An investment strategy is a protocol and methodology for allocating funds of a portfolio. This strategy is based on an investor’s risk profile. The more risk the investor is willing to take, the greater the potential returns, but also the higher risk of a loss in capital. There is a whole universe of investment strategies, from the least risky of buying treasury bills and government bonds with high credit ratings, to the more risky of buying stocks based on fundamental analysis, technical analysis or simply buying and holding for the long term. Some investors also look to stocks with dividends that return a yield over time, to mitigate some of the risks of the stock market.

Following research I did on Caterpillar Inc. (NYSE/CAT) back in March, which culminated in the article, Caterpillar’s Cracks Indicate an Economic Slowdown. I said that, at that point in time, the stock was priced for perfection. If one had an investment strategy that incorporated technical analysis along with fundamental research, it was evident that the stock was due for a pullback. At the time of the article, the stock was trading at $109.00; with the current price being approximately $92.00, the stock dropped almost 16% in less than two months.

Looking at the investment strategy of Caterpillar, while the stock has sold off, there are still some warning signs. With China being a large engine of growth for the world economy, signs of a slowdown would impact one’s investment strategy. Recent reports that sales of Chinese bulldozers dropped 51% in March from a year earlier are certainly a red flag. Real estate construction continues to slow down and I think this could spread through the world economy.

Chart courtesy of www.StockCharts.com

In addition to more headwinds from a fundamental point of view, I also like to look at technical analysis when formulating my investment strategy. There are several interesting points of interest when looking at the technical analysis picture. I like to view the Fibonacci level in addition to the 50% retracement based on the opening and closing prices. In technical analysis, you should work with the indicators you are most proficient in. From the lows in October to the highs in February, the stock was overbought and due for a selloff, which we’ve just encountered. In technical analysis, if one indicator is used several times, this increases the importance of that level. Looking at the technical analysis of the selloff, once the stock price went below the 38.2% retracement level, the stock couldn’t gain additional buying support and the price fell to just shy of the 61.8% level. This range is extremely important in technical analysis, as evident by the indicated squares going back to last fall. Technical analysis tells us that a move beyond this range will most likely indicate the next big move, either a re-test of the lows or a re-test of the highs.

In technical analysis, following a large move, it is normal for a stock to pull back into this range and trade around its 50% retracement level, which Caterpillar is currently doing. Also note the oversold condition in the Relative Strength Index (RSI), noted with the circle. The indicators in technical analysis tell us that we might get a bounce back up, partly from new long-term investors and partly from short sellers covering their positions. This does not mean a new bull market, as we would need to see more technical analysis indicators confirm that. The overall trend is still down, but one must be aware of some buying support at current levels.

With the uncertainty in Europe and China, I think from a fundamental point of view that it might be difficult for this stock to exceed its highs in the short term. Most likely, we might get a small move back up within this trading range. For now, I think a lot of people looking at this chart from a technical analysis point of view will be trading the ranges and looking for a breakout to either side.

The latest revelation that JPMorgan Chase & Co. (NYSE/JPM) suffered a multi-billion loss on bad investments is yet another warning sign that bank stocks are littered with questionable trades that the average person simply can’t decipher. The investment strategy developed by bank stocks over the past decade has been questionable at best. The strategy of taking excess liquidity and using those funds in an investment strategy to enhance earnings, which then leads to higher bonuses, has littered the bank stocks with billions in losses over the past decade.

Chart courtesy of www.StockCharts.com

JPMorgan estimates that, while it tries to unwind the position, it will cost an additional $1.0 billion. I’ve actively traded around several large blowups due to bad trades, such as Amaranth Advisors, and things get far worse before they get better. Amaranth Advisors was a huge player in the natural gas markets. As its investment strategy started going south, everyone on the street smelled blood in the water. This exacerbated the company’s losses, as its positions got squeezed. Amaranth ended up losing over $5.0 billion in one week, with the entire firm shutting down shortly after with losses well in excess of $6.5 billion, out of total asset size of $9.0 billion.

This is similar to legendary hedge fund manager John Paulson. His firm, Paulson & Co., was squeezed out of his investment strategy in being long gold during the fall of 2011. The street got wind of his investment strategy and proceeded to squeeze him, forcing even larger losses that snowballed into more selling.

The street is extremely smart in figuring out large players and their respective investment strategy. No one firm can control a market for long. Eventually, the Street will squeeze them out. JPMorgan’s unit has in excess of $200 billion, so a $2.0-billion loss is not a huge amount relatively speaking. But, for bank stocks, this is a worse-case scenario, as more regulatory pressure will be forced onto them as outrage rises.

Frankly, I think there might be an opportunity to look at JPMorgan, but only once it is out of its position. The firm is still one of the largest and most profitable bank stocks, but it will take most of this year to unwind its investment strategy, and I also believe more losses will come. I would look to the late fall or winter, as bank stocks might perform poorly during the September-October period. If we get more news of losses, but JPMorgan also announces it is out of this investment strategy, then that might perhaps signal a long-term bottom. There is, however, a long time to go between then and now. For the time period, I would not invest in bank stocks until the dust settles, which might not happen until early next year.

The recent sale of Edvard Munch’s “The Scream” for almost $120 million is a clear indication of the market sentiment regarding hard assets. The sale took place at Sotheby’s Holding, Inc. (NYSE/BID) auction house, one of a few firms whose investment strategy is to auction off high-end art and antiquities.

This sale was the highest priced auction sale in history, showing that the market sentiment for rare assets is still very high. The reason why the price went so high is that the collector assigned the value of the art as far more than paper money. When market sentiment gets to the point where the actual paper money is worth less than hard assets, this is a warning sign to everyone.

Yes, this art is only for the super-rich, but if they’re willing to trade a paper money for a painting, this tells me that paper money is becoming more worthless every day. The market sentiment of the super-rich is not to be ignored. If their market sentiment indicates that money printing is causing the devaluation of the dollar, then I would suggest following in their steps and protecting your assets.

While we can’t all participate in the high-end art market, regardless of our market sentiment towards paper money, one way is to look for firms the corporate profits of which will benefit from this market sentiment. The sale took place at Sotheby’s auction house, the main publicly traded firm available for investors who believe that the market sentiment of hard asset values will continue to go up. On Thursday, May 10, 2012, the firm will announce quarterly corporate profits. Even with this sale and the profit generated, I think it will miss corporate profits. Therefore, I would not invest in the stock at this point.

The stock is coming off two straight quarters in which there was a decline in revenue and, even though the high-end art is selling, a lot of the mid-to low-end art is not. Partially I think this is a sign that, even though the market sentiment for many is to trade paper money for assets, people don’t have a lot of disposable cash left to acquire such assets.

Chart courtesy of www.StockCharts.com

Sotheby’s stock does trade at a book value of almost three times, quite high for a firm that isn’t growing corporate profits at a fast pace. While profit margins are very healthy at over 20%, quarterly revenue declines recently have worried me. Looking at the weekly stock price after a big run-up from 2009 to 2011, the stock has pulled back and retraced into several Fibonacci levels. This area will be of significant resistance and impede further moves up, as market sentiment is now essentially flat; neither bullish nor bearish.

Chart courtesy of www.StockCharts.com

Looking at the shorter term, you’ll notice two horizontal lines that have locked Sotheby’s stock into a trading range. With so many reversals along the trading range, it’s not possible to predict which way will break out, only that whichever side the stock does break out, it will be significant and will most likely continue in that direction. News this week about the company’s quarterly earnings might be the catalyst for the stock to break the range and for a change in market sentiment.

With a series of quarterly revenue misses, I am doubtful Sotheby’s can beat estimates. Looking at the chart, there aren’t that many bullish signs to me. If somebody knows something about the company’s corporate profits, they’re not buying ahead of the news. Investors are sitting on their hands and I would recommend you do the same.

When it comes to investment strategy, many U.S.-based firms simply take the approach of blaming cheap foreign labor everywhere else and throwing up their hands as if there’s nothing they can do. That’s not much of a long-term investing strategy. There are some examples of U.S.-based firms that are generating strong corporate profits with a unique investment strategy—providing innovative products that customers really want.

Cummins Inc. (NYSE/CMI) is one such American firm that has seen rising corporate profits and has an intelligent investment strategy. Cummins produces engines for trucks and machines. Some might think: how can a U.S.-based firm increase corporate profits by building an engine when foreign competitors must be able to do it cheaper? The answer is: good old-fashioned innovative designs developed with an investment strategy to provide customers with a superior product. Demand for engines built by Cummins continues to grow around the world.

Cummins’ investment strategy is to become the leader in producing innovative, high-quality goods. This vision is not short-term thinking, but rather an investment strategy built carefully over time that is now paying off in strong corporate profits.

Thirty-five percent of sales for Cummins came from emerging markets like India, China, Brazil and other smaller nations. In 2007, this number was 27%. While corporate profits have been strong, the latest quarterly results are showing some weakness in these emerging markets, as revenue declined 16% in China and 18% in Brazil. While these declines will hurt short-term corporate profits, the firm has a long-term investment strategy with a long-term vision over the next decade.

In the short term, cautious comments by the CEO, N. Thomas Linebarger, might indicate that a pullback is in order; the CEO stated that he doesn’t believe any economy is going to do well in the near term. Cummins estimates that these emerging markets over the next 10 years will grow more than double what the U.S. and Europe will return.

A benefit of having an investment strategy built on a strong product is that the name Cummins has now become synonymous with high-quality products, which drives corporate profits. In 2011, income increased 78% from 2010. First-quarter profits of 2012 were $455 million, up 33% from 2011. The CEO states that the investment strategy for Cummins over the next several years is to achieve $30.0 billion in annual sales and $20.00 a share in corporate profits, a very lofty goal in a weakening global environment.

The other advantage Cummins has is that it’s a natural gas benefactor as well. Cummins is one of the leaders in converting diesel truck engines into natural-gas-powered engines, another division that’s seeing growth in corporate profits. As the price of natural gas remains low, the conversion of existing diesel engines to natural gas will drive corporate profits, a smart long-term investment strategy.

One of the most interesting statements I heard from the CEO was: “Whatever your technology offering is now, next year’s has to be better.” A great statement, showing that Cummins is focused on innovation as a core investment strategy.

Chart courtesy of www.StockCharts.com

The recent high in March is showing a negative divergence, as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) Line did not correspond with highs of their own, a bearish sign. The stock is now trading below the median uptrend line, which usually indicates a possibility of trading down near or below the lower uptrending line. Fibonacci retracements show a support level of approximately $102.00 and, if that breaks, long-term support at the $85.00 area. Considering some of the negative comments by the CEO on weakening emerging markets and world economy, I can see this stock selling off for a period of time. Some of these comments echo what I found in my research of Caterpillar Inc. (NYSE/CAT), which you can read about in Caterpillar’s Cracks Indicate an Economic Slowdown.

Cummins appears poised for a short-term pullback. However, the investment strategy over the long term appears quite solid. More U.S. companies need to take a page from Cummins investment strategy to drive corporate profits by innovating and providing extremely high-quality products that are the leaders in each category. The goal of a company should be to have its name synonymous with high quality in the mind of the consumer. This investment strategy will enable high margins and strong corporate profits over the long term.

Google Inc. (NASDAQ/GOOG) is one of the most unique technology stocks. There are many technology stocks that try to rival Google. Google sets itself apart from other technology stocks through innovation as a key investment strategy. But this desire to expand too far has led to some mistakes. While many investors believe Google to be a pure marketing company, it has expanded its investment strategy to include the retail sector.

The retail sector is a slightly different animal for Google and technology stocks need to adapt their methods for that sector.

Google has recently announced that it will be selling tablets directly to consumers, along the same lines as Apple Inc. (NASDAQ/AAPL). Technology stocks will tend to copy each other once they see a firm has been successful with an investment strategy. The tablet market is one in which Google is falling behind, as Apple currently holds approximately 73% of the market share, according to industry research firm Gartner Inc. In addition to Apple, Amazon.com, Inc. (NASDAQ/AMZN) also sells a tablet, for the lower end of the retail sector, which funny enough runs off of Google’s “Android” operating system.

The success of Amazon’s tablet, the “Kindle Fire,” is a problem for Google, as other firms decide to build their platform on top of the Android operating system. This will cause more fragmentation in the retail sector, resulting in Google losing control of its operating system. The advantage of Google’s search engine is that it controls and can keep track of all the searches that are occurring, mining this data for marketing purposes. This data is worth billions of dollars. Once another company builds its system on top of Android, Google does not have access to this information. Amazon collects and stores the data from the Kindle Fire, not Google.

The retail sector is a tricky investment strategy for many firms, including technology stocks. The last attempt by Google to try to sell to the retail sector directly ended up in poor results with its “Nexus” phone. The new tablet to be sold directly the retail sector this time should work somewhat better. The main problem with the investment strategy of selling a phone online directly to the retail sector is having deals with cell phone carriers across different locations and countries. This won’t be an issue for tablet users, as many forgo data plans and primarily use Wi-Fi.

Google just announced that it is adding a cloud storage service to compete with other technology stocks. I can see an advantage that Google might have over other technology stocks, as its understanding of data search and storage is most likely at the pinnacle of the industry. The main problem that I see with all of these plans is a lack of a complete ecosystem tied together, as compared to other technology stocks like Apple and its “iOS.”

The really interesting information comes from Google itself, as it reported the percentage of users running each version of Android. According to Google, only 2.9% of Android devices are using the latest operating system. Over 86% of Android users are using old software, without the latest bells and whistles. Either the devices can’t get upgraded to the new software, or consumers aren’t buying the newest devices. Either way, it’s not a good sign for Google.

When developers build applications (apps), they assume the latest operating system is in use. As we all know, consumers want tons of apps to play with. Without the apps, the device is useless. A perfect example is Research In Motion Limited. (NASDAQ/RIMM), as I wrote in my article, Beginning of the End for RIM? Now, let me be clear; I am not comparing Google with RIM. Google is far and away a better company than RIM. I’m only suggesting that Google needs to pay careful attention to the retail sector and formulate an investment strategy that makes sense for the long term. With the brilliant minds at work there, I certainly would not bet against the company. With the stock trading at a forward price-to-earnings ratio of just over 12, the valuation makes a compelling case; however, I would wait to see what the reaction in the retail sector is to these products and services.