One Indicator Pegs U.S. Economy at Worst Level since 1959

Many economies predict 2014 to be the year of the economic recovery. Some economic indicators and surveys support this view, but this powerful common sense indicator shows the economy at its worst state since 1959.

Money velocity is the frequency at which one dollar changes hands and is used to buy goods and services within a given period of time.

To illustrate we’ll look at two simplified mock economies:

The Federal Reserve prints $100 to buy Treasuries from banks (NYSEArca: XLF). The bank invests the $100 in stocks.

A consumer withdraws $100 from his bank account to pay his mechanic. The mechanic takes his wife out for a nice dinner and the restaurant uses the money to pay its staff and buy new equipment. After receiving her pay check the waitress goes out and buys a new watch.

The original $100 in the second mock economy changed hands four times (high velocity) and helped support three additional individuals/businesses once  in circulation.

The conclusion is obvious: The higher the velocity, the healthier the economy.

Below is a chart of the U.S. money velocity. The St. Louis Fed money velocity data goes back as far as 1959. Current money velocity is at an all-time low.

This can’t be good for the economy and one would think that low money velocity couldn’t be good for the stock market either. Is that so?

Rather than assume, here are the facts.

The second chart plots the S&P 500 (SNP: ^GSPC) against the money velocity of M2 money stock.

The S&P 500 is charted on a log scale to enhance the major up and downs of the past 55 years.

Low money velocity preceded a bear market in 1973 and lower prices in 1977. Low money velocity was also seen about a year before the 1987 crash, which sent the S&P 500 and Dow Jones spiraling.

But there were other instances that had no effect, or no immediate effect, on the S&P 500 (NYSEArca: SPY) and Dow Jones (NYSEArca: DIA).

The current wave of velocity anemia is as unprecedented as the Fed’s liquidity machinations. Both events are likely connected (for every action there’s a reaction).

At very best, money velocity (and lack thereof) may serve as a very blunt warning signal.

Fortunately, there are better warning signals. One of them is discussed here. In fact, it is so effective, I call it insider trading. How Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Trusted German Newspaper Asks: “Will the Financial System Collapse?”

A reputable German newspaper asks the question forgotten by many domestic media sources: With or without tapering, will the financial system collapse? The answer may be surprising to many.

Have you ever gotten tired of the same old financial news coverage dispensed by the likes of CNBC, Fox, Wall Street Journal, Reuters, and other US media outlets?

I’m not saying it’s bad information, but like eating the same meal over and over again, the same slant on financial developments could become a bit stale.

In my last trip to Germany I made a conscious effort to pick up and read a number of reputable German finance/economy magazines.

I’ll write more about interesting tidbits discussed in the German financial media in the coming days, but here’s more detail about a headline that caught my attention?

“Is A Financial Collapse Approaching?” 

This question was featured on the front page of the September 4 edition of the Focus Money magazine.

As a contrarian investor, my first thoughts were that prominently discussing the odds of a financial collapse minimizes the chances of just such an event. But this changed after I read the article.

Focus magazine asked legendary emerging markets investor Mark Mobius for his feedback on various investment themes. The MIT educated Mobius is 77 years old and heads the emerging markets team for Franklin Templeton.

Tapering Yes – Collapse No

Mobius expects Bernanke to start tapering, but says that this will have virtually no effect on stocks (NYSEArca: VTI) as liquidity remains in the system (although he admits QE’s role in driving up stock prices).

Mobius asserts that banks (NYSEArca: KBE) have cleaned up their balance sheets and will funnel more money in the real economy. “The fear of tapering is overdone – it will barely affect stocks,” he says.

Mobius believes that QE by the Bank of Japan will be successful and ultimately affect world markets (NYSEArca: EFA). In fact, liquidity provided by the BOJ will make up for the liquidity withdrawn by the Federal Reserve.

Time to Buy US Stocks?

Focus magazine: “As an emerging markets (NYSEArca: EEM) specialist, would you recommend buying US stocks?”

Mobius: “Diversification is important and investors shouldn’t put all their eggs in one basket, but it’s certainly a good idea to buy US stocks.”

A Bear in Bull’s Clothing

The financial collapse headline and Mobius’ views struck a cord with me as I see the odds of a major market top forming around current prices greater than 50%.

After reading the Focus Money article it became clear that – according to Mobius – there is no risk of a financial collapse. From a contrarian point of view that’s more bearish than bullish.

Mobius has strong opinions about other emerging markets issues, such as:

1) China’s government completely (as in 100%) controls its banks and has the ability to successfully implement any and all financial policies.

2) The most attractive place to invest is Africa, in particular Nigeria.

I don’t agree with Mr. Mobius’ outlook, but he does offer a perspective not available to many US investors.

Another somewhat shocking forecast is featured in Germany’s Handelsblatt, the German economy and finance newspaper.

The front page of an August edition touts another gold rush caused by China.

For more information read: According to Reputable German Newspaper, New Gold Rush Lies Ahead

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter

 

How Big is CAT’s Effect on Stocks and Economy?

Caterpillar’s (CAT) earnings disappointed, but is this the only reason why CAT has become the number one target of a famed hedge fund short seller? Could this CAT wreak havoc on the ‘dogs of the Dow?’ Here is how CAT affects the Dow Jones.

This CAT is bad news for the ‘Dogs of the Dow’ and has become the number one short target of a famed hedge fund investor.

Global construction equipment powerhouse Caterpillar (NYSE: CAT) announced thoroughly disappointing second-quarter earnings on Wednesday.
Revenue dropped 15.8% to 14.63 billion and earnings slid 43% to $960 million. Perhaps more importantly, earnings and revenue guidance was lowered as well.
Caterpillar’s global dealers have been selling some of their inventory, but largely refrain from restocking CAT equipment due to lacking demand.
CAT already implemented factory shutdowns, rolling layoffs, and expense cutting programs and will continue to do so for the remainder of 2013.
A company like CAT, that operates in an economically sensitive sector and has tentacles spread out over the entire globe, provides an interesting gauge of the global economy.
Here’s a thumbnail sketch of why many are worried about CAT’s message.
Many of CAT’s customers are in the construction and mining sector. Take a look at ETFs like the Market Vectors Gold Miners ETF (NYSEArca: GDX) and you know why mining companies aren’t in a position to chauffeur mined metals in the latest model dump truck.
Many metals, such as copper, iron or silver, are used in construction or technology. Slowing demand for metals cautions of a slowing economy. Dwindling demand for construction equipment has the same effect.
Just last week, famed short-seller Jim Chanos, founder of Kynikos Associates, picked CAT as his top choice to short for a number of reasons, such as deflating Chinese real estate bubble, slowing cycles and some accounting troubles.
CAT And The Dow
Apparently there are plenty of reasons to be bearish on CAT, but how does this affect other stocks?
CAT accounts for 4.22% of the Dow Jones Industrials Average (DJI: ^DJI) and Dow Diamonds ETF (NYSEArca: DIA) and is the ninth biggest component.
As the chart below shows, there’s quite some directional harmony between CAT and the Dow Jones Industrial Average.
In fact, from 2005 – 2011 CAT and the DOW carved out major highs and lows in pretty much the same week every time.
This changed in early 2012 when CAT started heading south while the Dow kept climbing higher.
This phenomenon is not exclusive to CAT. We’ve seen a very similar lag with copper prices
(related article: Indicator Exposed: ‘Dr. Copper’ – More Quack Than Doctor)
What does this mean? There may be a very complicated and intricate explanation for this, but the most likely one is that the economy is weak, but the Fed and other central banks are strong.
Oh yes, and stocks might be in trouble … eventually.
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF

Banks – Record High Excess Deposits May Fuel Stock Bubble

JPMorgan just recorded the largest amount of excess deposits in the history of banking. This sounds good at first glance, but it reflects a trend that exposes the entire banking sector to way above average ‘human error.’

In the aftermath of the financial crisis, the Fed kept encouraging banks to lend more.

Money makes the world go round and if banks don’t lend the economy doesn’t hum.

As of June 30, total loans by JPMorgan hit the lowest amount ($726 billion) since September 2012. Yeah, that’s not great, but not terrible either, it’s only a 9-month low.

At the same time deposits hit an all-time high of $1.203 trillion. That doesn’t sound bad; it just shows that JPM is well capitalized.

But behind the façade of engineered figures lurk some troubling questions:

  1. Banks are supposed to lend the money entrusted to them via customer deposits. The interest margin is where banks make their money. Apparently though, the margin business is no longer as attractive as it once was.

    Investing customer funds is obviously more profitable than lending. What happens if banks have no incentive to lend?

  2. JPMorgan’s excess deposits are at an all-time high of $477 billion ($1.203 trillion – $726 billion). Where does the excess money go?

The ‘London Whale’ trading disaster, which cost JPM some $3.4 billion (as far as we know), was funded by excess deposits.

With 61%, JPMorgan has the lowest loan-to deposit ratio and leads a trend. The average loan-to-deposit ratio for the top eight commercial banks has dropped nearly 10% in recent quarters.

We don’t know exactly where banks put their money, but we know Wall Street is just plain greedy. Like a horse, big banks will gorge themselves on juicy returns regardless of the consequences.

Right now it’s easier to make money with stocks, junk bonds, and other sophisticated leveraged instruments than lending. No doubt that’s where money is going and $477 billion (that’s just from one US bank) can buy a lot of stuff.

Based on past experience, big banks don’t know when enough is enough. Rather than stopping while they’re ahead, they’ll continue to play until someone gets stuck with a hot potato.

As per last week’s ETF SPY analysis, the Financial Select Sector SPDR (XLF) does not appear to have reached the end of the rope yet.

Higher prices are still likely, but technicals as well as big banks propensity for short-sighted decisions, caution that this time may only have been delayed, not different.

The Economy’s ‘Bread and Butter’ Sector is Back in Recession

The Federal Reserve has ‘manufactured’ a relentless bull market for stocks while kicking the economy’s ‘bread and butter’ sector – manufacturing – into recession territory. Manufacturing activity is at a 42-month low, stocks at an all-time high. What gives?

On the first business day of each month the Institute for Supply Management (ISM) releases the Manufacturing ISM Report on Business, also known as ISM Manufacturing Index.

The forecast for May called for a reading of 53, but 49 is what we got. This is the worst ISM headline print since June 2009.

We hear the headline print report every month, but what does it (49 this month) mean anyway?

The Manufacturing ISM Report on Business is based on the responses of member purchasing and supply executives from around the country.

Survey responses reflect the monthly change, for each of the following indicators: New orders, backlog of orders, new export orders, imports, production, supplier deliveries, inventories, customers’ inventories, employment and prices.

The resulting single diffusion index number reflects the percentage of positive response from the segments that qualify for seasonal adjustments (new orders, production, employment, supplier deliveries). For May that number was 49. Any print below 50 indicates that the manufacturing economy is generally declining.

Stocks and Manufacturing Out of Sync

A declining manufacturing economy doesn’t automatically translate into lower stock prices. As the chart illustrates, a contracting manufacturing economy from 2004 – 2007 didn’t deter the S&P 500 from soaring to the 2007 high.

The same thing happened from 2011 – 2013. The S&P 500 (corresponding ETF: SPDR S&P 500 ETF – SPY) and all major market indexes (with exception of the Nasdaq) are now trading near all-time highs, the ISM manufacturing index at a 42-month low.

There’s one major difference between the 2004 – 2007 and 2011 – 2013 period:

Prior to 2007 the Federal Reserve didn’t spend trillions of dollars to prop up the economy.

I don’t use the ISM Manufacturing Index as a leading indicator for stocks. Based on Monday’s strong rally despite a weak ISM reading, the stock market cares as much (or little) about the manufacturing data as I do.

A Price to Pay … Eventually

A strong manufacturing sector is as vital to a healthy economy as a strong heart for the body. If the heart is weak, the body suffers … eventually.

If the manufacturing sector is weak, the economy suffers … eventually. When the economy suffers, the stock market declines … eventually.

The divergence between stocks and the ISM Manufacturing Sector was dissolved in 2007/08 when the S&P lost about half of its value.

The key question with all things QE is this: When will the Fed ‘manufactured’ bull market backfire? Answer: Eventually? Question: When is eventually?

It’s the mission of the Profit Radar Report to identify major turning points for the stock market and to quantify what exactly ‘eventually’ means.

The Shameless, Obvious & Unreported Cheating Tricks of Politicians and Wall Street

When was the last time both houses of Congress unanimously passed a bill? It was actually very recent, when Congress repealed and castrated the Stocks Act, a law designed to curtail insider trading by politicians.

Amidst much fanfare, on April 4, 2012, President Obama signed into effect the STOCK Act. What is the Stock Act? The acronym ‘STOCK’ Act stands for:

Stop Trading On Congressional Knowledge

That law was designed to provide transparency about the finances of members of Congress and senior officials, and to make sure they are not benefiting financially from their knowledge as government operatives.

Why was the STOCK Act needed?

Insider trader is illegal for everyone but Congressmen, senior officials and their staff. Yes, they took advantage of that convenient little loophole. For example:

1) If you sit on a healthcare committee and you know that Medicare is considering not reimbursing for a certain drug, that’s market moving information. And if you can trade stock off of that information and do so legally, that’s a great profit making opportunity.

During the healthcare debate of 2009 members of Congress were trading health care stocks, including House Minority Leader John Boehner who led the opposition against the so-called public option, government funded insurance that would compete with private companies. Just days before the provision was finally killed, Boehner bought health insurance stocks, all of which went up.

2) In mid September 2008, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Literally, the next day Congressman Bachus bought puts (options that increase in value when stocks fall) based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. While Congressman Bachus was publicly trying to keep the economy from collapsing, he was privately betting that it would.

3) When Illinois Congressman Dennis Hastert became speaker of the House in 1999, he was worth a few hundred thousand dollars. He left the job eight years later a multi-millionaire. Congressmen make about $174,000/year. How did he do it?

In 2005, Speaker Hastert got a $207 million federal earmark to build the Prairie Parkway through the cornfields near his home. Just before, Hastert had bought some of those cornfields and land adjacent to where the highway is supposed to go. Five months after this earmark went through he sold that land and made about $2 million.

4) The same good fortune befell former New Hampshire Senator Judd Gregg, who helped steer nearly $70 million dollars in government funds towards redeveloping a defunct Air Force base, which he and his brother both had a commercial interest in.

No, I Want to Continue My Insider Trading

Apparently – if you believe politicians – the planned online database that would keep track of Congressmen’s financial transactions was viewed as a national security risk by Congress.

Without much fanfare, both houses and Congress unanimously – when was the last time there was a unanimous vote in Washington – repealed and castrated the STOCK act. President Obama signed the repeal a day later.

The signing of the STOCK Act in December 2012 was showcased on TV. That faithful day President Obama vowed: “I’m very proud to sign this bill into law. I should say that our work isn’t done. There is obviously more we can do to close the deficit of trust and limit the corrosive influence of money in politics.”

That’s right Mr. President, your work was not done. The Act had to be castrated to make it palatable. The benchmark of merely “limiting the corrosive influence of money in politics” (forget about eliminate, limit is the best we can do) was obviously set too high.

Like a dog off the leash, some politicians get to revel in their newfound freedom. Since the STOCK Act was repealed, we read this (reported by the Washington Times):

Sen. Dianne Feinstein introduced legislation to route $25 billion in taxpayer money to a government agency that had just awarded her husband’s real estate firm a lucrative contract to sell foreclosed properties at compensation rates higher than the industry norms.

As it turns out, this will be the first in a series of articles about corrupt politicians and Wall Street gangsters. The next article will reveal how big banks rig multi-trillion markets.

>> Sign up for the FREE iSPYETF Newsletter to avoiding missing part II of The Shameless, Obvious & Unreported Cheating Tricks of Politicians and Wall Street.

Romney or Obama – 7 Reasons Why the Next 4 Years Will be Lousy for Stocks Regardless

The U.S. presidential campaign is nearing its end and there are some compelling reasons to actually vote for the presidential candidate you like least.

This Bloomberg headline caught my attention: “Economy set for better times whether Obama or Romney wins.”

The commentary brings out that: “No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds.”

From Headwind to Hurricane?

Optimism without realism is just wishful thinking and unfortunately the article lacked any factual evidence pointing to a sustainably strengthening economy.

In fact, there are many reasons why the headwinds created by the 2008 near financial collapse will turn into a hurricane, not tailwinds.

1) Artificial Everything: The human body needs nutrients to function at its optimum. Real and organic foods are the best source of nutrients. The 2004 documentary “Super Size Me” shows the body’s reaction to a junk food only diet.

Like the human body, the economy needs real and organic growth to function at its optimum, but all it’s getting is junk food mixed with steroids. Artificial earnings growth, artificial GDP growth, and artificial jobs creation result in an artificial stock market. The sugar crash is coming.

2) Fiscal Cliff: Financial engineering has become the top U.S. industry sector, but despite the abundance of financial engineering talent, there are only two ways to reduce the U.S. deficit: A) Cut government spending and B) Increase taxes.

Both options are as necessary as they are counter productive to an expanding economy.

3) Baby Boomers: Baby boomers were born between 1946 and 1964. More than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years. There are 76 million of them and it is estimated that they account for about 50% of total U.S. spending.

4) Low Interest Rates: Retired baby boomers are reliant on interest rates and dividends to generate income. Interest rates are near all-time lows and generating retirement income is nearly impossible.

Imagine a retired couple with a $1,000,000 nest egg. At best you may find a 1-year CD with a return of 1%. That’s $10,000 a year or $833 a month. Not too long ago you could earn $50,000 a year or $4,166 a month. Retirees will be forced to clam up and hold on to their money if the nest egg is to last.

5) Flight to Junk Investments: Low interest rates force investors into higher yielding vehicles. Those include high yield bonds (more appropriately called junk bonds) and municipal bonds. But there’s no free lunch on Wall Street.

If you want higher returns, you have to take more risk. The iShares iBOXX High Yield Corporate Bond ETF (HYG) and the iShares S&P National AMT-Free Municipal Bond ETF (MUB) have been bid up to near all-time highs.

Financial liquidity is as much about money flow as it is about perception. We’ve seen in 2008 how fast perception can change and how fast junk, muni bonds and even investment grade corporate bonds can drop.

6) Deflation: Japan has been dealing with persistent deflation for decades. Money infusions by the Bank of Japan (Japan’s equivalent to the Federal Reserve) failed to resurrect the economy. Deflation suffocates an economy.

The fact that trillions of dollars worth of U.S. QE money hasn’t caused the expected inflationary environment warns how close the U.S. is to the deflationary spiral.

7) Systematic Problems: A ship with a leak in the hull requires a trip to the wharf. Replacing the captain may quiet uneducated passengers, but it doesn’t fix the problem.

The U.S.S. America (our economic ship) suffers from many “leaks.” A new president, regardless of who it is, can’t fix those leaks.

Like water, Wall Street and Washington always travels the path of least resistance. Unfortunately, the path of least resistance leads to a dead end littered with all the cans that have been kicked down the road.

Like water, the stock market finds small cracks and applies pressure until it bursts. The market has found the economic weaknesses; it’s just a matter of time until the wall of “extend and pretend” breaks.

How will Obama’s election affect stocks? Look at the ship, not the captain.
How will Romney’s election affect stocks? Look at the ship, not the captain.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

How Will Hurricane Sandy Affect Stocks and the U.S. Economy?

Hurricane Sandy has shut down the New York Stock Exchange. The last time a natural catastrophe forced Wall Street to go into hibernation was Hurricane Gloria in 1985.

Even though trading at the NYSE has halted, investors never stop looking for the next opportunity. What sectors will be most affected by this or any other hurricane and are there any profit opportunities?

Insurance Sector

It’s yet to be seen what kind of damage Sandy will cause. According to the National Oceanic and Atmospheric Administration (noaa.gov), Katrina was the most expensive hurricane with damages of $145 billion.

Someone has to pay for that damage and insurance companies (that’s what we have insurance for) will end up paying a fair share of the repairs.

Property and Casualty Insurance companies collected about $471 billion worth of premium in 2010. According to a report by the Congressional Research Service, done right after hurricane Katrina devastated New Orleans. The net profit earned on the $471 billion worth of premium should be about $40 billion.

The same report states that: “Most insurance experts would agree that the $100 billion-plus catastrophic event remains a challenge for the U.S. property and casualty insurance industry.”

A common sense approach to investing suggests to stay away from the insurance sector and ETFs like the SPDR S&P Insurance ETF. Of course, the ultimate cost of any disaster will be passed on to policyholders via increased insurance premiums.

Energy Sector

The New Jersey coast is home to more than six large refineries and has a refining capacity of 1.2 million barrels per day. As of Monday, two thirds of the refineries were shut down.

New Jersey refineries account for about 7% of total refining capacity in the U.S. In comparison, the gulf coast accounts for 45% of U.S. refining capacity.

The decreased energy demand of the densely populated East Coast caused by hurricane Sandy could be about the same or more than the loss of refining capacity. This means rising oil and gasoline prices nationwide are far from guaranteed.

In fact, immediately following hurricane Katrina, oil prices dropped a stunning 21%. Hurricanes are not an automatic buy signal for ETFs like the Energy Select Sector SPDR (XLE), S&P Oil & Gas Exploration & Production SPDR (XOP) and others.

Home Construction Sector

Home improvement stores like Home Depot and Lowe’s should attract a big chunk of the disaster prevention and disaster repair dollars spent. The iShares Dow Jones US Home Construction ETF (ITB) has an 8.7% exposure to Home Depot and Lowe’s.

Retail Sector

Will money spent at Home Depot and Lowe’s cannibalize the holiday spending budget? Retailers like Macy’s, Kohls, Gap, Nordstrom, Tiffany, Amazon, Best Buy – all part of the S&P Retail SPDR ETF (XRT) – could suffer from Sandy.

Hurricanes and the Stock Market

What’s the effect of hurricanes on stocks? The chart below shows all major U.S. hurricanes (since the year 2000) in correlation to the S&P 500 Index.

Allison in June 2000 came amidst the tech bubble deflation. Charly, Frances, Ivan, Katrina, Rita, and Wilma didn’t make a dent in the 2002 – 2007 market rally.

Gustav and Ike happened right before the financial sector unraveled in 2008 and Irene landed on shore at a time when we expected a major market bottom.

The August – October timeframe happens to be a tumultuous one for nature and stocks and recent hurricanes coincided with stock market inflection points.

This could be the case again with Sandy. Last week’s Profit Radar Report pointed out that the S&P 500, Dow Jones Industrials, MidCap 400 Index, and Russell 2000 are all above key technical support.

Like a stretched rubber band they should snap back, but if the don’t they’ll break. As such, the next opportunity will likely be triggered by technical developments not hurricane Sandy. The Profit Radar Report will provide continuous updates and trigger levels for the “stretched rubber band” condition.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Contrarian Investment Idea: China ETF Looks so Bad, is it a Buy?

Just a couple of years ago China was considered the world’s growth engine, but not anymore. Pretty much every piece of news related to China’s economy is negative and Chinese stocks are close to their 2008 low. Is this a contrarian investment opportunity?

A few days ago, a reporter from Investor’s Business Daily asked me to write about an international investment opportunity. I focused predominantly on the action of the S&P 500, Nasdaq-100, Dow Jones, gold, silver, euro, and 30-year Treasuries, so it took a bit of research to come up with an international trade set up.

The opportunity that stood out most is a highly contrarian one and won’t win you a popularity contest at your next cocktail party: China.

Barron’s July 2, front cover categorized the Chinese economy and stock market as a “falling star.”

Printed in bold black font on the same front cover is this warning: “The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing.”

The Contrarian Opportunity

Contrarian investors know that forecasts of “hard landings” often turn into some of the best buying opportunities (remember how everyone felt about U.S. stocks just a few months ago). Contrarian investing means going against the crowd and requires nerves of steel and often patience, but even technical indicators suggest that a buying opportunity in China is approaching.

The Shanghai Composite Index is only about 15% above its 2008 low (@ 1,679) and currently sits atop important support, right around 2000. Unfortunately, U.S. investors can’t invest directly in the Shanghai Composite Index, but don’t worry, there’s an ETF for that.

The iShares FTSE China 25 Index Fund ETF (FXI) provides exposure to the 25 largest and most liquid Chinese companies. FXI seems to be forming a giant 5-year triangle with well-defined support and resistance.

How to Trade FXI

A break out in Q4 2012 is quite possible. Key support is currently at 31.70 and rising. Key resistance is currently at 36.30 and falling. The key support level lets you know exactly if and when you’re wrong (a break below 31.70) and makes this trade attractive from a risk management perspective.

There are two ways to trade this constellation:

1) Buy on weakness and as close to 31.50 as possible with a stop-loss just below 31.50 (more aggressive option).

2) Buy once prices break above 36.50 with a stop-loss just below 36.50 (more conservative option).

Hopefully, by the time the next cocktail party rolls around it’ll be more fashionable to talk about Chinese investments and how you got in before anyone else did.
Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Investors Now Embrace the Most Hated Stock Rally Ever – Is it Time to Bet on Short ETFs?

After a 12% rally investors are starting to buy into the S&P 500 and other indexes again. At the same time technical resistance is getting stiffer and seasonality is turning bearish. Is it time to buck the trend and start nibbling on short/inverse ETFs?

PIMCO’s king of bond funds, Bill Gross, joined the “stocks are dead’ club in late July and CNBC calls the latest rise in stocks the “most hated stock rally in history.”

At the June 4 low (1,267 for the S&P 500) investors and investment advisors hated stocks like fish hate hooks. Despite (actually because of) this negativity stocks keep on keeping on and June 4th turned out to be the second best buying opportunity of the year (see charts below).

But nothing is as persuasive as rising prices, and 12% into the rally investors are starting to embrace the idea of continually rising stocks. The crowd is generally late to the party (thus the term “dumb money”) and this time may be no different.

Investor sentiment is an incredibly potent contrarian indicator. Unfortunately, sentiment-based signals in recent months have been murky, but are starting to make sense again.

Murky Doesn’t Have to be Bad

Murky is not always bad though. The following is what I mean by murky during this summer and how the sentiment picture is starting to clear up.

The Profit Radar Report (PRR) continually monitors various investor sentiment measures, which includes the Investors Intelligence (II) and American Association for Individual Investors (AAII) polls as well as the Equity Put/Call Ratio and VIX.

The Sentiment Picture below was published by the PRR on July 20, 2012. Quite frankly it was one of the oddest sentiment constellations I’ve ever seen. The VIX was near a 60-month low parallel to a multi-month pessimistic reading of the AAII poll.

This just didn’t make sense and the simple conclusion was that there is no high probability trading opportunity.

Six weeks and several head fakes later the S&P 500 Index (SPY) is trading a measly 30 points higher than it did on July 20, and even in hindsight we know that there was no high probability trade.

Current Sentiment Picture

The second chart reflects the change of sentiment of investment advisors (II) and retail investors (AAII) since July 20. There’s no excessive bullishness, but rising prices are starting to resonate with investors.

Sentiment alone doesn’t tell us how high stocks may rally or if they are ready to crack right now. When we expand our horizon to include seasonality and technicals we see that September (especially starting after Labor Day) sports a bearish seasonal bias and that there’s strong resistance at S&P 1,425 – 1,440.

There is little reason for investors to own stocks right now. Aggressive investors may choose to pick up some short or even leveraged short ETFs at higher prices.

The Short S&P 500 ProShares (SH) and UltraShort S&P 500 ProShares (SDS) are two inverse ETF options that increase in value when the S&P slumps.

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