A Rogue Trader and Market Turmoil

Normally I don't like to comment on News stories but this one is just incredible considering how chaotic the markets have in the last few days.

Here's an Excerpt:

"It kind of begs the question now, did the Fed cut rates courtesy of a rogue trader at SocGen having to close out a massive position and sending the stock market into turmoil?"


Here's the News Story

Global Investing & Diversification - Not Always!!!

Those who advocate global investing better check the following numbers which states that there is no benefit to global investing when most of the world's stocks markets are highly correlated. Maybe in the future, there will be a decoupling from US markets, but certainly right now.

The Correlation statistics below are against S&P 500 ishares (IVV) (Time Period: 3 Years)

Source: Smartmoney.com

Conclusion
There is sense of Fear and Panic surrounding the markets right now, and until it subsides world markes will continue to fall.

Hang in There!!!

Brutal Market - Next Stop 12,000

You can listen to strategists, economists or market pundits and their optimistic views, but the market always tells you the truth. The truth is we are no where close to a bottom.

Critical Support at 12,000
Next stop for DJIA is 12,000. Do not put anymore money into this market until there is stability, today (Jan 17) we're witnessing a free fall. We'll see if it stablizes at 12,000. If not, the market is in real danger of a crash.



All News is Bad News
Currently, all news is bad-news. Investor psychology will be defeated in an environment like this, and you certainly need nerves of steel to hold on.

Whether it's the FED, the financials, consumers, some one must issue a piece of good news to turn this bearishness around. A rate cut will certainly help! But is 1/4 point good, 1/2 point sufficient? or are the rate cuts built into the market already. I don't know the answer to that.

Conclusion
The important thing is to watch the critical support levels and ignore "experts" who say this market is cheap, valuation have never been so attractive. The markets are telling you what they are not! It certainly looks like this is setting up to be a brutal year.
At some point (don't know when), it will be attractive to get in again. Just not right now! I've emphasized healthcare sector is the place to be going forward, I continue to believe that. Also, the gold market (although volatile) will continue to perform well.

(Not so) Happy Investing...

Stick with Healthcare Sector - Multiyear Trend

All attention seems to have been given to Gold and Agri stocks since the beginning of the new year. However, the healthcare sector has quietly been moving to the upside breaking critical multiyear downtrend. My take, stick with Healthcare, this is the just the beginning of a long upward cycle.

Trendline broken to the upside:

The chart below is a ratio of the S&P healthcare sector ($SPHC) and S&P 500 index (SP500). It clearly shows the trendline has been broken to the upside




This chart below is a ratio of the S&P healthcare sector ($SPHC) and DJIA (INDU). It also shows the trendline has been broken to the upside


Conclusion
Stick to healthcare, this is just a beginning of a long upward trend. Read my previous post alluding to an imminent breakout of the healthcare sectors on a short term basis. It hasn't happened yet. However on a long term basis, the charts above clearly indicate a reversal of a multi year downturn. These moves are significant indeed!!!

Healthcare Sector Breakout Imminent

YTD the S&P healthcare sector is up 3.4% while rest of the market is getting pummeled.

Healthcare Sector Breakout Imminent
Below is a chart of 4 indices: All are near the top of their trading range suggesting a breakout is imminent:
$IXV - Healthcare sector - Amex;
$NHG - Healthcare Index - Dow Jones;
$SPHC - S&P 500 Healthcare Index;
$NYP - Healthcare Index - NYSE



Within the S&P healthcare sector, the following stocks are less than 5% from their highs:

• Abbot Labs (ABT)
  
• Aetna (AET)
  
• Allergan (AGN)
  
• Bard C R Inc. (BCR)
  
• Baxter International (BAX)
  
• Becton Dickinson (BDX)
• Cigna Corp. (CI)
  
• Coventry Health Care (CVH)
  
• Genzyme (GENZ)
  
• Gilead Sciences (GILD)
  
• Hospira Inc. (HSP)
  
• Humana Inc. (HUM)
  
• Johnson & Johnson (JNJ)
  
• Laboratory Corp. of America (LH)
  
• McKesson Corp. (MCK)
  
• Merck & Company (MRK)
  
• Varian Medical Systems (VAR)
  
• WellPoint Inc. (WLP)
  

Among other healthcare stocks that have broken out:
Icon PLC (ICLR)
Covance (CVD)
BioMarin (BMRN)
Healthways (HWAY)
Acorda Thera (ACOR)

ETFs to Play
Those looking to play the healthcare ETFs could view a list on Yahoo Finance

Conclusion
While other sectors are getting pummeled healthcare stocks might offer some protection to your portfolio.

Disclosure: I do not own any shares of companies mentioned above

Goodbye US Bull Market

Wow, Last September The Dow Jones was hitting new highs in the midst of the subprime mortgage crisis as if the problem was quickly contained. Of course, we now know that was just the beginning . As it sits at a critical level (12,500), it's time to examine why it's the end of a bull market.

End of the bull market
Here are the reasons for the end of the bull market in the US, I don't know how the US slowdown will reverberate across global markets. But, the trend is definitely down going forward!

1. Corporate Profit Growth slowing
2. Housing has not seen a bottom
3. The Credit Crunch continues - Deflating business investments
   
4. Consumption will inevitably slow
5. Manufacturing in Us has already showing signs of slowing

Corporate Profit Growth slowing
Operating earnings for the companies in the Standard & Poor’s 500-stock index are forecast by analysts at S.& P. to be 8 percent lower for the final three months of the year, compared with the period in 2006, after a 9 percent year-over-year drop in the third quarter.

Housing has not seen a bottom
Below is a snapshot from S&P Case/Shiller index of home prices across the nation. Notice how far prices have appreciated which should given an indication of how much further they could fall.




The Credit Crunch continues - A Deflationary event
The chart below (source: Generational Dynamics) illustrates how commercial papers' ascent to astronomical levels is now followed by a precipitous drop.

Excerpt from Dec 14 2007: "since the market [ABCP] peaked at $1,200bn in early August, it has shrunk by more than one-third." (source: FT.com). No doubt this kind of deflationary event affects business investment going forward.



Consumption will inevitably slow
Consumer Debt is at a all time high and this could be partly due to the appreciation in the housing prices. So, If housing prices have dramatically fallen, could consumer debt be next? This chart says it all...




Manufacturing in Us has already showing signs of slowing
The table below shows a trend in indicators from Nov to Dec (Source: ISM manufacturing index)



Looking at the factors mentioned above, the market has only one place to go, which is down, despite what the FED does with interest rates

Hello Mr. Bear Market
What I don't know is if this will be a 'grizzly' (vicious) bear market or a 'knut' (light) bear market. Regardless of the severity, one must be prepared for the downturn that will no doubt feel like it's the end of the world.

part 2 to follow...

Before you bathe in Gold, Consider...

Ok, Gold breakout today was historic but here's how I would play it going for forward. Short Term Target is 900 and will probably retest 850 before moving beyond 900. Either way, we are in unknown territory from now on...
















Strategy
1) Play the ETFs:

• Buy GLD (Streettracks Gold Trust Shares) -> Play on Commodity itself! (This has broken out!!!)
• Buy GDX (Market Vectors Gold Miners) -> Tracks the $GDM (gold miner sector- AMEX) This is has not broken out!!!
• Buy XGD (iShares S&P TSX gold index) -> Play on Commodity itself in CDN dollar (This has broken out) - Trades on Canadian Exchange
  
• Buy HGU.TO (Horizon's Beta Pro Gold Bull) -> Tracks S&P TSX Gold Index (This has not borken out) - Trades on Canadian Exchange

2) Play the stocks for leverage:

• If you notice above, while the commodity has broken out to new highs, Gold stocks have not participated in the runup. So, Buying the stocks gets you extra returns via leverage
  
  
• There are several ways to play the gold stocks. From the list below, Pick the type of stocks according to your risk tolerance. The top being least risky and the bottom being highly risky (notice I did not use the word "safe"). These are after all high beta stocks. The hierarchy looks like the following:
  
  
1. Gold Producers - Large
2. Gold Producers - Mid and Junior
3. In Development Stage - Mid and Junior
4. In Exploration - Juniors
5. Moose Pasture
   

3) Stocks to Consider

• While I'm hesitant to recommend any juniors, I will stick to the Large and Mid-Sized Gold producers

• Agnico Eagle Mines (NYSE: AEM)
• GoldCorp (NYSE: GG)
• Kinross Gold (NYSE: KGC)
• NewMont Mining (NYSE: NEM)
• Yamana Gold (AMEX: AUY)
• Freeport (NYSE: FCX)

Conclusion
In the short term, gold should hit 900 and back off to retest the previous highs (850 or so). Just remember, Whenever you have a multi decade breakout, the move is very very significant.

Happy Investing

Disclosure: I do not own any of the securities mentioned above