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.

Just because the crash of 2008 did not usher exactly the kind of depression experienced after the market crash of 1929 does not necessarily mean that we may not be heading that way anyway. How come? In essence, a depression is nothing more than a prolonged recession. How do you know you are in a depression? Simply, when economic growth remains minimal, when interest rates hit rock bottom, and when consumer spending all but disappears along with the credit supply. It is also quite depressing to know U.S. banks have about $1.3 trillion in cash, but are super reluctant to lend to the private sector, entrapped by a liquidity conundrum of their own making.

What causes a depression? Typically, a depression happens after one or more asset bubble explodes, while the credit supply implodes and dries out. In contrast, most recessions are the result of heightened inflationary pressures and overstocked manufacturing inventories. So, what do you think: are we repressed in a recession or depressed in a depression?

Consider one more argument that it may be the latter. Central banks all over the world, not just in the U.S., have dumped trillions of dollars into the global economy. With that much money in the global financial systems, world economic output should be tremendous. Yet it is not, far from it, which only proves that this is not just another recession and that it resembles more and more a bona fide depression.

All that is growing these days are the unemployment lines. True, there are no soup kitchens for the poor yet, but I suspect there wouldn’t be any just yet, as long as the government is mailing the checks each week for 99 weeks to the currently estimated over 10 million unemployed Americans. Whichever way you look at it, there is nothing simple or ordinary about this economic downturn.

How do things look in a depression? Things change. People change. How they perceive debt changes. How they behave in malls changes. Depressions leave much deeper scars than recessions. They leave people traumatized and take years to recover from, to forget foreclosures on beloved homes, to forget collection agencies’ calls, to forget the humiliation of not being able to provide for one’s family.

Perhaps this is why we are seeing home sales sliding to 15-year lows. Perhaps this is why bond markets are sounding every warning bell they have in their arsenal. Perhaps this is why yields on U.S. Treasuries have gone Japanese on us.

Here are some disturbing facts. The 1930s depression did not create declining economic output every quarter. In fact, during the first impact from 1929 to 1933, no more and no less than six quarters had produced increasing GDP data. On average, during these upturn quarters, the economic output growth rates were known to achieve eight percent on an annualized basis. However, since any growth, let alone an eight-percent GDP, was virtually unsustainable, no one in their right mind could declare the recession as over. Incidentally, stock markets flew into the stratosphere in the early 1930s, gaining 50% in the aftermath of the Great Crash simply because the confusing GDP data had lulled everyone into a beautiful illusion that the worst was over.

I’m tired of this emotional rollercoaster, too, of all the ups and downs, hopes inflating, hopes deflating. But if emotions are taken out of the equation and the equation viewed realistically, some harsh truths are undeniable. The Federal Reserve has cut the funds rate to zero, like Japan, and its balance sheet is in tatters. The U.S. budget deficit has swelled to nearly 10% expressed in relation to GDP, which is actually double the deficit vs. GDP ratio created during the 1930s, when Franklyn Delano Roosevelt was running the show. Finally, decades of easy money have left U.S. households, businesses and the government with $6.0 trillion of debt that has to be retired one way or another.

I’m risking the dubious honor of being called a “permabear.” But it is not as if I want to be über-pessimistic. Actually, on my off days, I’m quite an optimist, as well as a realist. Instead of looking for someone else to tell me if it’s raining outside right now, I prefer to open the window and see for myself. And the view from the window is telling me that there is no quick and easy way out and that I should read the market better within the still dismal macroeconomic context, not while blinded by short-lived stock market rallies.

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.

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.

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.

The decline in stocks should not be a surprise given that the stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag.

There are numerous technical breaks to the downside on Wednesday, with all four of our key stock indices turning negative this year. The NASDAQ and Russell 2000 are trading below their respective 50- day moving average (MA) and 200-day MA. The DOW is below the 200-day MA, but holding just above the 50-day MA. The S&P 500 is holding precariously around its 50-day MA. I feel that the recent failures to break above the chart tops for the various indices were bearish.

Watch for downside supports as follows: DOW at 10,000; SP 500 at 1,040; NASDAQ at 2,100; and Russell 2000 at 600.

Driving the selling was renewed concern towards slower growth in the United States by the Federal Reserve, along with news of slower growth in China and England. Weakness in China could easily spread globally to Europe and the U.S. due to economic interconnectivity. News of lower imports in China is driving concerns of slower growth in the country, which would also impact other global economies.

Overseas in England, the central bank lowered its GDP estimate, blaming the potential slowing in the U.S. and the eurozone. Germany also announced slower growth.

The Fed will expand its measures to increase lending; even so, this may not be enough to avoid weakness imported from overseas economies. Again, the fear of a potential double-dip recession is surfacing.

In addition to the economic growth concerns, the lack of job creation will continue to be a critical factor going forward into 2011 that could impact the rate of economic renewal. There were about 2.9 million jobs available in June, according to the Labor Department.
Consider that there are over 14 million workers looking for jobs at the same time, it does not look promising for the unemployed. And, until we see a pick-up in jobs, consumer spending and GDP will be impacted.

Further on the corporate front, tech bellwether Cisco Systems, Inc.
(NASDAQ/CSCO) has indicated a shortfall in revenues, which we have said is not what we want to see.

Oil is edging lower after retrenching back below $80.00 on the global economic concerns. Gold is failing to hold above $1,200 despite the stock market concerns.

Watch to see if there’s any buying on weakness. Be careful, and wait for the dust to settle. It may be an opportune time to accumulate stocks on weakness. Market indices have decent bottom support.

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.

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.

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.

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.

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.”

The new “Wall Street Reform and Consumer Protection Act” is a brick of a law at 2,300 pages. Being a mammoth, no wonder it had spawned a few unintended consequences, one being a just what is meant by credit agencies being held more responsible when providing their ratings. The panic was substantial to the point that the Securities and Exchange Commission had to act as a go-between, calming the markets and even invoking a reprieve of sorts from its own regulations.

For almost 80 years, credit rating agencies such as Standard & Poor’s and Moody’s have enjoyed a comfy and protective legislative cushion, whereby, if their ratings turned out to be completely off their rocker, the agencies couldn’t be sued. Nice, right? But the new financial reform legislation has taken that protective cover away in lieu of assigning the highest ratings to toxic assets that have both triggered and caused the Great Recession.

In other words, this means that credit rating agencies will be for the first time in history actually legally liable for their ratings. Trying to pull back the protective covers, S&P and Moody’s are now prohibiting their ratings from being used in offering documents, effectively creating a Catch-22 situation. Meaning, firms trying to raise capital by issuing debt backed by assets, such as mortgages or car loans, for example, can no longer disclose credit ratings of asset-backed securities, yet they are required to do so by other legislation.

The ripples already spread out last week. According to “The Wall Street Journal,” Ford’s financing unit has had to delay issuing bonds backed by its car loans because not a single credit rating agency showed up for the “ratings party.”

This is when Ben Bernanke had to step in, advising the SEC to deal with the situation as soon as possible. Bernanke’s concern is that all this pulling and tugging is placing undue pressures on the credit markets in an environment where it is still difficult for many companies to borrow money from distrustful lenders.

What the SEC did was issue a sort of an amnesty, but not to credit rating agencies. In last week’s statement, the SEC has allowed Ford to issue unrated asset-backed securities for a period of six months. The reprieve stems from the SEC guidelines addressing the distribution of asset-back securities under Regulation AB.

Meredith Cross, director of the SEC’s corporate finance division, stated, “Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit ratings in these Regulation AB filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement, while still conducting registered AB offerings.”

It remains to be seen if this transition period will be sufficient to calm both debt and credit markets. But I’m not so concerned with issuers having difficulty peddling their asset-backed offerings. What I’m really concerned about are credit rating agencies. Don’t you find it curious how now, when their legal safety net has been removed, rating agencies are suddenly reluctant to do their jobs, which is to rate debt issues? Makes you wonder what they have been doing before.

We already have serious doubts about their rating methods and consider credit agencies to have gloriously boondoggled ratings of toxic assets. They were supposed to be one of the watchers. It seems that the watchers may have been asleep for eight decades with the public being none the wiser had it not been for the credit crisis. They are now awake and there are no doors and windows to protect them, which seems to be the reason they don’t want to be the watchers anymore. But what else are they good for, then?

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.

A common question I’ve been hearing over the past couple of months is, “Michael, if you believe the stock market will ultimately retest its March 2009 low, why are you recommending positions in gold stocks. After all, if the stock market falls, won’t gold stocks fall as well?”

Yes, this is true. If the stock market goes down, all stocks will be affected. But my bet is that gold stocks will be the least affected by a downturn and they can actually be a good place to park cash.

I say this for three reasons:

Junior gold mining companies have not performed well since the bear market rally started in March 2009. There are many bargains amongst the junior gold mines right now. As the price of gold moves towards $2,000 an ounce, the juniors will rise in price — they are a great speculative play.

The majority of companies listed on the stock market have their success somehow related to consumer demand. After all, the American economy is 70% consumer-driven. Companies like Apple Inc. (NASDAQ/AAPL) could see their earnings drop quickly if consumers stop spending. Gold companies are not affected by consumer spending patterns.

Only two factors drive the price of a gold stock, and that is how much gold the company has access to and the price of that gold. As the stock market declines, money will move out of stocks and into…what? T-bills paying less than one-percent interest? Real estate you can’t liquidate once you buy it? Investors will run to quality gold stocks.

Homestake Mining and Dome Mines (comparable to Barrick Gold and Newmont Mines of today) were the two biggest gold mining producers in the early 1930s, when the Great Depression hit. These stocks did exceptionally well during the 1930s.

A stock price chart of the Dow Jones Industrial Average from the early 1920s to the late 1930s looks terrible…millions of investors lost billions of dollars. But look at a chart during the same period of U.S. gold mining companies and you will see a strong trend upwards.

So, bottom line: all stocks go down during a bear market. But gold stocks, at least during the 1930s, outperformed the popular stock market average exponentially. In fact, U.S. gold stocks were one of the best places to park cash in the 1930s, as these stocks more than tripled in price during the decade, while the rest of the stock market collapsed.

Michael’s Personal Notes:

I really can’t write enough about the terrific job Steve Jobs has done over at Apple Inc. We are talking about a fellow who started the company, was pushed out by his own board of directors, had health issues, got a liver transplant, and overcame so many obstacles. It’s a perfect example, I remind my children regularly, of what persistence and determination can lead to.

Yesterday, Apple reported a huge 76% profit in third-quarter profit. Net income in Apple’s last quarter hit $3.25 billion. Call it demand for the new “iPad,” demand for the latest version of the “iPhone” or simply customer spending on the upswing, Apple continues on a tear.

Jobs has not created a business; he has created a culture. And this is why Apple exceeds. It doesn’t matter if you already have an “iPhone.” If an updated version comes along, you want it, because you love the brand so much. A culture, a community, is much stronger than a business.

Is it any wonder why Apple stock sells at $250.00?

Where the Market Stands:

The Dow Jones Industrial Average opens this morning down 1.9% for 2010 and only 200 points away from turning positive again for the year.

I read so many negative stories about the trading volume being light on the market, the technical picture for stocks being very poor, the economy still in shambles…I often write about these topics myself. Yes, the long-term outlook for America is negative.

But, right now, the stock market — or should I say the bear market — only looks six to 12 months out. With all the negativity surrounding the market and with corporate earnings continuing to rise, I still believe that the bear market rally will continue riding the wall of

worry before it moves lower.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a

reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.

07/21/10 — China may be the most significant growth market in the world, but there are some real issues that need to be addressed or there could be further weakness going forward.

There are increasing signs of a potential slowdown in China. There have been downward revisions in the country’s Gross Domestic Product (GDP). The People’s Bank of China suggested that GDP could slow to two percent to three percent in the first half. The country’s purchasing managers’ index, similar to the gauge used in the U.S., fell to 52.1 in June from 53.9 in May, while the rate of the country’s crude-oil refining output slowed in June.

A decline in infrastructure spending in China will impact GDP, yet there continues to be new spending programs aimed at developing the previously overlooked western regions in China. The country’s central government will invest over $100 billion across 23 new infrastructure projects in western China spreading to Inner Mongolia in the west. Projects include railways, roads, airports, coal mines, nuclear power stations, and power grids.

In spite of the potential slowing, China continues to grow well above other industrialized countries in both Europe and North America. The Organization for Economic Co-operation and Development (OECD) predicts that China’s GDP will rise over 11% this year, but will slow to over 10% in 2011. These are impressive growth metrics, however you look at them.

And, if all pans out, China could become the world’s biggest manufacturing country in 2011 based on output and surpass the United States, according to IHS Global Insight. The research showed that the U.S. is accounting for about 19.9% of global manufacturing output in 2009, compared to a close 18.6% in China.

We all sense the move by China to the position of top dog will inevitably take place, like it has in the areas of Internet users, auto sales, and cell phone users

So, while it remains a frustrating time for holders of U.S. and Canadian-listed Chinese stocks, I remain long-term confident and bullish on China despite the short-term risk. Yes there will be some rough sailing in the short term, but you would expect this. The key in my view is to look at companies that you like and accumulate positions on market weakness. This may be an initial position or dollar cost averaging. The fact is that Chinese companies continue to report excellent operating results and growth, but have suffered due to the issues in Europe and China.

In my view, the risk is much higher now. The key is patience to withstand the market jolts and believing in the long-term prospects of China.

07/19/10 — Money was flowing on Wall Street last week. Add up the second-quarter profits of Intel (NASDAQ/INTC), Google Inc. (NASDAQ/GOOG), Bank of America Corporation (NYSE/BAC), JPMorgan Chase & Co (NYSE/JPM), Citigroup, Inc. (NYSE/C) and General Electric Company (NYSE/C) — which all reported their second-quarter profits last week — and you have $18.4 billion in earnings hitting the Street.

One would think it was time to rejoice! After all, corporate profits are on a roll again. But the market has been concerned with something else, something more serious for future earnings.

As we all know, on Thursday, Congress passed the most comprehensive financial reform since the Great Depression. Most financial institutions have publicly commented that the bill, which is over 2,000 pages, will have an impact on their future earnings. Unfortunately, the financial institutions have yet to figure out the exact financial impact of the new bill. Most banks are “still trying to figure it out.” And if there is something the stock market does not like, it is uncertainty.

The Goldman Sachs Group, Inc. (NYSE/GS) has agreed to pay the SEC 550 million dollars to settle its civil fraud suit. The penalty, the largest amount ever paid by a financial institution to the SEC, comes amid rumors that the SEC might lay other charges against Goldman
for more possible securities regulation breaches.

Hence, when you add the Goldman Sachs settlement and the unknown cost to financial institutions of the new financial reform bill, money is being taken away form the Street, not added.

Looking at the charts, the Dow Jones U.S. Bank Index is down 64% from its peak in early 2007. Comparatively, the Dow Jones Industrial Average is only down 24% over the same period.

We all know that the bursting of the real estate bubble hit U.S. banks hard. Now, through the new financial reform bill and hefty SEC fines, the government is giving big American banks a “you should have known better” slap in the face.

Would I jump into the financial stocks?

Despite the great earnings being generated by companies like Bank of America, Citigroup, and JP Morgan, I believe that the stock market is telling us these companies are far from out of the woods.

We need more information on how the financial reform bill will affect the U.S. bank stocks before making the decision to jump in and buy them.

Michael’s Personal Notes:

Yes, it is true. Effective January 1, 2012, all U.S. sales and purchases of gold and silver coin of $600.00 or more in value will have to be reported by the transacting dealer to the IRS.
Source: www.numismaster.com.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning down 3.3% for 2010. I’m still of the opinion that we are in bear market rally that will take stocks higher first, before the next leg of the bear takes hold.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce
nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.