current trend is almost identical to the trend that crossed 11,000 in April. The current trend has yet to pull back or have a correction and stochastics trading at 93, the market looks to be overbought. Be aware: stochastics can be oversold or overbought for long periods of time. If you believe the Dow is going higher watch around the 11,200 level. If you believe the Dow is going lower watch the 10,700 level.

Other Factors

Jobs, jobs, jobs! If the job recovery doesn’t pick up, the market will stall out. Main street is still hurting no matter what the market is doing. Retail investors don’t want to be in stocks but rather in bonds. The so called “Currency War” that some are referring could really come back to hurt Americans and the U.S. Dollar. The dropping U.S. Dollar will make import prices higher, along with higher gas prices. Remember when looking at stocks or ETFs to look at more than just stocks, take a look at what else that could affect the potential stock or ETF.

Fundamental Meaning

In a simple explanation, the market has just got more expensive. The Dow closing above 11,000 means nothing fundamentally. Don’t shy away the markets because they just got more expensive as the first company, Alcoa (AA), reported its quarterly earnings after the market close today. If earnings come in strong, then the market could be undervalued and send the market higher.

Technical Meaning

For technical traders, the Dow closing above 11,000 means almost nothing. So, what does it mean? Technical traders like round numbers. Other than that, the trend is still moving higher.

Psychological Meaning

This is probably the biggest meaning of the Dow crossing 11,000. It’s nothing more than a psychological number. With every movement higher, retail investors start feeling more and more confident about dipping into the market. Keep in mind: An inflow of retail investment usually indicates a top, whether long-term or short-term as retail investors are always the last into the market.

By no means am I calling a top in the market. Just remember that 10,000 was only about 8 weeks ago, which represents a 10% move in a short period.

The Technical Side

Looking at the chart below, you can see the trend is still intact but momentum seems to be running out. The trend is your friend and you should trade it as so. What do you do when the trend looks like it is about the break or reverse? Buy protection in the form of puts, shorting against long positions, or just go flat (no positions) until you have evidence the trend is still intact and continues to move higher or lower, whichever, the direction.

The 10 DMA on the SPX held today but looks like it might roll over. It looks like sellers want to short this market as the recent volume has been on down days.

Economic Data

Jobs, jobs, jobs. This week’s jobs number may be crucial to market direction. It will be interesting to see how traders will react to the reports. The Census jobs will skew the employment reports. If they come in worse than expected, even with the Census numbers, the market is likely to sell off. Jobs are a lagging indicator but with almost 10% of workers unemployed, it has the power to move markets. The ADP numbers that disappointed traders could give a sign as of what to expect from the payroll and unemployment numbers.

Now, might be a good time to take some profits off the table or to buy some protection.

Citigroup (C)

Citigroup is in a turn-around phase and once it pays back the government, this stock has the potential to move much higher. This stock is a longer-term trade or more like an investment, which could see a double in price action over the next few years.

SciClone Pharmaceuticals (SCLN)

SciClone is a Chinese pharmaceutical company that operates mostly in Asia but sells its primary drug ZADAXIN in 30 different countries. SciClone Pharmaceuticals recently had a big upgrade, which has driven up the price. SciClone Pharmaceuticals has many products in testing phase which once completed could drive the stock higher, easily reaching the $5/share mark.

Conexant Systems (CNXT)

Conexant Systems is a semiconductor company that recently reported a less than expected earnings loss. The stock currently has a PEG ratio of 0.33. Conexant closed today at $3.64. Although the trend is down, the stock may find support at around $3.00 as the 200 DMA will support the price. This stock is a trade and not an investment: place stop losses and be prepared to take profits quick.

Xinyuan Real Estate Co (XIN)

Xinyuan Real Estate is a Chinese property management company that also engages in residential real estate development. This stock trades at less 3.86 times forward P/E and at a PEG ratio of 0.14. If you believe in the Chinese real estate bubble, stay away from this stock or take it for a quick trade. The stock is currently selling at a discount to book value and presents a promising trade for a couple points.

Global Ship Lease (GSL)

Global Ship Lease leases container ships to various container-shipping companies with long-term contracts at fixed rates. The company is selling at less than book value with the current price/book ratio of 0.66 and a P/E ratio of 3.22. Global Ship Lease has 17 ships currently on the water with two more coming at the end of 2010.

Trading penny stocks significantly increases your risk. Most of the companies listed are microcap companies that can also increase risk. Please research these stocks before making any purchases. Consider penny stocks speculation and allocate the appropriate funds to them.

DISCLAIMER: I do own shares of SciClone Pharmaceutical.

The Psychological Effect

The psychological effect of the unemployment number crossing 10 percent could have a significant impact on trading tomorrow. If the number comes in higher than expected, the market will probably sell-off. A correction would not necessarily be a bad thing now, as the markets have come a long way since the March bottoms.

Market Looking For Direction

Recently, the market volatility has increased along with the market swings. The Dow 10,000 looks toppy and if the number comes in worse than expected, expect a quick loss in the markets. If the number comes out better than expected, the market will probably continue higher. Those who are short the markets get out of the way until the next source of bad news or lose big.

Be Prepared To Jump In Or Out

You can make a lot of money trading economic new but prepare yourself to get out quickly if the trade does not go your way. If you are trading the employment numbers, please remember your stop orders. The unemployment numbers will move the markets tomorrow. I do not recommend trading economic numbers. If you do so, play it safe and take profits or stop losses.

I traded the failed head and shoulders pattern in July, but quickly reversed the trade after breaking up through and holding the neckline. Too many people were shorting the head and shoulders pattern in July and when a few people stepped in to buy; those who were shorting got stopped out. With September around the corner, is it time to sell?

As the market seems to keep going higher, some stocks are getting ahead of the underlying fundamentals. So, why have we not seen a pullback? Whenever the market looks like it wants to pull back, fund managers, retail investors, and others are piling in with hopes of catching up to the indexes. Afraid they will miss the next move higher. The current market just doesn’t want to sell.

Looking at the chart below, the S&P 500 volume is thinning out while making new highs. Recent volume has been concentrated in just a few companies.

Although the S&P 500 is in a nice upward trend, many others and I think there will be a correction. The $64,000 question is when and how much? One thing I learned quickly in trading is that if most investors and traders suspect it, then most likely it will fail. How many times did investors and traders call a bottom on the way down to the March lows? I think the head and shoulders pattern failed because it was a one sided trade…everyone was short, including myself.

While I think a pullback is near, I remain bearishly long. My trading portfolio is currently flat while my income portfolio is loaded with preferred stocks and junk bonds. However, as the markets continue to rise, so do my stop loss orders. Maybe, September will show us what is next to come.

Looking at the chart below you can see five technical indicators that may signal the market is heading lower. Here is a list of the five indicators and why they might be saying to get out of long positions as the markets heads toward a possible correction.

1. Stochastics – looking at the daily chart below, you can see the stochastics have turned over. I like the slow stochastics but needs confirmation from other indicators.
2. Resistance – the S&P 500 is stuck around 950 for about 2 weeks now and is unable to close above 950. The market is currently in a range with 950 as the upper number. No a reason to go short but a good reason to sell long positions and look for a better entry level.
3. Volume – has slowly decreased as the market headed higher. As the market reached the 950 level (resistance mentioned above), volume is declining which is an indication that traders do not want to buy at these levels.
4. Trend Line Broken – the current uptrend line dating back to March is broken.
5. 200 Day Moving Average – this is probably one of the most important indicators on a daily chart. Although the S&P 500 has yet to break down through the 200 DMA, it may be coming. The S&P 500 just broke through the 200 DMA to the upside about 2 weeks ago and maybe in a retest of the 200 DMA; which is one reason not to get short, right yet. If the S&P 500 breaks through the 200 DMA, you may want to start hedging or placing shorts.

Is The Market Headed Lower?

DISCLAIMER: Please use your own research. This post is for informational use only and not a recommendation to buy/sell any securities.

Buy Gold

One of the safest and most popular ways to trade or protect your portfolio from inflation is investing in or trading gold. The easiest way to invest or trade gold is through the SPDR Gold Trust ETF (GLD). Looking at the chart below you can see the GLD has performed well gaining 60% over the last three years when compared to the dollar at which lost 6%. If you are looking for another way to trade gold, try looking at the Market Vectors Gold Miners ETF (GDX). Gold miners significantly increase their profits when inflation picks up; as gold moves up, mining companies profit margins expand.

Treasury Inflation-Protected Securities

Treasury Inflation Protected Securities are another way to trade inflation. ETFs like iShares Treasury Inflation-Protected Securities ETF (TIP) give you a real rate of return, do not expect to make a significant amount of money here but rather reserve the value of what you have. What happens when global inflation occurs? Try looking at global ETFs like SPDR DB International Government Inflation-Protected Bond ETF (WIP) track global inflation. Looking at the chart below again you can see TIP outperformed the dollar returning 16% while the dollar lost 6%.

Buy Commodities ETFs

Commodities are a great way to trade inflation. Commodities tend to move more rapidly than the other two ways mentioned above. Commodities ETFs like PowerShares DB Commodities Index ETF (DBC) have big price swings and should be traded and watched carefully. Buying into commodities at the wrong time can devastate a portfolio but when used right they can produce huge gains. You might want to buy the individual commodities like crude oil along with a gold ETF previously mentioned.

Whatever ETF or tracks you choose to use, do your research before getting into them. Make sure you have a good case for an increase in inflation. These ETFs will not do much good to you in a deflationary period.

Short-Term Bear / Long-Term Bull

Right now, I am a short-term bear and think the market will go lower than the current level but if you are looking for a long-term trade/investment, I think stocks will be higher in 2010. Stocks are due for a pullback from the recent rally whether it is a new bull market or just a bear market rally.

Watch Oil Closely

Oil is at levels not seen in months as it passed through $62 a barrel today before pulling back. The current economy is not ready for increasing fuel cost, which could delay an economic recovery. Keep an eye on oil and gasoline futures; they might be worth investing in.

Always have stops in place with any position.

Disclaimer: I am short the market and do own shares of ProShares UltraShort S&P500 (SDS).

Banks Dish Out Bad News But…

Friday, banks received the results of the stress test and after the close of the markets regulators shut down the First Bank of Idaho, which is the 29th bank to fail this year. Yesterday, information about the stress test results leaked out and apparently, Bank of America and Citi will need more capital to meet regulations. Even with the closure of another bank and more banks needing to raise capital, no real massive sell-off occurred.

Swine Flu Has Little Effect On Markets

This is probably one of the, if not the, biggest event so far this week that could have crushed markets. Although, the news of the Swine Flu affected the Mexican stock market, the US market seems to have shrugged it off. This could still have a huge impact on global markets and trade if the flu continues to spread but for now it is having little effect.

If the markets continue to shrug off bad news, it could present a great buying opportunity. Watch the S&P 500, if it gets above and maintains the 875 level, the markets could go for another leg up. At the same time, if news continues to get worse and as more information about the bank’s stress tests come out, a higher than expected unemployment number and other factors could push the market back down for a correction.