There’s absolutely no reason why the price of gold can’t hit $1,500 in the next six months. It might do so much sooner.

Successful speculation in commodities has been and always will be a volatile endeavor, but there’s no other capital market that experiences the bandwagon effect to the same degree. Forget fundamentals; the spot price of gold will likely hit $1,500, because it can. With a current spot price of around $1,250, gold only has to appreciate another 20% before achieving this milestone. I think it can easily do so and, along the way, make a lot of money for gold investors.

As we’ve considered before, the gains to be had from gold mining investments are mostly about incremental returns. Gold stocks have been going up for a while now and many are currently trading at their 52-week highs. From my perspective, even the most exciting Chinese stocks can’t compete with gold. The market is just that hot for the commodity.

When China and Australia report manufacturing and GDP numbers that beat consensus estimates, you know that this Asian region is doing well — much better than over here. Australia is doing great right now because of China. The country can’t find enough skilled workers, the housing market is on fire, and it is selling all of its gold and other resource production to China. With a small population base, that’s the makings of a booming economy.

Even when domestic capital markets fret about China’s economic growth, the Asian country’s economy is still growing at an almost double-digit pace. And, along with India, this is a powerhouse region that just happens to have a strong affinity for jewelry.

This is the biggest selling feature for the argument of a rising gold price. The fact is that, with these two economies growing at breakneck speed, the physical demand for gold (in manufacturing and jewelry) is getting stronger. All you have to do is look up the latest financial results of some jewelry chains in China. The first quarter was weak, but the second quarter saw a huge pick-up in sales, and the bottom half of the year is always the economy’s strongest.

When you consider the outlook for a weaker dollar, huge government debt, and huge increases in the money supply, the argument for buying gold is convincing. Add in relatively stable production of the commodity on a global basis and a solid demand base from industry and individuals in Asia, the argument for gold really does sell itself

There’s not much action in the stock market for speculators, unless you’re trading the index. Enthusiasm for stocks always goes in waves and the only group that’s experiencing any upward momentum in this market is, of course, gold and silver stocks. Other precious metal stocks are holding up well, but none are performing with the same robustness as gold.

The spot price of gold really doesn’t have to do much going forward. It only has to stay where it is in order for gold companies to produce significant profit growth this year. Even the junior producers are now participating in the current rally for gold stocks. This is a sign that institutional investors are paying much closer attention to a sector that is often ignored.

Again, enthusiasm for stocks or even specific groups of stocks always occurs in waves and the key to making big money from equities is being in the right sector at the right time. Very often, the best returns aren’t about owning individual stocks, but the right sector that’s experiencing positive industry momentum.

The mining business has that momentum now and it’s most pronounced in gold. As individual investors, however, we don’t tend to identify with the industry, because mining operations are often in foreign lands and in secluded locations. Companies have head offices in financial centers in order to more easily raise money, but everything else is on location on a remote property. Combine this with the volatility inherent in commodity prices and it’s no big surprise that most investors tend not to be interested in this group for investing purposes.

This is why institutional participation makes up most of the investors in a public mining company and why financing a mining business is tailored to meet institutional needs. This often means that a company will raise regular equity capital and attach sweeteners like warrants to an offering in the hopes of attracting more institutional money.

I believe that the gold mining business is only at the beginning of a long run of prosperity. The global fundamentals are in place to sustain high gold prices. As well, the money is there to finance production growth. It’s the best of both worlds for the industry and it’s the best of both worlds for gold equity speculators.

One of the strongest groups of stocks prior to the recent market selloff that began in the last week July was semiconductors. This sector got a strong boost from Intel Corporation’s (NASDAQ/INTC) second-quarter numbers, which were quite strong. Only now are a number of other stocks in the semiconductor group pulling back with the broader market. It was a good trade that looks now to be over. Over for the entire group.

Intel is a good benchmark stock to follow, because so much of today’s economy uses semiconductors — computers, cell phones, consumer electronics, and cars. The company’s stock price had been holding up very well until it announced that it would purchase security company McAfee, Inc. (NYSE/MFE) for $7.7 billion. The market just isn’t sure about Intel’s corporate strategy with this purchase. Investors don’t have a sense as to whether this acquisition will be a good fit.

The company is also rumored to be interested in purchasing the wireless semiconductor business of Infineon Technologies AG (NYSE/IFX), which is Europe’s second largest chip-maker. This acquisition would allow Intel to manufacture chips for Apple’s “iPhone.” This is one area where Intel’s been lacking in operations. As we all know, smart phones have been tremendously popular.

Investors seem to like Intel’s strategy with Infineon Technologies, but not the acquisition of McAfee. It’s understandable, because investors don’t like to see companies purchase other businesses that operate outside of their core competency. McAfee has an existing alliance with Intel, but the company operates to secure corporate and consumer computers, an area quite unfamiliar for Intel.

Once all this acquisition dust settles, I think that Intel could be an attractive opportunity for large-cap investment. The stock is currently yielding close to 3.5%, because its price has been hammered over the last few weeks. The bear market has certainly helped with this move. Nobody expects the company to experience any runaway growth anytime soon, but earnings are still expected to tick higher over the coming years. It’s likely that Intel’s strategy to diversify through acquisition comes down to trying to accelerate growth in an otherwise growth-less economy.

Among several other large-cap companies, I’d keep Intel on my watch list. The stock is currently trading at its 52-week low and isn’t much loved by the Street.

The best action for equity speculators (other than being short) continues to be in precious metals, particularly gold and silver. In the precious metals industry, the players are made up of large-cap producers, mid-tier producers, juniors and then the specs. These are companies that own property with mineral resources, but that aren’t currently producing.

Currently, the best action for investors within the industry is in mid-tier producers. This is where merger and acquisition activity is beginning to accelerate. Red Back Mining (TSX/RBI) just agreed to a friendly merger with Kinross Gold (NYSE/KGC), and it’s only a matter of time before large-cap producers like Barrick Gold (NYSE/ABX) and Newmont Mining (NYSE/NEM) start bulking up on mid-tiers. The reason that merger activity has been accelerating within the industry is that a lot of these companies have a lot of cash on their books with no place to put it. When you have a producing mine and a certain amount of money dedicated for exploration each year, any excess cash just sits in waiting. That’s why, when the spot price of gold is strong (as it is now), most established producers generate significant amounts of excess cash. Combined with higher stock prices, gold companies have all the currency they need to do very big deals.

Kinross Gold announced a $7.1-billion deal to acquire Red Back Mining in an all-stock deal, right when Red Back Mining was trading near its 52-week high for the year. Gold companies don’t have to worry about overpaying, because their stock prices are lofty and so are their bank accounts. The high spot price of gold makes shareholders very forgiving.

One thing that’s been detrimental to investors among large-cap precious metal producers is a lack of dividends paid by most of the players. By this I mean enough of a dividend yield, like three percent and up, for an investor to make a long-term commitment to a stock. Because the price of gold is so volatile, it’s difficult for investors to consider a big producer as a core holding, because cash flow changes dramatically with the spot price of the underlying commodity.

I have no doubt in my mind that we will see a lot more mergers and acquisitions in the gold sector over the coming quarters. There are only so many good names out there. If I had my druthers in this market, I’d own them all.

If you’re looking for some downside protection in this market, one of the most popular instruments is an exchange-traded fund (ETF) called the ProShares Short S&P 500 (NYSEArca/SH). Basically, this security tries to mimic the S&P 500 Index 100% in the opposite direction. So, if the stock market goes down, SH goes up by about the same amount. It’s the kind of security that represents some downside protection in equities.

The broader market isn’t looking too good here and you know you’re in a bear market when investors ignore good corporate news. If a stock like Intel Corporation (NASDAQ/INTC) isn’t going up coming out of a recession, then you know you’re in trouble.

We’ll have to see if the current pullback lasts, but it’s likely that the market will test 10,000 on the DJIA and 1,000 on the S&P 500. Investor sentiment seems to be critically volatile.

There isn’t a lot of action to take in a market like this. Speculating in equities is much more difficult in this kind of environment where there really is no trend. Things are up one day and down the next. Perhaps the best strategy for traders is to just play the index futures.

I still view precious metals, particularly gold and silver, as being one of the most attractive sectors in the market for investors to consider. A lot of gold stocks have already gone up in value, but the fundamentals support the current valuations. A lot of mining companies have solid expectations for production growth over the next few years. With the current global fundamentals, I just don’t see gold dropping below $1,000 an ounce. At this price point, mining the commodity is solidly profitable.

We had some strong price performances in select large-caps, like DuPont (NYSE/DD) and Caterpillar (NYSE/CAT), over the last couple of months. Companies like these are viewed as barometers on the global economy. But, the market seems destined for some near-term retrenchment. It’s partly the time of year, but also a reflection of the expectations for the future. We just aren’t seeing the kind of growth necessary for investors to want to buy stocks.

I think some downside protection in this market is a good business strategy. The broader market is highly vulnerable for the rest of this year.

It looks like that downside protection for stocks is going to come in handy. The economic data are catching up with investors and stock prices are behaving accordingly. Given the fundamentals and the outlook, it’s time to start paying serious attention to large-cap stocks. The timing isn’t right yet; but, if we get another major stock market correction, then a good buying opportunity will present itself.

The good news in this market concerns the rest of the world. Germany’s economy is improving and China’s economy is still strong no matter what the headlines say. Australia’s economy is solid. The global economy is experiencing decent growth and this will help pull us out of the doldrums when the timing is right.

Of course, the economy still has to find a new equilibrium for itself. You can’t have that much speculative excess in the system (culminated in the housing crisis) without taking years for it to correct itself. And, speaking of excess, we keep coming back to the same issue about the current state of things — debt. It’s an ugly beast that, frankly, is keeping everyone down.

We’ve been seeing a new trend in economic data over the last couple of quarters, which is that people are choosing not to spend. If there is extra money around, it isn’t going towards excessive consumption. In the near term, yes, this does have a detrimental effect on the economy. Long-term, however, this is precisely what we need to have happen. At the government level, fiscal discipline is out of control. Individually, the age of austerity is becoming apparent. It’s my hope that this trend continues and consumers choose to invest in debt reduction and their savings accounts before considering a batch of new clothes. It’s a simple formula that, in the long run, this economy needs.

Getting back to stocks, what we’ve seen in the first half of this year is a tremendous performance from big companies that have managed to squeeze almost every dollar out of their cost structures. This, on balance, has allowed for an impressive earnings performance so far. If the broader market has further downside (which my gut says it does), then the next bottom is worth paying close attention to. The economic cycle is going to reverse. It’s only a matter of time.

Back in March, I wrote in this column about growing investor interest in the agricultural sector. Like precious metals, most individual investors have no affinity or exposure to this huge industry, but I’m certain that this is one sector with excellent potential for above-average returns over the next 10 years.

A few others feel the same way. In what can only be described as a bold and opportunistic move, mining giant BHP Billiton Limited (NYSE/BHP) just announced an unsolicited takeover bid for the world’s largest fertilizer business by capacity, Potash Corporation of Saskatchewan Inc. (NYSE/POT).

The $39.0-billion hostile takeover bid is for $130.00 per Potash share and virtually all participants (except BHP) view the offer as too low. Potash operates a great business and there’s a lot of pent-up global demand for potash, phosphate and nitrogen. This is why Street analysts view the $130.00-per-share offer as too low and traders have already bid up Potash shares to just under $150.00 a share in anticipation of a bigger offer.

People usually don’t think about agriculture as a business or an investing opportunity. This is especially the case with fertilizer. While the fertilizer part of the industry is highly cyclical, it’s a product that farmers can’t do without.

I believe that we’re at the beginning of a new up cycle in the agricultural sector and there’s good money to be made from this trend. The commodity price cycle is not over and, in my view, is about to migrate into basic agriculture commodities. Already, the prices of sugar and coffee are strong. If we get a period of sustained price inflation from the huge increases in government money supplies, guess which products are going to increase dramatically in price? Food products.

I wouldn’t have an equity portfolio going forward that didn’t have some exposure to agriculture. All you have to do is look at Deere & Company’s (NYSE/DE) latest financial results. The big-green-tractor-maker is seeing strong revenue growth from its global operations. While the company said that Europe is weak right now, sales are strong in Asia, Canada and the U.S. market, where farm incomes are going up big time. There are even new Chinese agriculture stocks in the marketplace. One hot trader is China Agritech, Inc. (NASDAQ/CAGC), which sells fertilizer.

Currently, there are new funds being set up that are pooling investor money to actually buy real farm land in Canada and the U.S. In my mind, this is the biggest vote of confidence; yet, it’s a sector that’s been in the doldrums for a long time. Every industry has its heyday and, over the next 10 years, I believe that the agriculture industry is going to make big money for investors.

There are some great earnings results coming from smaller Chinese companies. Clearly, in this market, if a stock is going to move, the business has to beat consensus estimates and increase guidance for the future. Without outperformance, good companies are seeing their stock prices drift.

Most of the U.S.-listed Chinese companies that are beating consensus estimates are technology-related. Many of these small technology firms are crossing the 100-million-dollar mark in annual sales, which is a really good benchmark for these businesses to achieve. Critical mass is important for a company and for shareholders.

If you read the financial results of a lot of U.S.-listed Chinese companies, you’ll notice that many of these businesses are increasingly branching out into the rest of Asia for growth. Domestic operations continue to hold the lion’s share of revenues, but I’ve noticed this expansionary trend over the last few years and it’s a signal that Chinese management teams are more confident operating in other countries. As well, other countries are more willing to deal with domestic Chinese corporations, because their price points are usually so much more attractive.

Speaking of economies of scale, another trend in this group of businesses is the incredible profitability that some are achieving. For those companies where business conditions are good — they have a tendency to be really good, with large margins and exceptional bottom-line profitability. Western companies could only dream of such operating margins. It comes down to huge economies of scale, lower costs for raw materials and lower costs for labor, even for skilled workers.

The investment market for Chinese equity shares is very fickle. Speculators are highly volatile in the ownership of their positions. Sentiment as a group also tends to be susceptible to the broader stock market action in China, as well as the risk aversion of the domestic equity market.

With the broader stock market in China down, I think that a bottom will soon be achieved. Domestically, there are a lot of attractive businesses trading on U.S. stock exchanges for very reasonable valuations. There is a risk premium associated with this group and this is why valuations tend to be lower than similar U.S. public companies. Regardless, if you’re an equity speculator, you can’t ignore the opportunities in this group.

Like all sectors in the stock market, U.S.-listed Chinese shares move in and out of favor with investors. Currently, speculators are looking again at this sector, and rightly so. Even if China’s economic growth slows down over the next few years, the country is still growing by leaps and bounds for its size.

You should be happy with your gold investments. The group’s been going up solidly in this market and many of these stocks are now trading right around their 52-week highs.

This is one group that has real staying power in the current bear market for stocks. With gold over $1,000 an ounce, mining the commodity is profitable. Over $1,200 an ounce, it gets very profitable.

The two most opportune groups for equity speculators remain gold (silver also included) and U.S.-listed Chinese companies. There isn’t a lot of value left in the gold sector, but there’s a lot of it in Chinese stocks.

A lot of smaller Chinese companies that are listed on American stock exchanges are only now reporting their second-quarter numbers. Of the companies that I follow, most are reporting very good to excellent financial growth. About half of these companies are raising their financial guidance from previous estimates. Nowadays, that’s the only way a stock will move. A company has to impress the Street by beating itself.

The broader market is clearly vulnerable right now and the recent improvement in sentiment from mid-July to mid-August now seems to be gone. Trading volume’s been falling since June, which isn’t unusual at this time of year, but isn’t very helpful for bulls.

It will be interesting to see what happens (if anything) to investor sentiment as we get closer to the fourth quarter. If there isn’t any marked improvement towards the end of September, then I think the S&P 500 Index will be vulnerable to breaking the 1,000-point level.
Some downside protection will be a must, if you don’t already have it.

The flight to Treasuries among institutional investors is a real sign that there’s no appetite for risk in capital markets today. If investors would rather own government debt over stocks, then you know that equities are stuck in the doldrums.

So far, reduced interest rates and rates for mortgages are not working to help grow the economy. They’re only keeping things relatively stable. What we need is growth and the Fed is basically out of options. My worry continues to be price inflation down the road and that monetary policy might become too used to interest rates that are very low. We might then get a situation where the global economy builds enough inflation to sideswipe a struggling U.S. economy. In this scenario, interest rates would have to rise dramatically to try to contain prices. It’s a slippery slope and a real possibility in the next few years.

There have been some decent trades lately in the equity market. The action isn’t great, but there’s been some good price action related to earnings news from U.S.-listed Chinese stocks.

This is a group that’s worth watching now, because there is value in this sector. With a lot of these companies, those that are profitable have a tendency to be highly profitable and valuations for a number of these businesses are attractive. The trading action is nowhere near as robust as was the case a few years ago. But, despite all the headlines about China, there remains significant growth in that economy for businesses to exploit.

If you want to do yourself a favor, put together a list of all the U.S.-listed Chinese stocks that recently hit new 52-week lows. I guarantee you’ll find some attractive businesses in that list. The thing with this group is that the trading action is event-driven. This is especially the case now, because domestic Chinese equities are in the doldrums. You can’t know when some big corporate development is going to happen, but you do know when earnings are going to be reported. Trading U.S.-listed Chinese stocks around earning news is a good strategy for speculators. The returns might be modest, but these stocks can also gap up nicely as well. Don’t forget; it is a bear market for stocks.

Right now, there’s really no point in being an equity investor, with the exception of gold stocks. I think you’re better off as a near-term trader, playing the news. There’s just too much that can go wrong with the economic data. Just look at the news from the Fed. Sentiment in this market is changing on a dime.

Now that second-quarter earnings season is over, all the equity market has left to trade on is global economic news. While it never used to be this way, China’s economic reports are affecting domestic equities. I still have a tough time dealing with this reality considering how fundamentally different the U.S and Chinese economies are. But, if that’s the way the market wants it, then there’s no point in ignoring it.

No doubt, equity investors are desperate for growth and they are willing to look anywhere to find it. There is growth in the mining business and there is growth in China. The key, of course, is always the risks.

I’m amazed at the spectacular performances currently underway by some key Dow stocks. A number of big, brand-name companies are hitting new 52-week highs in this market, namely E.I. du Pont de Nemours and Company (NYSE/DD), also known as DuPont, and Caterpillar Inc. (NYSE/CAT) — both up about $10.00 a share in the last month. 3M Company (NYSE/MMM) is looking very strong and even AT&T Inc. (NYSE/T) is showing surprising price strength on the stock market.

But, the price strength is not uniform. Just like in the Dow Transports, some component stocks are doing well, while others are not.

It’s very difficult to make any bold calls as to what might happen to the economy and the stock market. A case can easily be made for both the bulls and the bears. The recent positive change in investor sentiment could stay with us a while longer.

In this market, I’d be a value speculator, but not a new long-term investor. I would not overpay for any equity security with the possible exception of some speculative gold trades.

If you get the opportunity, pull up a 20-year stock chart on 3M. This Dow stock is worth about $63.0 billion at current prices and, according to the chart, looks to have made a full recovery from the subprime-mortgage-induced meltdown. But, you’ll also notice that the stock hasn’t really done anything for the last seven years. It’s just bounced around in a big trading range. Without the company’s dividend payments, stockholders in 3M would have lost money due to inflation.

There are a lot of stories in the marketplace similar to this one. A number of big companies have seen their stock prices make what I refer to as a full price recovery since the financial crisis. But, even with this solid price performance, most of these stocks are trading for about the same money they were a decade ago. This begs the question: is it worth even being in equities at all going forward? With this kind of track record, my answer is: only as a select speculator.

A buy-and-hold investment strategy worked tremendously well in the 80s and 90s. In the last decade, it has proven to be a failure. Without dividends, it would have been a real failure. For the amount of investment risk inherent in stocks, the last decade hasn’t been worth the effort.

Speculators like to move in and out of positions. Investors tend to buy and hold. I’d be a speculator in stocks, but not a long-term passive investor. Investment risk is too high and expected returns are too low.

The single best strategy a passive investor can employ in this market is to sit on cash and wait. Get out of debt and save for the future. Returns on cash are very small right now, but so is investment risk.

We’re in a consolidation phase for both the economy and the stock market. It will be a while yet before a new economic trend takes over. Frankly, I can see the day in the next several years where the interest rate on cash deposits will outweigh the risk premium associated with stocks. There’s a reckoning going on and we are going back to basics.

When things are unclear, I like to go fishing. Preferably, I like to go fly fishing, but I’m willing to make allowances depending on the location. Having recently gone bass fishing, it occurred to me on the water that the outcome for the stock market was just as uncertain as catching a bass. Things could go well depending on the weather, the right, enticing bait, and whether there are actually fish located where you’re fishing. Similarly, the stock market could go up depending on the right investor sentiment, the right conglomeration of news, and whether earnings support the fundamentals. Right now it’s tough fishing and the weather isn’t looking good.

I think it’s still too early to express a definitive view in the current equity marketplace. We’ve had good corporate news and good economic news. Yet, just when things look like they’re turning a corner, we get the opposite news and equities retreat.

No, we’re still in a consolidating bear market for stocks. The system is still working at balancing itself out and we’re only at the end of the beginning of this cycle. Accordingly, there isn’t much new action to take.

The rest of 2010 should be difficult, both in terms of corporate developments and economic fundamentals. I believe in the need for some downside protection in this market and I also believe that exposure to gold is a virtual necessity, even if we do go through a period of price stability or deflation.

We’re harping a lot on gold these days and I know that a lot of individual investors are reticent about these kinds of investments. It’s true that precious metal investments aren’t quite the same as buying a stream of earnings based on the sale of a manufactured product. But, as you already know, there isn’t much growth out there no matter what the industry. With the current fundamentals, I’d rather bet on production growth by the ounce of gold, even with a fluctuating spot price. It’s a business model that beats all others right now.

We are starting to see industry consolidation in the gold business and this is a sign that business is good among the larger players. Cash flows are up, debts are down and profits are plentiful. If you’re still sitting on the fence about gold, that’s okay. There’s no rush to do anything in this market. I would say, however, that a gold position represents both upside and downside protection in a market that’s caught in a funk.

Picking stocks is always like bass fishing. You never know how things will turn out. But, as an equity speculator, the job is to take in as much information as possible and express a view with the highest reasonable likelihood of success. It’s the exact same thing as tossing a hook in the water.

Finally there’s some good news on the corporate revenue front. A lot of big companies reported solid earnings growth in the second quarter, but revenues haven’t been inspirational. The Dow Chemical Company (NYSE/DOW) just reported very solid numbers and this is a good sign for the industrial economy.

The company reported that its revenues in the second quarter this year grew to $13.6 billion, representing a solid 26% increase over the same quarter last year. Dow Chemical experienced a seven-percent increase in sales volume and a 19% increase in prices. This combination of sales and price growth is a good indicator for the industrial economy.

Dow Chemical experienced double-digit sales gains in all geographic areas (31% in North America), and the company expects a sustained global economic recovery led by Asia.

The company’s numbers actually fell short of consensus estimates just slightly. But, in this market, who cares? A 26% gain in sales for the largest chemical company in the U.S. is big news as far as I’m concerned.

We are experiencing an uneven economic recovery and not all industries are participating. It won’t be until the housing sector really stabilizes and all the foreclosures are worked through the system that the economy will be on solid footing for growth. The good news is that monetary policy is still onside and that interest rates remain low.

It would seem that investor sentiment has had a change for the better recently. While investors have been more willing to forgive less-than-stellar economic news, we can’t fool ourselves about the trading action. The broader market rallied in June, and then pulled back sharply. Also keep in mind that trading volume isn’t very robust. I don’t know where sentiment is going to take the current equity market but I’ve learned never to cry wolf. 

A company like Dow Chemical is a benchmark stock to follow. E.I. du Pont de Nemours and Company (NYSE/DD), better known as DuPont, also reported very good second-quarter numbers and cited volume growth along with increasing prices as reasons for its improvement. Most economists, however, expect the U.S. economy to slow in the second half and, while economists are usually proven wrong, the consensus seems probable.

If there wasn’t growth in Asia, then I think U.S. corporations wouldn’t be reporting the kind of numbers we’ve seen this second quarter. We’re definitely on the right track, but we’ve got a long way to go before we can say things are back to normal.

I think it’s time that serious equity speculators put Chinese stocks on their radar screen. Domestic Chinese equities have been doing terribly this year. Just pull up a 10-year chart on the Shanghai Composite Index and you’ll see the downward price action and volatility.

Chinese equities had two spectacular up years beginning in early 2006 until late 2007. From the low, the index appreciated about sixfold. Then, in 2008, everything came apart. The market gave up almost all of those gains in one year’s time. In 2009, the market came back somewhat, but has now given up most of last year’s progress. Chinese equities continue to prove to the global marketplace that extreme price volatility is now the new normal and that the business cycle can be harsh.

I’m putting domestic Chinese equities on my radar screen because of the poor trading action. It’s possible that Chinese stocks may find a bottom this year.

U.S.-listed Chinese stocks have also been hit by weaker price action. Investor sentiment for these shares has dwindled because of the action in China, but also due to the risk aversion that’s inherent in a bear market. Frankly, there is a lot of good value in these shares right now.

But, when you’re speculating in a secondary market, the whim of the marketplace is the only arbiter of prices. Just because a company is trading for an attractive value on a stock exchange doesn’t mean that you’re going to make any money. The effect is even more pronounced in a bear market. It is, however, worth watching these companies, waiting for the right time to pounce.

A lot of experts have pronounced over the years that you can’t time the market, but this is precisely the most important factor in determining your returns. Timing is virtually everything if you’re in the equity speculation business.

It’s fair to argue that China’s economic growth will be robust over the next 10 years. A well-known Chinese bank is likely to be much larger and more profitable a decade from now due to population growth and expansion. But, this doesn’t mean that now is a good time to invest in such a security.

I like when markets go up and down in big moves over short periods of time. I like waiting and watching for extremes. Currently, Chinese equities are falling, as the economy attempts to correct itself from a long period of overgrowth. If the current trend holds, the Shanghai Composite Index could soon be trading at a key technical level, which is the low it set in late 2008. This to me will be a very interesting level at which to consider going long the Chinese equity market.

One thing you can’t do in the stock market is control the amount of returns you can generate. Dividends from solid companies provide a level of security, but look at what happened to BP. Anything can happen to any big company at any time. If you are invested in stocks, you are taking a big risk.

Risk isn’t only the other side of the equation; it’s also a factor that you can help control by choosing your investments carefully. I know a lot of people with a lot of money and I can tell that, once they accumulate a lot of wealth, risk-avoidance becomes a top priority. The problem is that it’s difficult to beat the rate of inflation without taking on some risk with your investments. And when you have a lot of money, you have a lot of salespeople calling you trying to sell you things.

Probably, the single best wealth-creating opportunity for individual investors in the past has been real estate. The recent housing crisis aside, you likely won’t find a wealthy investor whose portfolio doesn’t include some real estate.

Investing in real estate is a numbers game. You need population growth, an attractive location, and attractive financing. The cost of building and renovating will continue to go up, and building codes will increase. There’s little you can do to control your risk in real
estate, except not being overleveraged and owning the right asset in the right location. Time, of course, is always your greatest asset in this sector. And we may soon be getting to that time when real estate is a good value again.

Getting back to stocks, if you look at the long-term charts of the main index averages, it’s quite apparent that the actual periods of significant capital appreciation in stock prices are short and few. Most of the time, the market is trading in mediocrity. This makes it very difficult to be a consistent winner at speculating in stocks.

We’ve been talking more and more in this column about having some portfolio insurance for your equity holdings. Some exposure to gold is a good start. This should already exist. The way the market is trading lately, I think a short position would be a wise option to
consider. I like the fact that the technology and railroad industries are saying that business is getting better. The problem is that investor sentiment is not.

If the Dow Jones Industrial Average breaks 10,000 in a meaningful way, then I think we’re in for real trouble. Right now, decent earnings are holding the index above this level. I get a sense in the marketplace that investors are anticipating an all-or-nothing type of outcome for the rest of year. Either the market’s going to tank or it’ll recover to Dow 12,000. Michael Lombardi has been writing a lot about the bear market rally still having life left. Combine that with my thoughts and maybe the market can do both: rally close to 12,000 and then come crashing down again.

One of the best companies to follow is E.I. du Pont de Nemours and Company (NYSE/DD), more commonly known as DuPont. This 208-year-old company is perhaps the greatest economic barometer due to its diversified global operations. If you want to know what’s happening in the industry, then all you have to do is follow DuPont.

The company just reported great second-quarter earnings and the numbers handily beat consensus estimates. This is a real accomplishment in this economy.

DuPont reported outstanding sales growth of some 26% to $8.6 billion in the second quarter. At a time when most large companies are struggling to generate any sales growth at all, this is a tremendous performance. Not only did the company experience higher selling prices in most of its markets, total volume of products sold grew a solid 21%. And the good news is that the company’s domestic U.S. operations experienced solid growth. Total U.S. sales grew 18% to $3.6 billion. Asia Pacific operations grew 47% to $1.8 billion.

Naturally, this strong performance translated right to the bottom line. Net income tripled to $1.2 billion, compared to 400 million dollars in the same quarter last year. And, to top it all off, DuPont increased its earnings guidance for all of 2010 to between $2.90 and $3.05 per share, up from the previous estimate of $2.50 to $2.70 per share.

I always make a point of following DuPont and its financial results. I don’t own the stock, but what the company says about its operations is telling because of all the businesses it operates: chemicals; agriculture; electronics; and automotive.

But, for all the good news at this particular company, the equity market isn’t much enthused. Investors are caught in a funk, just like consumers. We’re in a bear market and sentiment just isn’t strong enough to carry good news. That’s why some downside protection in this market is a must.

I’m worried about after earnings season, when equity investors will have to rely solely on economic data. Sentiment is already fragile and the stock market seems only willing to act mostly on bad news while ignoring any good news. We’re getting technical bounces in stock prices, but I think we’re still in for this large trading range around Dow 10,000. If corporate earnings aren’t good in the third quarter, then we could be talking about a new consolidation around Dow 8,000. It’s a bear market, so anything could happen.

I recently came across a few attractive technology stocks that would be considered small- to medium-cap in size. They operate in the semiconductor industry and are still riding Intel Corporation’s (NASDAQ/INTC) coattails. Still, I really prefer gold and silver in terms of a focused equity strategy for speculating at this time. While there’s no runaway market for any sector in this economy, mining stocks offer the best bang for the buck.

Previously, it was U.S.-listed Chinese stocks that were the most attractive sector for speculators. While many of these companies are still growing and highly profitable, weakness in domestic Chinese equities and an attempt to deleverage the Chinese economy have taken the steam out of this sector. This year, I figure there will be some very attractive U.S.-listed Chinese stocks in which to consider buying low.

Previous to the hype surrounding Chinese stocks, alternative energy was the hottest sector on Wall Street. Everything from pollution control technology to solar panel manufacturers was experiencing serious trading action from institutional investors.

These thematic changes to investor enthusiasm do illustrate just how fickle the marketplace is for stocks. If you’re not hot — you’re out. Of course, everything is much more difficult for equity speculators in a bear market. Time horizons for expected returns are always longer.

I like the idea of speculating in gold, silver and other precious metal producers. While you have the risk that the spot price of the underlying commodity will weaken, you can be fairly certain of expected production growth. With gold well over $1,000 an ounce, producers of the commodity are making money hand over fist.

One of the best ways to learn about which groups of stocks are outperforming is to review which companies are hitting new stock price highs on the market. This is also a great way to discover which market sector might be the next big thing.

Even on a small scale (like wanting to make one or two near-term trades), this strategy increases your odds of making a profit on a position. When Intel reported a very good second-quarter performance, almost the entire semiconductor group moved nicely higher. Several small companies operating in related business saw their stock prices experience very strong price moves. These were incremental return trades due to some big, brand-name news. Even in a bear market this kind of trading can make money.

For years, I’ve always made a point of reviewing the daily stock market action. Which stocks hit new 52-weeks highs and which made new 52-week lows. Top net gainers, biggest percentage movers, and which companies experienced substantial new trading volume. It’s a simple procedure you can do yourself on a daily basis and it really helps hone your market view, as well as helps you come up with new trading ideas. Now, more than ever in this market, we need all the help we can get.

It’s a tough stock market to make any money from. With sentiment changing almost every day, one might as well just trade index futures. In this market, the likelihood of owning a runaway winner is so small that it would really come down to blind luck.

The timing isn’t right yet to be making any bold moves in equities. You can trade around earnings news, but the returns are small. We’re likely to get more of the same from the broader market — a wide trading range around Dow 10,000. Once earnings season is over, however, the market will only have economic data to trade on and, so far, this news hasn’t been good enough.

I do feel that some sort of portfolio insurance is a useful strategy to consider over the next couple of quarters. The fact is that investor sentiment remains locked in a bearish mindset. Companies are generally saying that business is getting better, but investors don’t believe that they can outpace the economy. Revenue growth needs to be more robust for any stock market rally to sustain itself.

Right now, there are a number of attractive large-cap stocks that offer high dividends to shareholders. These stocks are the most attractive in this market on a relative basis. For speculators, you can trade the index and you can trade precious metal producers. You probably would be better off investing in real estate.

I’m not hugely bearish on stocks, but I see mediocrity in the numbers. No growth equals no growth, and this applies to revenues, earnings, and stock prices. Sitting with money in equities in a no-growth environment only works if you collect big dividends. In the absence of a bull market, equities don’t really make a lot of sense. Mind you, there isn’t a lot else to consider if you have money to put to work. Cash and bonds certainly don’t pay much.

A lot of investors are sitting on the sidelines waiting for a catalyst to take action. While there are always big risks out there, I don’t think we’re going to get a big catalyst anytime soon. Both the economy and the stock market need more time to balance themselves out.

07/21/10 — So far, we’ve not had any confirmation of the strength of Intel Corporation (NASDAQ/INTC) in the technology sector. This is a telltale sign that the economy’s in a state of lackluster growth. The technology numbers aren’t saying that the economy’s in trouble necessarily, only that it isn’t really going anywhere.

The financial results for IBM (NYSE/IBM) are always an important benchmark, because this company sells a lot of computers, but also a lot of information processing services. It is one of the best benchmarks for the technology sector.

The company reported a two-percent increase in quarterly revenues and a nine-percent increase in earnings. This was under the market’s growth estimates. Importantly, the company disclosed that the value of its service contracts dropped 12% during the quarter to $12.3 billion. IBM’s getting hurt by weakness in the euro, as the company does most of its business outside the U.S. And, like most big businesses, IBM has only been able to grow its earnings through strong cost controls. This isn’t sustainable if revenues don’t accelerate over the coming quarters.

We also saw results from Texas Instruments Incorporated (NYSE/TXN) that didn’t come up to Wall Street’s expectations. The company’s second-quarter sales grew strongly, but not enough to impress investors. Management did say, however, that it expects a strong third quarter this year.

It’s a mixed bag of results so far this earnings season and this isn’t surprising. Some businesses are growing, while others are not. What is crucial is how investors are interpreting the numbers and, so far, negative sentiment prevails. The stock market seems bent on breaking below Dow 10,000. The only question is: how low will it go?

I think that investors need to consider some protection for their equity portfolios. Anything can happen to the markets, of course, but it just doesn’t seem very plausible that a new stock market rally will develop anytime soon. You can short the market doing something as simple as buying an ETF. I never liked going short, but I see how useful it can be in a diversified portfolio.

07/19/10 — The general uneasiness of the stock market is blatantly apparent and even good earnings news can’t seem to sustain any lasting interest from buyers. Clearly, the bear market reigns.

So far, corporate earnings are holding up well, but the numbers are padded by extreme cost control. Top-line growth just isn’t happening, and this is worrisome for the next 12 months. Unless we get more robust revenue growth, the earnings picture will slowly deteriorate.

There continues to be a lot of talk about two very real scenarios for the economy — a double-dip recession or a lost decade. I’m in the camp that feels that a decade of very slow growth is more probable given the situation. We have a lot of issues to work through before we can even find a new equilibrium to start from.

For individuals, the two main issues to be dealt with are housing and employment. For governments, the two main issues are spending and debt. Really, these issues are the same for both governments and individuals. They’re just on different scales.

As we all know, the housing market doesn’t operate like the stock market. Housing booms and busts take a lot of time to work things out. And, so do debts and deficits. If governments decide that they want to be more prudent with their finances (as they should), then this will have an impact on the economy. We can’t have it both ways. In my view, the housing market has only just begun to right itself after the initial shock of the subprime mortgage meltdown. We’ve got a long way to go before inventories, foreclosures and prices find the right balance, before another upturn in the housing market develops.

Low and slow. That’s a reasonable expectation given the current state of things.

There are also a lot of potential shocks out there that could contribute to a slow growth decade. The sovereign debt issue in Europe is not over. The numbers really aren’t getting any better. The politicians have only begun thinking about the issue. It’s a great first step, but investor sentiment can still easily turn on the euro. This currency risk has enormous ramifications for you and your daily life. In addition, the world’s second largest economy (China) is in the process of deleveraging itself both in terms of monetary and fiscal policy. You can see this reflected in Chinese equity markets. In a bid to keep a lid on inflation, China’s economic growth is likely to come under pressure over the next several years. Whether we like it or not, this affects our economy.

It really doesn’t matter what the prediction is. An individual’s best strategy in these economic times is the elimination of debt if possible. After that, you can trade the market’s action, but don’t expect any major new trends to develop.