Where Can We Make Profits Now?

If I knew the definitive answer to that question I would make this article about one paragraph long and we’d all go out, mortgage the farm (if we could qualify for a mortgage) and then get filthy, stinking rich. By the way, don’t miss my secret, short-term profit-making strategy at the end of this article.

Today’s 3% rally in the three major US stock indices gives the impression that the future looks very bright for stocks and the market in general.

A better-than-expected profit report from Lowe’s Cos (LOW)., an uptick in homebuilder sentiment and positive comments from analysts about U.S. banks revived investors’ confidence in an economic rebound.Stocks fell sharply last week on worries that a recovery might be further off than hoped, interrupting a rally that has left the Standard & Poor’s 500 index up 34.5 percent since March 9. Was Monday’s rally a sign that the big money is to be made in the stock market from this point forward?

My guess is that the answer to that question is no. Even if the DJIA could rally to around 10,000, that is less than 18% higher from here. However if the DJIA tested the lows of 6470 from today’s close of 8504, that would be a drop of 24%. The downside risks are greater than the upside potential at this point.

Despite Monday’s bounce the market is expected to remain volatile as investors look for signs that the economy is actually recovering - not just slowing its descent. If those signs aren’t forthcoming and convincing, watch out below.

At the start of the market’s upswing in March, signs of stabilization were enough to encourage investors to buy stocks. Linda Duessel, equity market strategist at Federated Investors, said the rally has been driven by “less bad” information.

Steep drops in home values have been at the heart of the economy’s troubles, slicing into consumers’ wealth and saddling banks with huge losses. Analysts believe that stability in the housing and banking industries are imperative for the economy to rebound.

“There’s a realization that things are going to get better,” said James Cox, managing partner at Harris Financial Group. “That’s the main theme of the market over the last couple of weeks.”

Dr. Stephen Leeb, the editor of The Complete Investor weighed today on the situation, especially in light of the impressive rally that oil and a natural gas pulled off today. He wrote:
“Our general advice is that, to the extent the current rally continues, you will likely profit from commodity-related investments. The only thing that could short-circuit commodity gains would be further declines in economic growth. Any improvement in the economy will only push commodities higher. So stick with commodities, including oil and gold.

“As for the market in general, the downside still outweighs the upside at this point. We still could see a retest of the recent low. However, we are heartened by the fact that the government seems determined to do whatever it takes to avoid a real depression. Given the choice, we would rather face the consequences of monetary stimulation than deflation.

“With that in mind, if the market does move lower, we would probably see the Federal Reserve buying large amounts of Treasury bonds. Treasury bonds have been under pressure as a consequence of the monetary stimulation taking place. That won’t change, especially with the Chinese buying commodities (which reduces demand for Treasury bonds). So the government will need to step in and buy bonds if it has any hope of keeping mortgage rates low and engineering a recovery in the housing market. (Of course, this can become another vicious circle which leads to inflation.)

“Longer-term, we expect the stock market will remain stuck in a trading range. The Dow will have a hard time getting past 10,000 anytime soon, which gives us a maximum upside of 20% from here. (Short-term, we doubt it will get that far.) The bottom of the trading will probably be around 5,000. Those boundaries may remain in place for a very long time.

“Short-term, too, the downside outweighs the upside. Given the negative signals from our indicators, we think the recent rally has been extremely speculative and could soon run out of steam.

“Bottom line: the way to make money in the long-term trading range will be to invest in commodity-related investments.” I agree, especially with oil looking like it wants to test the next major upside resistance level at around $68 a barrel. Precious metals also have remained strong and have defied the seasonal correction factor so far.

I noticed Prieur du Plessis today was quoting some of the market legends on the fundamental realities of the current economy in the US and especially in the ravaged areas of the EU like Germany. Today he wrote:

Asking Richard Russell (Dow Theory Letters) what fundamentals he thought could cause the market to break the March lows, he replied:

You want guesses? Here are mine. (1) A collapse of the dollar along with a collapse in the bond market. (2) The US losing the reserve status of the dollar. (3) US consumers going on a long and unexpected buying strike plus a consumer saving campaign that shocks the economists and the Fed. (4) The Fed unable to halt asset deflation. (5) Federal budget deficits growing completely out of control, the compounding interest on the federal debt paralyzing the country with the catastrophic result that nobody will lend money to the US.

According to the Telegraph, James Montier of Société Générale said

Prolonged suckers’ rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again. Genuine bottoms tend to be “quiet affairs.

“Teun Draaisma, Morgan Stanley’s stock guru, expects another shake-out, as reported by the Telegraph.

We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We’re not convinced the banking system has been fully fixed.

“He anticipates the new bull market to kick off later this year - perhaps in October - anticipating real recovery in 2010.

“I am of the opinion that the US and other mature stock markets are in the process of mapping out a base development formation, which probably means toing and froing between policy tailwinds and economic headwinds.

“But the “too-much-too-fast” rally made it inevitable for markets to either consolidate or retrace some of the past nine weeks’ gains prior to moving higher. Such a pullback as is now taking place is natural and necessary and should not be too much cause for concern, provided the levels from where the rally commenced in March hold.”
I really enjoy reading the Mogambo Guru that is published in the Daily Reckoning each Monday. Concerning the realities of how many unemployed people there actually is in the US, the Mogambo said:

“The Really, Really Bad News (RRBN) is when you look at the U-6 estimate of unemployment, which includes “Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian population plus all marginally attached workers,” and which was 15.8%!

“No wonder, then, that John Williams at shadowstats.com figures that unemployment is actually running closer to 20%!

“There were also some big downward revisions for prior months, and the laughable Birth/Death Model assumed, for no particular reason that anybody can actually discern, that another 226,000 “hypothetical jobs” were created in April, including 76,000 jobs in leisure & hospitality, 65,000 on professional & business and 38,000 in construction! Hahaha!

“Things are looking bad for everything except gold, silver and oil, which is good because they are all cheap as hell right now!”

And so my friends, I must concur, that from here the greatest hope for significant profits will be in commodities that are purchased patiently, especially after some healthy pullbacks and corrections.

I especially favor silver which I’ll be buying hand-over-fist if the price breaks down again below $12 an ounce. The silver ETF (SLV) works well in this regard, and so does Silver Wheaton (SLW) which works almost like a proxy for silver. The Central Fund of Canada (CEF) is one of my favorite way to invest in physical gold and silver (approx. 60% gold and 40% silver) and have it safely stored and insured too.

And now for my secret, profit-making formula for the short-term (over the next 5 months): When (not if) the current stock market rally begins to convincingly break down and the media, exchange specialists, and “smart money” begin to sell and drive the cost of stocks down, we don’t have to sit there like deer in the headlights.

We can make money, some nice money, on the way down using the ETFs that short the market. Check out the following symbols: (DOG), (SH), (SKF), (SBB). These are just four of these ETFs. Before the stock market begins its next big descent we can familiarize ourselves with these, get to know the risks, strategies and track record of them, and choose which ones might work well for you.

If you end up buying some of these towards the top and the market starts tumbling again, your next challenge is to determine when to take your profits by selling them. Thus you overcome your fear by buying them when you’re ready and your greed by selling them before the stock market finds its next bottom.

Finally, at some point between now and let’s say the middle of November 2009, you begin “buying low” like you did last February and March 2009. You’ve read my articles in the past so you are creating your “wish list” of great companies and ETFs to buy after the inevitable correction to come. Buy low, sell high, carefully short when you think the stock market is too high, and then buy low again.

If only it was as easy as it sounds. It isn’t! But unless you have a plan, a rational strategy to take advantage of whatever comes next, all you’re going to be able to do is to watch, observe and hopefully learn. By the way, you don’t have to use much of what’s left of your investment capital to work my “secret, profit-making formula for the short-term”. You can try it if you’re so disposed with as little or as much as you can afford to loose.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

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