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.

As an investor and trader, what you can do when you feel the market may be set to take a pause and stall is to write some covered calls on your long positions. This appears to be the case at this juncture.

Covered call writing (also called Buy-Write) means you hold an underlying position in the stock represented by the call option. It is much less risky compared to naked call writing, in which you do not have an underlying position in the stock. Be aware of this distinction, as it will save you lots of stress and potential unnecessary losses in the long run.

Let’s take a look at Cisco Systems, Inc. (NASDAQ/CSCO) and assume that you own 1,000 shares at a cost base of $15.00 per share. You are already up just over $5.50 a share based on the prevailing price of $20.50.

You continue to be bullish on Cisco, but at the same time feel that the stock may continue to pause given its failure to move higher and its retrenchment back to just above its 52-week low of $20.36. There are several strategies at your disposal. You can sit on the position and wait for the stock to rise. The problem is that this is an inefficient use of capital in my view.

So, why not make your capital work for you? It’s much easier than you think and represents a win-win situation. The process involves writing covered calls on your holding of 1,000 shares of Cisco. For every board lot (100 shares) of Cisco, for example, one call option may be written.

Covered call writing is a straightforward, low-risk generator of premium income, and it guarantees a selling price for the stock. Don’t write a covered call if you do not wish to lose the stock due to a possible exercise from the call holder.

Let’s say you are mid-term neutral on Cisco and believe that the stock may have limited upside potential prior to January 2011. What’s the next step? Given this, you could generate some premium income by writing calls on your 1,000 shares of Cisco. By writing the calls, you in turn are obligated legally to deliver your 1,000 shares of Cisco at the predetermined strike price if exercised and if assigned to you.

Here are the mechanics. You own 1,000 shares of Cisco and decide to write 10 OTM (Out of the Money) Cisco January $24.00 Call option contracts (OTM since strike price is greater than market price) at $51.00 per contract, or $510.00 for the 10 contracts. This is the risk premium you get for assuming the risk and is yours to keep whether the call options are exercised or not.

The strike price selected in call writing should be what you feel comfortable selling the stock at if it were to be exercised. If the strike price were to be set too low, it would have a higher probability of being exercised and you could lose your shares, perhaps at a lower price than you would want. Be careful about this. Conversely, setting a lower strike price translates into higher premiums for you. The decision ultimately depends on your view of the market.

The bottom line is that you need to be comfortable selling your shares, which in this case is at the strike price of $24.00. If this happens, you would make $9.00 on the stock, plus $0.51 for the premium, for a return of $9.51 on the base cost of $15.00. The return would be over 60%. The downside of course is that you lose the stock, especially if it advances higher above $30.00.

Each situation is different, so be careful when doing covered call writing.

The year 2010 is turning out to be dud, unless we see a stronger third quarter and forward guidance. And, while the possibility of a double-dip recession is likely relatively low, there are still concerns with stalling in the global economies. China has shown some stalling with the government there, trying to gingerly rein in some growth in order to avoid an asset bubble and inflation. Any sustained slowing in China would impact other global markets.

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. Pundits estimate GDP growth of eight percent at the end of 2010.

Overseas in Europe, Germany is reporting some positive news and this is important for Europe given that what happens in Germany could help dictate the direction of Europe.

Domestically, the tormented housing sector continues to under duress. New and existing home sales were sub-par. The soft housing data will also continue to impact consumer confidence and spending. Housing company Toll Brothers Inc. (NYSE/TOL) managed to beat on earnings per share and revenues, yet the fact that revenues fell 1.5% year-over-year continues to point to softness in the housing sector. We are still not buyers in housing.

The key Durable Goods Order reading for July showed a decline of 3.8% versus the estimate of a 0.5% increase. The reading indicates continued caution towards spending on big-ticket and non-essential goods, which will impact GDP. Unless consumers spend on non-essential items, the economic recovery will likely continue to be slow.

The bias is negative, as stocks search for a bottom. Until we see this, the downside risk remains high.

The DOW broke below 10,000 to 9,937 last Wednesday, which is a red flag. The S&P 500 also broke a critical support level at 1,040 and the Russell 2000 broke below its key psychological support at 600. While the indices all managed to bounce back above the key levels, the technical breaks are bearish and point to potential additional downside moves. What you what to see is some buying support to surface on declines to or below these levels.

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 stock indices remain below key technical levels. The key will be the ability of markets to hold as we move forward. I continue to be cautious due to fragile technical picture and global economic growth issues.

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.

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.

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 currently negative this year and fighting to find some support.

On the charts, the stock indices are trading at a crux at the key moving averages (MAs), but below the tops on the charts as follows:

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

The DOW has broken below its 50-day and 200-day MAs as of August 19, while the NASDAQ is below 2,200 and its 50-day and 200-day MAs. The S&P 500 failed to break its key 1,100 level on August 18, and it 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, we are seeing 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; I’m just warning you to be on alert.

My near-term technical assessment is as follows:

NASDAQ

The near-term technical picture is moderately bearish on weak Relative Strength (RS), so there could be more downside moves. The index needs to break 2,320 in order to gain ground.

The NASDAQ is holding below 2,200 and its 50-day MA of 2,229 and 200-day MA of 2,270. Be careful, as the 50-day MA remains below the 200-day MA. The index is oversold.

DOW

The near-term technical picture for the DOW is moderately bearish on weak Relative Strength. The DOW has broken below its 50-day MA of 10,302 and 200-day MA of 10,451.

Be careful, as the 50-day MA is below its 200-day MA. There is a bottom around 9,800 on the chart. The index is overbought.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 are moderately bearish on weak RS, so there could be more downside moves. The S&P 500 is holding above the key 1,040 level, but is back below its 50-day of 1,089 and 200-day MA of 1,116. There is a top around 1,125. 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 bearish on weak RS, so there could be more downside moves. The index trades with the economy. The index has fallen below its 200-day MA of 644, as well as its 50-day MA of 642. Watch for key support at 600. There is some topping on the chart around 675. The index is overbought.

You don’t have to tell General Motors to go to China and look for growth opportunities. In fact, you don’t have to tell anyone. The world’s automakers know that, to grow, you need to have a presence in China’s auto sector, whether in a venture with a Chinese company or as a standalone manufacturer of vehicles. The auto sector in China remains strong, as the country is the world’s largest auto market with an estimated 16.5 million vehicles this year, according to the Chinese industry association. Foreign auto companies looking for growth are expanding in China.

General Motors is seeing continued strong and impressive growth in China. The company has made two straight quarters of profits and is looking to launch its shares soon.

In the first quarter, GM reported greater sales in China of 1.21 million vehicles versus 1.08 million in the United States, a first for the company. Watch for some slowing, as sales of vehicles in June slowed to 10.9%, down from 25% in May and 34% in April, representing two straight months of declining growth. To deal with the slowing growth, China announced that it would provide subsidies of around $440.00 for buying some fuel-efficient vehicles. GM remains under U.S. government control, as it tries to reinvent itself and pay back the government loans. To do this, GM knows it must grow outside of its domestic market in the U.S. and Canada.

GM predicts vehicle sales in excess of two million in 2010, up from 1.83 million vehicles in 2009. Germany-based Volkswagen said it would invest about $8.0 billion in China over the next three years. Volkswagen is aiming for sales of two million vehicles by 2018. Japan-based Nissan Motor wants to sell 900,000 vehicles annually by 2012, according to Bloomberg.

Only about 41 in 1,000 Chinese own a vehicle in China, according to some industry pundits. Given this, there is clearly ample room for growth, especially as the income levels continue to rise. This trend will continue to drive vehicle sales going forward to the point where China will likely remain the top auto market in the world.

The area of expensive or luxury vehicles is booming in China — it’s one of the top markets in the world. The rich are getting richer and they have plenty of cash to spend on expensive cars. The sale of luxury cars increased around 65% year-over-year in the first quarter of this year, according to auto industry researcher J.D. Power and Associates. The rate is well above what we are seeing in other industrialized countries. The middle class is growing at a staggering pace, with more millionaires popping up each day. When consumers find wealth, a big-ticket item they buy is a vehicle.

There are numerous ways to play the Chinese auto sector. You can buy an auto company with exposure to China, such as the major global automakers. Alternatively, you can also buy Chinese auto-parts-makers. Some Chinese auto plays that I have covered in the past include Brilliance China Automotive Holdings (OTCBB/BCAHY.PK), China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), SORL Auto Parts, Inc. (NASDAQ/SOR), and AutoChina International Limited (NASDAQ/AUTC).

China has overtaken Japan as the world’s second largest economy, and, in about 15 years, China is expected by pundits to become the world’s largest economy. Clearly, in Asia, it has become a tale of two cities. While China continues to report double-digit GDP growth in spite of 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.

While Japan has faltered over the past two decades, China has used the opportunity to put its massive cheap labor workforce to use and create colossal manufacturing capacity for the world’s manufacturers looking for cheap labor and a lower cost to produce goods.

China has developed into a dominant world economic power as well as a basin for incredible and sustained growth across many sectors from industrial, to mining, to technology. If it is saleable and in demand, then you know that China has the consumer market for it.

China has a population of about 1.3 billion people; about five times the size of the United States. The size of the middle class is over 300 million and this is expected to grow exponentially, as migrant workers have more disposable income. The current per capita income is just below $4,000 a year, but it has more than doubled over the past few years and wages appear to be heading higher. With this comes more spending. At the present time, only a small fraction of China’s GDP is driven by consumer spending, compared to about 70% in the U.S. China wants to drive consumer spending long-term.

The sheer size of the country’s middle class is mind-boggling and clearly reflects the amazing potential there. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million!

Can you hear the register? Gartner Research estimates that China will represent 72% of the world’s growth within the next 20 years. According to the Carnegie Endowment for Peace, China’s economy will surpass the United States by 2035 and grow to be twice as large by 2050.

While all areas are expanding in China, there are several key sectors.

An area that is growing at an incredible rate is the cell phone sector, where growth is enormous and there are currently more than 770 million users. That’s nearly more than the population of the United States, the European Union, and Canada combined!

Another strong area for growth investors is the Internet in China. Many pundits still view China as having more upside potential in the Internet space, as the country’s current penetration rate of 16% of the population is lower versus the average of 19% worldwide, and the U.S. penetration rate at a whopping 71% (source: The Pew Internet and American Life Project).

China has become the epicenter of the Internet world, with Internet demand growing at a staggering pace. The number of Internet users in China is tops in the world, with about 404 million on the Internet, according to the State Council Information Office in China. According to BDA China Ltd., China’s Internet usage could reach a staggering 490 million by 2012. In addition, about 58% of Internet users in China or about 233 million of 404 million Internet users roam the Web via their cell phones, according to the State Council Information Office. These are massive numbers and point to the staggering growth in China.

In the first quarter of 2010, e-commerce in China was $149 billion, according to iResearch Consulting.

While there are some short-term concerns, longer-term, you need to have some capital in China.

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.

We continue today with investing basics and talk about risk control.

Using stop-loss limits when investing is an outstanding risk management strategy that always pays off in the long term.

When you take on a position in a stock, you should immediately make note of a stop-loss limit from your entry price, say 20%. You don’t have to do this with your broker; you can easily make a note of it yourself.

A 20% stop-loss limit means that if the stock moves 20% lower in price from your original entry price, you cash out with a loss. By taking this loss, you preserve the rest of your capital to stay in the game. The idea is that your winning stock market positions will pay for your losing ones. This is why you always want to own a basket of stocks, not just bet the farm on one stock.

If you have $5,000 to speculate in small-cap stocks, put $1,000 into five companies and see what happens. Use a stop-loss limit on all five positions. Very likely, some will go down in price and some will go up. The goal is to cut your losing positions and ride your winning positions. It’s a simple strategy that works over the long term.

Now, you don’t just want to employ a stop-loss limit when you take on a new position; you want to have an informal stop-loss limit if your stock goes into profit territory. There is nothing worse than going through the time and effort of finding a great trade, taking the risk, making money, then giving up all the gains because you didn’t take any profits.

So, the best thing you can do is maintain a moving stop limit when the stock trades above your entry price. If a stock goes up 30%, consider maintaining a 10% moving stop limit from the stock’s most recent high. This way, you can consider taking some profits if the stock pulls back.

Remember, absolutely anything can happen to a stock. There could be a war, a strike, a stock market crash — anything. So, you have to take steps to protect yourself.

If you want to protect your wealth, then you must pay yourself first. The best way to do that is in cash. The richest people in the world hoard cash, because they know it is the best, least-risky asset you can own. Stock prices go up and down. Real estate prices go up and down. But cash generates a return on your investment that is often backed by the security of countries themselves.

If you want to protect the savings that you have created, you must maintain a portion of your holdings in cash. You can do this by investing in a money market fund.

As long as the returns on your cash investments are greater than the prevailing rate of inflation, you are ahead of the game.

This is how the rich get richer. Sure, they own large amounts of stocks. They own all kinds of real estate. But they also keep a lot of cash around that generates compound interest, year-over-year. This is how the great wealthy families of the world stay wealthy from generation to generation. They hoard cash and pass it down to their children. Cash is always king, no matter what anyone tells you (or tries to sell you).

Now, even when it comes to a small portfolio of speculative stocks, it pays to keep some cash. Why invest all your money at once in the stock market? Do you really think that there are 10 great stocks that just happen to be very attractive right now? It doesn’t make sense hat the best possible investment opportunities just happen to be when you’ve accumulated a little nest egg for yourself.

Take your time; if you have a pool of cash to speculate with, invest it slowly. Keep the rest in a money market fund until you can build a diversified portfolio over time.

Succeeding at stock market speculating takes time, money and practice. The good news is that it doesn’t take an extraordinary effort, only a consistent one. If you can’t afford to lose in the stock market, then you have to take action to separate your speculative money from the rest of your lifestyle.

With as little as $5,000, you could successfully create a portfolio of stocks that you hope will generate solid returns. Remember to spread your money around a number of positions; use stop-loss limits both on entry price and when a stock goes up in value.

You don’t need to be in any rush to take on new positions. Wait and watch for only the best stocks to come across your desk. Only invest in those companies that you are comfortable with. With diligence and persistence, anyone could be successful speculating in the stock market.

As I said in our last column, investing is not complex, but there are some basic things you should be aware of.

It doesn’t matter if you are investing in the stock market, real estate, or antique cars. The best way to protect your wealth is not to put all your eggs into one basket. This is obvious.

One of the keys to successful investing is longevity. The longer you are in the business of investing in the stock market, the more experience you gain and the more opportunities cross your path.

When you are buying a stock, you are investing in a business. The people that run that business are entrepreneurs, looking to generate a return on the capital their company invests. The people who provide this capital are investors — people like you. You invest your capital because you are looking to generate a decent return on your investment.

Naturally, if you are going to invest your money in a business, you want to have some say in how it is run, in order to protect your investment. In the stock market, however, you don’t have that luxury.

You can vote for company management or some specific initiatives, but you can’t actually participate in the company’s daily decision-making. So, this means that you do not have control over a company’s ability to allocate your capital. Therefore, the only option available to you as an individual investor in the stock market is to spread your investment capital around. You need to divide your own investment risk among a number of companies, because you can’t control the actions of any one of these entrepreneurs.

The phrase used to describe this spreading of investment risk is portfolio management. Portfolio management is a process that encompasses the creation, monitoring, and adjustment of your investments. The process never stops because you are continually buying and selling new stocks. Taking a “portfolio approach” to your stock market investments helps you stay in the game longer and improve your returns.

Taking a portfolio approach to your stock market holdings means diversifying the industries in which you invest. Not only do you need to spread your investment capital around a number of different stocks, but you also need to diversify your holdings across different industries. Owning a basket of stocks in one market sector increases your investment risk substantially, so you have to spread your money around different sectors if you want to protect your wealth over the long term.

The equity market’s sole purpose is to be a platform for the coming together of entrepreneurs and investment capital. All participants in the equity markets are taking a risk. Entrepreneurs risk their own time and capital to build a business. Investment dealers risk their own time and capital to back entrepreneurs, advise investors, and provide liquidity to the marketplace. Investors risk their own time and capital in order to see a business flourish and create wealth for themselves. The one common attribute of all the market’s players is that they are all taking a risk, with the goal of generating some expected returns.

As a businessperson managing your own portfolio, however, you aren’t running a typical business. You really don’t create a product, hire a sales force, and manage your inventory in the hopes of making a profit. As a businessperson running your own portfolio, you are engaged in the business of speculating on other peoples’ abilities to do these tasks on your behalf.

No matter how promising a stock market opportunity is, if you take the view that managing risk in your portfolio is the number one goal, you will do well in the long run.

Even the most sophisticated and experienced investors lose — big-time — in the stock market. Not only can losing be considered an element of the stock-picking process, but it also really represents the cost of doing business. No one can predict the future and no one can predict future stock prices. Risk should be your number one concern in the stock market.

Selling a losing stock position can be a very difficult thing to do. But, if one of your holdings drops 30% in value, remember that the ongoing risk to your overall financial position remains the same. Even the investment risk inherent in that same losing position remains the same — it could very well go down even further! This is why the management of risk is more important than potential returns. You cannot manage expected returns, but you can manage the amount of risk in your portfolio.

I will look at Part III of our investing ideas in the next issue.

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.

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.

The economic situation is improving in the United States, although there continue to be some growth issues in big-ticket items and housing. The Consumer Confidence reading fell in July for the second straight month. June Durable Goods Orders fell one percent with economists expecting a one-percent increase. This was the second straight month of disappointment and suggested weakness towards spending on big-ticket items, such as furniture and appliances. And, until we see spending pick up, growth may be stagnant.

And, while markets have been rallying, do not lose sight of the mounting debt and deficit issues in the U.S. and abroad in Europe.

The real problem I see is in the 27-member European Union (EU). The EU is a critical part of the global economies given it has more than 500 million people accounting for about 28% of the world’s gross world product in 2009, according to data from the International Monetary Fund. Problems in the EU can and will likely spread to other economies in Asia, Latin America, and North America. The EU is critical to the global economic recovery. Moody’s just cut the credit rating on Ireland, adding to existing debt issues in Greece, Spain, and Portugal. Greece and Portugal are not key economies, but Spain is the world’s ninth largest economy, so turmoil in that country could be devastating to the EU.

To help the EU countries in trouble, a trillion-dollar austerity program was set up in Europe that is aimed at helping economies, yet it could actually negatively impact economic growth in this vital region. The last thing the EU wants is weak members dragging the member group down, especially at a time when the countries are trying to rebound from the global recession.

With Europe expected to be sluggish in 2010 and 2011, there could be more problems down the road. Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the GDP growth in 2010 is pegged at a weak 1.5%, but a nice reversal from a five-percent decline in 2009. Growth in 2011 is even lower at 1.4%. In comparison, the U.S. economy is predicted to grow 2.8% this year and moderate to 2.4% in 2011.

The Organization for Economic Cooperation and Development (OECD) reported that the world’s rich economies will slow in the first half of 2010, but expects growth in the U.S. and Japan to exceed Europe. I feel that Europe may continue to underperform the global markets in 2010 and 2011.

So don’t be overly focused on the U.S.; you need to also monitor the situation in Europe. There has been some positive earnings news from European firms, and sentiment in the eurozone jumped in July, but it is only one reading and we need to see this reflected in the region’s growth.

And don’t forget China, with some signs of slowing there, which could impact other global economies.

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.

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.

Earnings and revenues are largely dictating trading at this time as evidenced by the volatility in the market. The results have so far been mixed and there is some concern towards revenue growth.

Bellwether General Electric Company (NYSE/GE) reported its first profits since 2007; yet a four-percent year-over-year (yoy) decline in revenues is a red flag, since GE is widely considered to be a barometer for the economy due to its diversified businesses in industrial, medical and energy.

We saw strong earnings and optimism going forward from Caterpillar Inc. (NYSE/CAT), 3M Company (NYSE/MMM), United Parcel Service, Inc. (NYSE/UPS), and AT&T Inc. (NYSE/T). The results are helping to offset revenue concerns at other companies that have reported.

In tech, the results have been mixed. There was a strong quarter from Apple Inc. (NASDAQ/AAPL), as the company easily beat EPS and revenue estimates. The company also offered higher revenue guidance. Earnings surged 78% yoy to $3.51 per diluted share, well above the $3.11 estimate. Revenue growth was 61% yoy, which is what traders want to see from companies.

Amazon.com Inc. (NASDAQ/AMZN) fell short on earnings, but managed to report a 41% surge in revenues, which is positive. Tech heavyweight Microsoft Corporation (NASDAQ/MSFT) also beat on earnings on a 22% rise in sales. Again encouraging to see the revenue growth, but Microsoft made a downward revision in its FY10 sales guidance.

Technology bellwether International Business Machines Corporation (NYSE/IBM) barely beat on its second-quarter earnings and came up about 500 million dollars short on revenues, which I view as worrisome. It’s something that I felt was crucial for this market to advance higher. To make matters worse, IBM also projected 2010 EPS that was a penny below Street estimates. Texas Instruments Incorporated (NYSE/TXN) was also slightly short on revenues, but was positive towards the third quarter. eBay Inc. (NASDAQ/EBAY) beat on EPS, but revenue growth was a mere six percent and the company cut the upper end of its revenue guidance for 2010. Online DVD renter Netflix, Inc. (NASDAQ/NFLX) and drive maker Western Digital Corporation (NYSE/WDC) were also both short on the revenue side. The revenue shortfalls added to the revenue issues at Google Inc. (NASDAQ/GOOG) and Yahoo! Inc. (NASDAQ/YHOO).

The lack of consistent revenue growth indicates that there may still be some demand issues from companies wanting to spend in face of the sluggish economic growth. Yet, American Express Company (NYSE/AXP) easily beat on EPS and reported a 13% rise in revenues. The results are encouraging, suggesting a pickup in consumer spending by cardholders.

In the banking sector, the results have largely been strong, but there continue to be issues with loan demand. There were strong results from Wells Fargo & Company (NYSE/WFC), Morgan Stanley (NYSE/MS), and JP Morgan Chase & Co. (NYSE/JPM). The Goldman Sachs Group, Inc. (NYSE/GS) missed on revenues. The Bank of America Corporation (NYSE/BAC) and Citigroup, Inc. (NYSE/C) reported mixed results and indicated that there were continued problems with lackluster loan demand. A plus is a decline in loan losses indicating that borrowers are able to better pay back loans.

The results are mixed, but we are seeing some positive growth in revenues. This is very important and is needed to drive sustainable gains in stocks.

A metric I like to look at is what the professional traders and money managers are doing. Some call this “following the money,” as the belief is that they know the story about a company better than the layperson. This is generally true, but is not always the case. Yet, by looking at the institutional holdings of companies and watching what they are buying, you can get some sense of what stocks may be in favor. It is just another analysis tool you can use to analyze what to buy.

Institutions control vast sums of capital and can sway the direction of a stock if it buys or sells. These institutions are also extremely accountable to their investors and hence there is a high level of quality research and due diligence before taking a position; much more than the retail investor. So, if you adhere to this belief, then following the money trail would make a whole lot of sense.

Take a look at Apple Inc. (NASDAQ/AAPL), for instance. The company is hot, and it has been tearing up the price charts to new historical highs. In its second quarter, Apple did not disappoint and easily beat EPS and revenue estimates. The company also offered higher revenue guidance. Earnings surged 78% year-over-year (yoy) to $3.51 per diluted share, well above the $3.11 estimate. Revenue growth was 61% yoy, which is what traders want to see from companies. Apple reported that it sold 8.4 million “iPhones” in the quarter, up 60% yoy, and 3.27 million of its new “iPads” since the product’s launch in April.

The company is hot now and is also tearing it up in the PDA market, as it takes market share from Research In Motion Limited (NASDAQ/RIMM). The who’s who of the financial world own Apple, including FMR, State Street, Vanguard, BlackRock, and Janus Capital.

The concern with Apple will be if the buying pattern reverses and we see a decline in buying and instead see institutional selling. This
would be a sign to perhaps take some profits. Take a look at the institutional holdings, which declined 1.49%, or 9.64 million shares quarter to quarter. This indicates some profit-taking, but it’s not a big deal, as there are 910 million shares outstanding.

Online books and music retailer Amazon.com, Inc. (NASDAQ/AMZN) has been sliding since trading at its 52-week high at over $150.00, but has subsequently been attracting some selling. Institutional holdings fell 2.71%, or about 7.78 million shares, quarter to quarter. The pros are taking some profits, which could foreshadow additional weakness ahead.

Google Inc. (NASDAQ/GOOG) recently fell after reporting disappointing growth. The company also is dealing with censorship in the world’s largest Internet market in China. The pros appear to be negative, as demonstrated by the cautious trading and the selling of 3.24 million shares, or 1.27% quarter to quarter.

The bottom line is that, as an investor, you need to monitor what the pros are doing as a complement to your own analysis.

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 — Earnings season started with a bang following strong reports from Intel Corporation (NASDAQ/INTC), CSX Corporation (NYSE/CSX), JPMorgan Chase & Co (NYSE/JPM), and Advanced Micro Devices, Inc. (NYSE/AMD).

But, wait, maybe all is not as rosy as we thought earlier last week. In the first miscue of the earnings season, search engine giant Google Inc. (NASDAQ/GOOG) came up short on the earnings side despite a positive 24% year-over-year rise in revenues. Revenues were slightly ahead of estimates. The decline is not that bad given that it could be much worse. The shortfall may be Google-specific and impacted by stagnant advertising.

Bellwether General Electric Company. (NYSE/GE) reported its first profits since 2007. Yet, a four percent year-over-year decline in revenues represents a red flag in my view, since GE is widely considered a barometer for the economy due to its diversified businesses, such as industrial, medical and energy.

Moving over to banking, The Goldman Sachs Group, Inc. (NYSE/GS) was fined a massive 550 million dollars for its questionable and unethical dealings in the subprime meltdown. The
Bank of America Corporation (NYSE/BAC) and Citigroup Inc. (NYSE/C) reported mixed results and indicated that there were still problems with lackluster loan demand. A plus is a decline in loan losses, indicating that borrowers are able to better pay back loans. The financial sector is looking for leadership to help drive any upward moves.

So far, early on, I am encouraged by some of the results, specifically the key revenue growth. Yet the stagnant economy is halting any sustainable upside gains for the time being.

On the economic front, inflation remains benign, with the June PPI declining 0.5%, which supports the low-rate environment.

In housing, estimates call for about one million foreclosed homes this year, according to RealtyTrac. Again, not encouraging news for a sector that continues to be distressed, which poses problems for consumer spending and GDP growth. There are concerns of potential
slowing in the second half, after Retail Sales fell a worse than expected 0.5% in June, the second straight monthly decline. The demand for loans for mortgages fell to a 13-week low, according to the Mortgage Bankers Association. The decline in loans is despite rates for mortgages being at a record low, so clearly there continues to be an issue in housing, which is not unexpected given the soft jobs market. Continuing claims rose for the recent week.

So, here you have a battle in the market, with everyone trying to digest the economic and earnings results. Of course, the next several weeks of earnings to come could make it clearer.

The fear now is that the economy may slow in the second half, with the possibility of a double-dip recession, albeit I do not expect this will happen unless jobs and housing tank.

Technically, the extreme overbought condition in stocks makes the market vulnerable to any major negative news, and we are seeing some of this now.