On the charts, the DOW and S&P 500 are managing to hold above key support levels at 10,000 and 1,040, respectively, but not before closing below these key technical levels in the recent sessions.

The bears appear to be in control, while the bulls are trying to hang on and minimize the losses. The blue-chip DOW closed below 10,000 on August 26 for the first time since July 6, when the index fell to 9,686.48. In the previous decline, the DOW held below 10,000 for five straight days from June 29 to July 6, prior to rebounding. The DOW has broken below 10,000 in five of the last six sessions to August 31. In our view, the breaks are worrisome and could point to a more sustained move below 10,000.

With four months remaining in the year, stock markets are negative and under selling pressure. Stock markets have closed lower in 17 of the last 25 sessions to August 30. The bias is negative, as stocks search for a bottom. Until we see it reach one, the downside risk remains high. The overall bias at this time is down, as reflected by the current level of the indices below key moving averages and chart tops. The key will be the ability of markets to hold as we move forward. I continue to be cautious due to a fragile technical picture.

The near-term technical picture has turned more bearish with weakening Relative Strength as of August 31.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and are fighting to find some support. The Relative Strength is weak.

On the charts, the stock indices are trading at a crux, below the key 50-day moving average (MA) and 200-day MA, along with the tops on the charts as follows:

Russell 2000 — 675
NASDAQ – 2,320
DOW — 10,650
S&P 500 — 1,125

The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, I continue to see a “death cross” on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator. I’m not trying to scare you off, but just warning you to be on alert.

I continue to be cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.

China overtook Japan as the world’s second largest economy in the second quarter and, in about 15 years China is expected by pundits to become the world’s largest economy. In the second quarter, China reported GDP of $1.34 trillion versus $1.29 trillion for Japan, but far lower than the $15.0 trillion GDP in the United States. China is experiencing continued growth in its per-capita income and spending. Consumer spending only accounts for less than 20% of China’s GDP, compared to around 70% in the U.S. The Chinese need to spend and this is what domestic and foreign companies are hoping for to help drive some growth.

Clearly, in the emerging markets of Asia, it has become a tale of two cities. While China continues to report double-digit GDP growth despite increased concerns of some slowing, Japan reported a weak 0.1% rise in its second -quarter GDP and continues to be impacted by decades of stagnant growth.

In reality, while Japan has faltered over the past two decades, China has used the opportunity to put itsmassive cheap labor workforce to use and create colossal manufacturing capacity for the world’s manufacturers looking for cheap labor and lower costs to produce goods.

As we said, China’s GDP is predicted to slow to the high single digits. The country’s GDP is pegged at 9.2% in the third quarter on dwindling stimulus, according to The State Information Center. China could see two straight quarters of declining GDP, albeit the growth is still far ahead of the U.S. and Europe. In the first quarter, China reported impressive GDP growth of 11.9%, and 10.3% in the second quarter. Pundits estimate GDP growth of eight percent at the end of 2010.

Evidence of slowing in China was demonstrated by the slowest increase in industrial output in July of 13.4% year-over-year and a slower rate of Foreign Direct Investment (FDI) in July. The FDI still grew at a 26.2% year-over-year at $6.92 billion in July, but well off from $12.5 billion in June.

China is also working on reining in speculative loans that have driven up property prices to bubble-like conditions. The fear is that a real estate collapse could wreak havoc on the Chinese banks. While property prices jumped 10.3% in July, its 14th straight month of gains, the increase was slower.

For some, the reality of playing the Chinese capital markets involves excessive political and economic risk. However, as we have said, you need to be well-diversified, which would enable you to play some Chinese growth stocks, especially those of the small-cap variety.

Our Chinese stock recommendations, while losing some ground, continue to show some strong gains. We remain long-term bullish on China, but you should watch for the short-term volatility.

On the chart, the Shanghai Composite Index (SCI) rallied after declining to below 2,350 in early July. The chart looks more positive now than the same time last month. Since then, the SCI has broken above its 20-day moving average (MA) of 2,636 and 50-day MA of 2,550 on a rising MACD. The 20-day MA has also broken above the 50-day MA, which is bullish, but remains well below the 200-day MA of 2,912. The SCI is in a sideways channel between 2,575 and 2,700. A strong break above could drive the index towards the 200-day MA.

It continues to be risky investing in Chinese stocks, but we know that, in the longer term, patience will pay off for us. We continue to favor China for growth investors who have long-term views.

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.

Years ago, we published an investment report on how Alan Greenspan and the government had a secret plan to devalue the U.S. dollar to make the ever-rising national debt of the U.S. more palatable. Was it really a secret plan?

I’ll never know. But if we look at the policies of President Obama’s administration and the current Fed chairman, coupled with the fact that selling U.S. Treasuries has never been so easy, one has to say that this “plan” is being played out quite well.

The government itself says that our national debt is $13.0 trillion, headed to $20.0 trillion by the end of this decade. I read one report yesterday that pegs our off-balance sheet debt (debt not on the books of the U.S. government), which includes old-age security, welfare, pension benefits for government employees, and other future government obligations, at over $100 trillion.

U.S. Treasuries are flying off the shelf, and we are very lucky as a country that we do not have to pay onerous interest charges on the debt we are issuing. In fact, people buying U.S. T-bills are basically not receiving a return at all, if you can call 0.15% on a three-month T-bill a return on investment. Investors are flocking to U.S. Treasuries for security purposes…they know the U.S. government will pay them back.

A chart of the U.S. dollar compared to a basket of the world’s most popular currencies tells the true story. The U.S. dollar has been declining for years against other world currencies.

So, the fool foreigners financing our debt through the purchase of U.S. Treasuries are not only receiving meager interest payments on their money, but they are also seeing less capital coming back when these T-bills mature, as the U.S. dollar keeps declining in value against most other world currencies.

Hence, the secret plan is working very well. We’re piling on debt to save and jump start the economy, knowing that, in the years ahead, as investors eventually shun U.S. Treasuries, our debt obligations will be “easier” and less costly to actually repay.

Here’s an example:

A Canadian institution bought U.S. T-bills several years ago, when it cost $1.20 Canadian to buy one U.S. dollar. Today, when that T-bill matures, the Canadian institution only gets back $1.04 U.S. per Canadian dollar invested, because the Canadian dollar has risen in value (like most currencies) against the U.S. dollar through the years. Regardless of whether this is planned or not, it’s very smart on the part of our government.

Every country wants a cheaper currency, because it makes debt repayments more palatable while lowering the cost of exports, the latter being something domestic manufacturers welcome with open arms. The U.S. is winning “the war of the declining currency.”

But, as the U.S. dollar continues to fall against other world currencies, only one currency is really benefiting, and that currency is not a fiat currency like the yen, yuan, or euro. That currency is gold.

The writing is on the wall: raise as much money as possible to finance our debt, and drop the value of the U.S. dollar to make those debt repayments “cheaper.” Gold benefits under such a scenario, because gold is sold principally in U.S. dollars. Is it any wonder the gold mining stocks are the only stocks rising these days?

Michael’s Personal Comments:

Investors are waking up this morning to a Dow Jones Industrial Average below the 10,000 level for the first time in weeks. Out of the last six trading sessions, the Dow Jones has been down five of them.

But it’s not just the stock market that has been getting whacked this week. Most commodities are down or flat, the U.S. dollar has taken a beating, and everyone is running to the safety of U.S. Treasuries.

Remember that old song with the lyric, “only fools rush in,” made famous by Elvis? Welcome to the U.S. bond market of 2010 — where fools are rushing in. I would not be a buyer of bonds at this point in the economic cycle. All bubbles burst, and the bond market is not exempt to bubbles.

The stock market is severely oversold and due for a bounce.

Where the Market Stands:

The Dow Jones Industrial Average opens his morning down four percent for 2010. I continue to believe that stocks are trading in the confines of a bear market rally.

The halfway point between the Dow Jones’ multi-year low on March 9, 2009, and its subsequent high earlier this year is approximately 8,850. Hence, for those readers who have written asking when I would consider the bear market rally over, technically speaking, the rally that started in March 2009 will not be over until 8,850 on the Dow Jones is decisively broken.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.

These are nervous times for traders and investors. Buying could leave you vulnerable for further downside moves, while sitting on the sidelines could see you miss rallies. My feeling is to remain prudent. Don’t worry about missing any rallies, as I’m not convinced that gains are sustainable at this point. This was demonstrated on August 21, when stock markets surged, but then foundered in the three subsequent trading days.

The stock indices remain below key technical levels. I feel that the key will be the ability of markets to hold as we move forward. As such, I continue to be cautious due to a fragile technical picture.

I do not sense any enthusiasm or interest in the market, as the trading volume continues to be muted. All eyes will be on the Durable Goods Orders on Wednesday and revised GDP on Friday. The Durable goods will be critical, as they indicate spending on non-essential goods, such as big-ticket items like furniture and appliances. Consumers feeling confident will tend to spend more on big-ticket items. Moreover, weakness in housing also pressures the demand for furniture and appliances, as homeowners will tend to not upgrade. The overall impact is on GDP.

Technically, the move below the key moving averages is worrisome in the absence of support. The Russell 2000 may test support at 600, as it precariously holds on pressure by economic concerns. The index fell as low as 601.69 on August 23.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and fighting to find some support. The Relative Strength is weak.

On the charts, the stock indices are trading at a crux below the key 50-day and 200-day moving averages (MAs) along with the tops on the charts as we discussed in our last visit.

The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, I continue to see a death cross on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator.

I remain cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.

Be careful, sit tight, and refrain from chasing gains, as I continue to question the sustainability of upside moves to the global market risk. Things should become clearer in mid-October, when the third-quarter earnings are due out.

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.

There is a bubble forming in today’s economy and I believe that bubble is in U.S. Treasuries. Yesterday, the yield on 10-year Treasuries fell to 2.5% for the first time since 2009.

Why the big rush to U.S. T-bills?

A one-word answer explains the situation: fear. The fear is that the anemic U.S. housing market will not recover, and thus the U.S. economy will lapse back into recession.

Despite the rate on a standard 30-year mortgage sitting at only 4.53%, according to the National Association of Realtors, purchases of existing homes fell 27.2% in July 2010 from the previous month. And that has fear setting back into the stock market.

But I see the fear as opportunity. Here’s why:

The popular S&P/Case-Shiller 20-City Index says that U.S. home prices fell 33% from mid-2006 to April of this year. This is the biggest decline in home prices in the U.S. on record. To give you an idea of the magnitude of the fall in prices, during the Great Depression, home prices fell only 15% in the U.S.

With the housing market backtracking, the S&P 500 has hit a five-week low, with the popular stock index’s price/earnings multiple falling to 14, matching the price/earnings ratio of the Dow Jones Industrial Average for the first time in weeks.

I see the decline in the U.S. home price market and the fear surrounding a further price decline in housing as an opportunity for investors to buy at bargain basement prices. Yes, home prices in the U.S. have fallen during this recession by more than double the rate they fell during the Great Depression; but remember unemployment during the Great Depression hit 25%. Today, unemployment in the U.S. is less than half that, at 10%.

Further, during the Great Depression, about 10,000 banks went under in the U.S. The Great Recession that started in 2008 is expected to claim 1,000 U.S. bank failures before the economic contraction we are experiencing is over — and depositors at those banks will have their deposits protected by the FDIC.

Only a few short decades ago, the U.S. government created the Resolution Trust Corporation to deal with all real estate U.S. thrifts and savings institutions foreclosed on, as oil prices crashed in 1986 to about $10.00 a barrel level. I remember those days very clearly.

No one wanted to buy U.S. real estate in the later part of the 1980s because no one believed real estate prices would ever come back. Boy, were the great majority of investors wrong. The smart money made a fortune in the late 1980s buying foreclosed-upon real estate from the banks and RTC. I see that opportunity again today for risk-takers.

This year, U.S. banks will foreclose on about one million homes in the U.S. The “smart” money is buying foreclosed real estate, as property prices continue to be depressed across America. Meanwhile, the “scared” money is chasing U.S. Treasuries for meager returns.

Who do you think will be the big winners in the end?

Michael’s Personal Comments:

Ever hear of a fellow named Douglas Yearly Jr.? Didn’t think you did.

Douglas is the CEO of Toll Brothers, likely the largest builder of luxury homes in the U.S., with an average price per home in excess of $500,000. Toll, which has been around for over 40 years, lost over $1.0 billion since the U.S. recession started.

But, even with U.S. homebuilder confidence at its lowest level on record, Yearly is buying land at dirt cheap prices…and plenty of it. Since January 2010, Toll Brothers has invested 250 million dollars in land acquisitions at bargain basement prices.

I believe that time will prove Yearly to have been a very smart fellow.

Where the Stock Market Stands:

The Dow Jones Industrial Average starts this morning down 3.7% for 2010. Above, I talked about the fear gripping the stock market these days.

While I’m long-term bearish on the general economy (due to too much government debt, a falling U.S. dollar, the U.S. Treasury bubble, and higher interest rates ahead), I have yet to see evidence that the bear market rally that started in March 2009 is over.

Yes, the rally has stalled for several months now, but the rally has not reversed or ended.

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

Investment money has a tendency to run to the place where it has the potential for the highest return.

In the late 1990s, we saw investment money run into tech stocks as the NASDAQ hit 5,000 (only at 2,209 today, 10 years later). In the mid-2000s, we saw money run to real estate as property prices boomed on interest rates that were low and easy-lending policies (residential property prices have fallen about 30% since then).

When the Great Recession hit, “money” got scared and ran to the safety of U.S. Treasuries. But with so much money chasing T-bills, bond yields fell to their lowest rate of return on record. Money isn’t running to gold yet, because most investors have yet to realize there is a bull market in gold bullion prices (but this will eventually happen, propelling gold prices much higher than they are today).

By our estimates, the stocks that make up the Dow Jones Industrial Average will collectively pay $280.00 in dividends this year. Based on yesterday’s close, the Dow Jones Industrial Average is yielding 2.7%.

Compare the 2.7% dividend yield of the Dow Jones Industrial Average to the three-month U.S. T-bill yield of 0.15%, or the three-year U.S. T-bill yield of 0.77%, or even the five-year U.S. T-bill yield of only 1.42%, and suddenly stocks do not look expensive.

Historically, bull markets have ended when the dividend yield on stocks has fallen below three percent and bear markets have ended when stock dividend yields have hit six percent. However, we must realize and acknowledge that these old guidelines were based on normal interest rates. A Federal Funds Rate of zero and 30-day Treasury rate of 0.15% are far from normal.

If we look specifically to return on money, stocks today, based on dividend yields alone, offer investors the biggest bang for their buck. As the U.S. economy continues to improve, as we understand that high unemployment and low residential housing prices are here to stay for years, and the fear of such turns into acceptance of “the way it is,” the yields on stocks will look more and more attractive.

Stock market advisors in 2010, several of whom are calling for stocks to crash, are failing to look at the various returns on money investors have available to them. Stock dividends yields today, compared to the yields on other forms of investment, are offering support and value for stock prices.

Michael’s Personal Notes:

The second quarter of this year marked a very significant point in world economic history: in the second quarter, China surpassed Japan as the world’s second largest economy.

China’s gross domestic product in the second quarter of 2010 came in at $1.34 trillion. U.S. GDP is about $3.5 trillion a quarter. China was already the world’s largest automobile market and the world’s biggest exporter.

A report from Price Waterhouse Coopers says that China will take over from the U.S. as the world’s largest economy by the year 2020. Goldman Sachs believes will happen in 2027.

But does the timing really mean anything? No. The fact is that we will see the U.S. dethroned as the world’s biggest economy in the short years ahead. For almost a decade now, I have been writing about the importance of investor portfolio exposure to the growth in China. It’s not too late to seriously consider diversifying your portfolio to ensure you participate and benefit from the unprecedented growth in China.

Where the Market Stands:

Yesterday, the Dow Jones Industrial Average turned just about breakeven for 2010. The market is in a narrow trading range. While most of the old big-name advisors are very bearish on stocks, I continue to believe that we are in a bear market rally that started in March 2009 and that the rally still has more time to run.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “suckers” rally developed in November 2007 which Michael quickly classified as bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.

The current investment climate has improved from a year ago, but there continue to be some concerns relating to the speed of the economic renewal in the U.S. and overseas.

I’m not a backer of chasing gains. Success in this type of market will continue to require patience and capital preservation. The last thing you want to do is to chase stocks higher and leave yourself vulnerable to a major downside move. The risk is there and you need to be aware of it.

If you don’t have a lot of money to invest and you can’t afford to lose in the stock market, your options are most certainly limited. Of course, nobody wants to lose money speculating in the stock market, but the reality is that it is part of the business. Lose the money now and you will be left out later on.

Make no mistake about it; it is a lot easier to spend or lose money than it is to create it. If you have already accumulated some wealth, you know this to be true. If you’re trying to save a bit of cash, you also know this to be true.

There are plenty of other worthy things to do in this world other than speculating in stocks. Buying and selling stocks is not for the faint of heart, so if you can’t sleep at night because you are worried about your portfolio, you may want to consider another kind of business venture. Think about what you are trying to achieve by investing in
stocks.

One of the most important requirements for being successful in the investment business is to develop your own approach to the market. You must approach the stock market in a manner that only you are comfortable with. Some people are good at short-term trading, while others excel at long-term investing. You can’t use anyone else’s “system” as your own. You will only be successful if you take in as much information as possible, try different approaches, and settle on a routine that works for you.

Okay, so you don’t have a lot of money to invest. Welcome to the vast majority of people in this world. This doesn’t mean, however, that you can’t accumulate a small pool of capital with a little effort.

The best way to get a small pool of capital together is to start saving on your own.

Take five percent from each of your regular paychecks and put it away every month in a money market fund. This isn’t money you need to live on; this is your savings for a speculative portfolio of stocks. This is the money that you can afford to lose.

Maybe you’ve already got a small equity portfolio. Stick with adding five percent of your regular paycheck to this portfolio. Soon, you’ll have a decent amount of money available to you to take a responsible approach to stock market investing.

I will look at other investing ideas in the upcoming columns, but, for now, ride the upward wave and make sure to take some profits along the way.

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.

For 43 years, GFMS, the world-renowned precious metals consultancy, has been publishing its gold survey, which is considered one of the most authoritative annual surveys of the gold market in the world. According to GFMS, gold and other precious metals predict further gains in investment and gold prices, building on the record-performing 2009. However, there are also concerns about the strength of the gold rally in the second half of 2010, considering that jewelry demand remains weak.

According to GFMS, in 2009, investment demand surpassed jewelry production for the first time since 1980. In effect, gold investments more than doubled last year to almost $60.0 billion, in part because of the declining U.S. dollar, but there were other powerful price-driving factors. Fears over quantitative easing — that is, fears over world central banks’ indiscriminate increase of money supply — played a significant role in gold investment activity in 2009. Additionally, mounting counterparty risks also contributed to gold’s upward momentum, rallying the gold price to record highs in early December of last year. In fact, it was during the closing months of 2009 that the complexity of overall investment reached a boiling point, particularly as buying of physical gold and gold exchange-traded funds (ETFs) rallied among ordinary investors and as more speculators focused on the futures market.

GFMS further added that 2009 to gold was more than just about investment activities. For example, the gold market had to address the issue of sharp declines in jewelry sales, which achieved record lows not seen in over two decades. The volumes that had peaked in 1997 have been almost cut in half in 2009, as the Great Recession in conjunction with an environment of still higher prices wreaked havoc on all kinds of consumer spending. 

At the same time, scrap metal supply rallied, piggybacking on elevated prices and panic-selling under the profound pressures of global economic trauma. As a result, the demand for scrap metal reached record highs in 2009, making up for almost 40% of the world’s total supply.

Based on its precious metals’ survey, the consultancy stated that the complex relationships of these forces were at their most dramatic in the first quarter of 2010, fuelled by strong forward momentum in precious metals’ prices during the fourth quarter of 2009. Furthermore, GFMS said that getting the real picture very much depended on having a thorough look at what was happening in the physical market. Meaning, as scrap metal demand skyrocketed in the first quarter of 2010 past not only jewelry demand, but also mine production, it should have not come as a surprise to anyone how investment activities managed to speed by the $1,200-per-gold-ounce mark as 2009 drew to its close.

In its latest survey of precious metals’ markets, GFMS also accounts for events that had transpired in the government sector, where net sales dropped a staggering 80%. This development is primarily attributable to lower sales by European central banks. GFMS also makes a mention of the importance of India’s purchase of 200 tons of gold from the International Monetary Fund (IMF), which gave a huge boost to the market and which has sent a clear signal that central banks’ attitude towards gold is on the cusp of dramatic change.

As a direct consequence of India’s IMF gold purchase, investors responded so bullishly in September that most mining companies still holding onto a hedge book immediately started unwinding their hedges. Unfortunately, there are still plenty of hedge books out there, totaling over 250 tons according to GFMS estimates. That much gold cannot be easily replicated with the outstanding books at year-end, regardless of how strong supply levels are from various markets. 

Having in mind that GFMS is forecasting higher mine output and minimal de-hedging in 2010, the implication could be that the consultancy has become somewhat bearish on gold. However, the message in the 43rd GFMS precious metals survey is that, while in the short-term, prices of precious metals, gold particularly, are likely to come under pressure, gold fundamentals are improving and investors have no good reason to start either minimizing or liquidating their gold exposure.

Looking ahead, upward price momentum for the remainder of 2010 is likely, because levels of investment activity are as strong as ever, in large measure because of exceedingly high levels of sovereign debt and the potentially long-term inflation threat looming in many markets. On the other hand, GFMS also warns that, since there are no immediate signs of where fresh investment is going to come from, nor are there macroeconomic factors out there strong enough to create another extraordinary upward price movement, the next rally in gold might take longer to materialize. According to GFMS, the precious metals market could be entering the end game now, although there might still be two years or more for it to develop. The only way to avoid a steep correction in the precious metals market and to bring it back into equilibrium would be to boost jewelry demand and to scale back the demand for scrap.

Monday was an impressive day for stocks with the S&P 500 and NASDAQ on a technical level, as both indices rallied back above their respective 200-day moving averages (MA) and the highest level in a month. All four of our key stock indices are now back above their respective 50-day and 200-day MAs and are positive on the year. While the indices continue to be down from their 52-week highs, between 5.61% for the DOW and 11.28% for the Russell 2000, the ability to rally and hold is encouraging. However, you need to be careful, as the 50-day MA remains below the 200-day MA with all four indices. Also watch, as there is some topping on the market charts. A strong break above on rising volume is critical.

The chart tops are as follows:

Russell 2000 — 675

NASDAQ — 2,320

DOW — 10,650

S&P 500 — 1,125

The trend of the NYSE new-high/new-low index had been edging higher, with 17 of the last 18 sessions bullish. The near-term trend is positive. In the technology area, investor sentiment on the NASDAQ is mixed, with only 17 bullish readings since May 6. 

NASDAQ

The near-term technical picture is bullish on above-average Relative Strength (RS), but the index needs to break 2,320 in order to gain ground.

The NASDAQ is above 2,200 and its 50-day MA of 2,225 and 200-day MA of 2,263. Be careful, as the 50-day MA remains below the 200-day MA.

DOW

The near-term technical picture for the DOW is bullish, with above average relative strength (RS), so there could be further upside moves in the near term. The DOW is holding above its 50-day MA and 200-day MA. Be careful, as the 50-day MA is below its 200-day MA. There is a bottom around 9,800 on the chart.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 are bullish, with above average RS, so there could be more gains. The S&P 500 held above the key 1,040 level and rallied above its 50-day of 1,082 and its 200-day MA of 1,114. The upward break is positive. There is key support around 1,040 on the chart. Be careful, as the 50-day MA is below its 200-day MA.

RUSSELL 2000

The near-term picture for the Russell 2000 is moderately bullish on above-average RS, so the index could see upside moves. The index trades with the economy. The index is above its 200-day MA of 640 as well as its 50-day MA of 638. Watch for key support at 600. There is some topping on the chart around 675.

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.

There is no doubt in my mind that the real estate market has bottomed out. I’m in Miami this week trying to pick up some “deals” in this recession-hit-hard town and I’m starting to see some changes in the marketplace for real estate.

I want my dear readers to be aware of two important changes in the property market:

— While there is still a glut of property (condos and vacation properties) on the market, prices have stopped declining because foreign buyers are in the marketplace buying up the deals. Florida and Arizona, in my circle of associates, are the places real estate investors are buying in.

— The bank-foreclosed deals and properties about to go into foreclosure (also known as “short sales”) are being bought by investors with cash. No financing. When you see cash buyers that usually signifies patient money that believes now this the time to buy. Cash buyers often do not have the pressure to sell. When cash buyers come in, it is usually a signal of a bottom in any market.

In Florida, the more inland you go (away from the ocean), the more prices for real estate have dropped. It is common to find inland property selling at half the price it sold at during the property market peak in 2005. There is a glut of product and cranes still stick through the top of unfinished condo buildings.

But, slowly, these depressed properties are being taken up by investors (or people looking for vacation homes) who are taking the “I might never see prices like this again” attitude.

While I’ve given my readers two important positives for the real estate market in the U.S., if you are planning to jump into this market, I also want to give you three warnings:

— A great number of homes in the U.S. (that have not been foreclosed on yet) are worth less than their mortgage. At any point, these homeowners might cave in and walk from their homes. That would put more product on the market, softening prices again.

— Interest rates cannot stay low forever. Once the Fed starts to tighten, which the majority of economists believe will happen in late 2010 or into 2011 (barring an inflation surge), real estate prices will come under pressure. In general, property prices rise when interest rates fall, and property prices fall when interest rates rise.

Yes, the bottom might be in for property prices in the U.S. But, because of huge inventory overhanging the market, prices may stay at the same level they are today for many years to come. So, if you are looking to make that real estate investment today because of depressed prices, you will need the patience to wait several years before those prices move back up again. As the old adage goes, “Patience is friend of the investor, enemy of the speculator.”

Michael’s Personal Notes:
Are the car-makers coming back to life?

Ford, GM and Toyota are all obviously doing better now that the recession is over. But how about the side effects of the recession, like the high unemployment rate — will that not keep consumers
away from buying cars?

Toyota, the world’s largest automaker, reported its biggest quarterly profit in two years yesterday. The company also hiked its sales forecast for 2010 to 7.38 million cars. Ford and GM sales are on the upswing, too. Rumors of a GM public offering persist.

Make no mistake about it, the economy is fragile. While demand is slowly rising for the car-makers, companies like GM, Ford and Chrysler are not as bloated as they used to be. By “bloated,” I mean they have closed dealerships to concentrate on only the most profitable sales locations, slashed overhead, and cut employees and employee costs. They are more efficient.

In the years ahead, as the economy continues to improve, the automakers will do better. But I wouldn’t personally be a buyer of the GM public offering, because the overhang of stock owned by the government could cause resistance on the stock price if the government decides to sell its stock into the market.

Ford stock has been a good play. But remember that looming higher interest rates could be another big problem for the automakers.

Liking the auto stocks, but not enough to buy them yet.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up two percent for 2010. After some seesawing in June and July, the bear market rally that began in March 2009 is back on the upward swing.

The economy is doing better, the stock market is moving higher — maybe retail investors (the majority of which missed this current market advance) will start getting back into the stock market. The bear would like nothing more than that.

Enjoy the rally and remember, “The trend is your friend.” We are up in the stock market for 2010 again, so that trend is “up” for now.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure — these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007 Michael was preparing his readers for worse times ahead.

With the first half of 2010 behind us, here’s an update on where I see things headed for the remainder of 2010, and where I believe my readers can make some money:

Stocks:

The surprise in stocks for the immediate term is on the upside. People are still very worried about the economy. National debt is out of control. Employment is high. Retail investors are staying away from the stock market. But corporate earnings are beating analyst expectations.

If you were to ask me about the short term, which would include 2011, I would tell you I am very bearish. I’m bearish because our dollar cannot sustain its value on the great amount of debt we have accumulated. National debt of $20.0 trillion by the end of this decade (we’re at over $12.0 trillion today) will place immense pressure on the U.S. dollar, which will eventually result in higher interest rates.

Higher interest rates may also be required as a deterrent to rapid inflation, which has historically been a problem for America after a prolonged period of easy money. But, for the months ahead, the Fed cannot raise rates because the economy is fragile. A low-interest-rate environment combined with rising corporate earnings is what the stock market loves. So I’m bullish for the immediate term, bearish going into 2011.

Like I’ve said all along, the bear market rally will suck more investors in before its next leg downward. And the best way to suck investors in is to move the market higher so investors feel that all is well again.

Gold:

I bought more gold last week, because I believe we are getting close to a bottom for the traditionally soft summer months for gold prices. If gold moves closer to $1,100 U.S. an ounce, I will buy more.

Because of my fears about the ramifications of ballooning U.S. debt, the concern about inflation and the longer-term worry about the status of the U.S. dollar as the world’s reserve currency, gold looks like an ideal investment to me for the years ahead. As absurd as it sounds, I’m expecting gold in the $2,000-to-$3,000-per-ounce range as time passes.

Real Estate:

The period 2009 to 2011 will go down as the bottom for real estate prices in the U.S. Banks and sellers have caved in to accepting “what the market is” and are thus accepting the lower prices they would not accept in 2007 and 2008.

I’m visiting Florida this week to see where I can come up with some bargains. The states that got hit the hardest by the real estate crash (Florida, Nevada, pockets of California and Arizona) offer the best values. Just because prices have bottomed for real estate, don’t expect them to rise for years. But remember: in real estate investing, money is made on the buying, not the selling. What this means is that buying at depressed prices is most important.

The Economy:

The people from small- and medium-sized business I speak to are telling me that the demand for their products and services is slowly starting to come back. Through the innovation of America’s businessmen and businesswomen, costs have been cut, ingenuity is prevailing, and the “machine” is starting to work again.

Please don’t get me wrong. Many businesses are still having trouble. Our manufacturing base has been eroded for good. But most businesspeople will tell you that 2010 is looking better than 2008 or 2009. The light at the end of the tunnel is getting brighter, but, unfortunately, it has been at the cost of lost American jobs. Profits are returning more as an outcome of slashed costs rather than rising revenues.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Markets have rallied above key moving averages, driving up the price of stocks across the board. Yet, instead of chasing the price advance, you could wait for a price dip to enter.

Alternatively, you do not have to wait for a stock to retrench to buy. Instead you could write put options on a stock for which you feel the upside is limited and that you want to buy on a decline.

When you write or short a put, you assume the legal obligation to buy a specific number of the underlying stock at the strike or exercise price for a specified length of time until the expiry date of the contract. To compensate you for the risk of exercising, you receive a premium from the buyer of the put option. After the expiry date, should the particular option expire worthless, you as the writer of the put retain the premium. This is a straightforward option strategy.

You may want to write a put under two scenarios:

You are bullish on a stock and believe it will trade above or near the strike price during the life of the put option. You could generate some premium income through writing put options and hoping they’re not exercised.

You want to purchase a particular stock at a price that is below the prevailing market price of the stock. If exercised, the put writer buys the stock at the strike price and, if not exercised, the put writer retains the premium. I will assume you are in this camp.

Let’s say you like Cisco Systems, Inc. (NASDAQ/CSCO), but want to buy at a cheaper price than the prevailing $23.30 as of July 27. Let’s say $20.00. You could short the Cisco September $20.00 Put option set to expire on September 17. If Cisco falls to $20.00 or below, the put would be exercised and you would be required to buy Cisco at the strike of $20.00, which was your objective. However, remember that you also get to keep the $0.22-per-share premium for writing the put, which equates to $22.00 per contract.

If Cisco falls to $19.95, it is likely that the put would be exercised. You buy at $20.00, but given the $0.22-per-share premium, you receive, your adjusted average cost would be $19.78 per share. At the end, you would get a position in Cisco at a price that you want. The risk here is that, should the price of Cisco fall even further, say to $18.00, you would be down $1.78 a share. The key is for the stock to hold and then rebound; otherwise, you would find yourself in a negative position.

Under this scenario, you want to buy a particular stock at a price that is below the prevailing market price of the stock. This strategy is often referred to as a cash-secured put.

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.

The bulls are in control, but you have to wonder how long it will last. The DOW recorded its third straight session of triple-digit gains on Monday and, in the process, rallied above 10,500 on a broad market rally. More importantly, the S&P 500 also closed above its 200-day moving average (MA) after recently managing to hold above the critical 1,040 level, which was a key development.

With the gains, all of the four key indices are trading in positive territory on the year, quite a reversal from just recently when the Russell 2000 was in a technical bear market, but is now down only 10.74% from its 52-week high. All four of the key stock indices have rallied above the 50-day and 200-day MAs — a bullish sign. Now we will see if the gains are sustainable. The market will need to see continued strong earnings and economic news to hold and advance higher. I expect some profit-taking given the overbought condition and hesitant Relative Strength, and based on the recent trading pattern.

As far as investor sentiment is determined by the new-high/new-low ratio (NHNL). The trend of the NYSE NHNL had been edging higher, with 13 straight sessions bullish from June 10 to June 28, prior to a dip to neutral, but 12 of the last 13 sessions were bullish. The near-term trend is positive. In the technology area, investor sentiment on the NASDAQ has been edging lower, with only 13 bullish readings since May 6, but the last two sessions were bullish.

NASDAQ

The near-term technical picture is moderately bullish on above average Relative Strength (RS), so there could be additional upside moves in the near term.

The NASDAQ is eyeing 2,300 and is above its 50-day MA of 2,228 and its 200-day MA of 2,260. Be careful, as the 50-day MA remains below the 200-day MA, but it has been edging higher. Watch to see if the index can hold, as the downward channel appears to be in place. The index is overbought, so watch for some near-term selling pressure.

DOW

The near-term technical picture for the DOW is moderately bullish with above average RS, so there could be additional upside moves in the near term. The DOW is above both its 50-day MA of 10,181 and 200-day MA of 10,402. Be careful, as the 50-day MA is below its 200-day MA. The index is overbought. There is a bottom at around 9,800 on the chart.

S&P 500

In the broader market, the near-term technical signal for the S&P 500 is moderately bullish, with above average RS, so there could be additional upside moves in the near term. The S&P 500 held above the key 1,040 level, and it has rallied above its 50-day and 200-day MAs of 1,083 and 1,113, respectively. There is key support around 1,040 on the chart. Be careful, as the 50-day MA is below its 200-day MA. The index is overbought.

RUSSELL 2000

The near-term picture for the Russell 2000 is moderately bullish on above-average RS, so the index could see more upside moves. The index trades with the economy. The index is above its 200-day MA of 639 as well as its 50-day MA of 639. The index is overbought. Watch for key support at 600.

Yet it’s not clear sailing by any means. Be careful, as the price trends on the indices are down and, unless there is a steady upside move, the trend will remain intact with additional downside moves going forward.

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.

On a recent trip to Manhattan, on Fifth Avenue near Central Park, I saw a retail window with the following written in huge yellow letters, “Smart Has the Brains, But Stupid Has the Guts.” My daughter took a picture of this store front window and I’ve kept it in my cell phone picture memory since.

Why am I telling you this?

Over the past 10-year bull market in gold bullion prices, each time the market corrects, the naysayers come out and say, “The bull market in gold is over.” And each time they are wrong.

Have you noticed all the articles in the business pages of the newspapers and the Internet the past month on how deflation could become a big problem? Well, the gold naysayers love this type of media. The economy is improving as well and the U.S. dollar looks like a haven every time another world currency comes under pressure.

So, who would be stupid enough to jump more deeply into gold given the above points? Me.

As I’ve watched and participated in the gold bullion rally since late 2002, each time I see gold prices move lower, I see a buying opportunity. We all know that the summer months (based on seasonality price charts) are the worst time for gold bullion prices.

Gold bullion prices peaked at about $1,260 an ounce in late June of this year. Since then, the metal has fallen back about $100.00 an ounce to the $1,160-an-ounce level. Looking at a price chart, the metal could fall even further to $1,100 an ounce, but why take the chance and wait for even lower prices that may never even materialize? I’m not.

Gold has risen steadily in price from $300.00 an ounce in late 2002 to $1,260 last month, a gain of 320% in eight years. Just as higher than the previous December 31 for nine straight years now. This gold bull market is very strong.

The rise in gold prices could foreshadow a time down the road (could be a year, could be five years) when inflationary pressure will rise substantially and/or the debt of the U.S. will become a huge obstacle for the value of the U.S. dollar, undermining its status as a
world reserve currency.

This past Friday, the White House raised it forecast for the fiscal 2011 budget deficit to $1.4 trillion. Over the next 10 years, Washington is projecting additional debt of $8.5 trillion. We already have $12.0 trillion in debt, so we are headed for $20.0 trillion in
national debt. How can any currency, backed by such debt, sustain itself?

That’s why the “guts” buy more gold.

Michael’s Personal Notes:

The Obama Administration is finally doing something for small business, but I believe the program is ill conceived…that the money will not flow through to the small businesses that are the backbone of this economy.

Under a bill that is awaiting Senate approval, the government will move $30.0 billion to small community banks. The hope is that the banks will leverage that money and offer $300 billion in loans to small businesses, which the government hopes will lead to new jobs. While the intent is good, I do not see this program working.

Talk to any small business banker today and they will tell you the same story: “There is a lack of demand from creditworthy customers” and “The biggest demand for small business loans is from the least creditworthy customers.”

Putting money in small banks to make loans is a great idea — but the government cannot force banks to make loans it believes are risky. In the first half of 2010, Bank of America, the biggest bank in the U.S., wrote off a staggering 14% of small business loans…10 times the rate of other commercial loans.

After the recession, banks are looking for more equity and profitability from small businesses before lending them money, and that is the real reason small businesses cannot get loans. Small business loans that would have qualified for some form of government guarantees (reducing the risk at the banks so they make more loans) would have been a more viable plan.

Where the Market Stands:

As I predicted in a mid-July editorial, “Stock Markets Getting Reading to Turn Positive for 2010,” the market abided and turned positive earlier this week. For 2010, the Dow Jones Industrial Average is up 1.1%.

It has been difficult for a market student and commentator like me to remain positive on the bear market rally in the face of the large head-and-shoulders pattern the Dow Jones formed in the first half of this year and in light of continued poor economic news. Each time the market moves lower, more stock market advisors come out and call the rally over.

But I’m sticking with my gut feeling that the bear market rally that started in March 2009 is not over…that the bear will continue its rally in an effort to suck more investors into the market before taking that big second leg down.

According to a recent survey from the American Association of Individual Investors, the number of individual investors who are bearish on the stock market has hit the highest level since July 2009…and we all know what has happened to stock prices since then.

The stock market does not decline when investors expect it to…and that’s why I believe the bear market rally will continue in the immediate term.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way, because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying: “…the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”