Archive for November, 2007

What’s Happening on Wall Street?

November 28, 2007

Wow!  The biggest two day gain in years.  Is it time to celebrate?  Better wait and see.

It is possible that we have successfully tested the August low.  It will be as much as three months before that can be stated with certainty.  It is also possible that we are going to complete what is called a “head and shoulders” top (or a “triple top”), with market peaks early in the year, July and October.  Again it could take three months or more for that scenario to play out.  How do we know which (if either) pattern is emerging?  The “double bottom low” would be confirmed by a rise decisively above the October high  (approximately 14,200).  A close of the Dow above 14,500 would confirm a continuing bull market.  A close of the Dow below the intraday August 16 low (approximately 12,455) would indicate a triple top and the possible start of bear market.

If neither of the above scenarios occurs we would be in a trading range market, with the Dow fluctuating between 12,500 and 14,300.

I use a complex formula of exponential moving averages to decide when buying or selling of securities is indicated.  This morning some banks and international ETFs gave the first “buy” signals in several weeks.  I bought BCS (Barclays Bank), BAC (Bank of America), AIB (Allied Irish Banks) and IRE (Govourner’s Bank of Ireland).  These are four of the six most undervalued large banks in the world.  I also have WB (Wachovia Bank) and WFC (Wells Fargo) on the deeply undervalued list, but they have not yet given “buy” signals.

I do not feel that these banks are sure to be safe from future downturns, but their  investment portfolios and earnings appear to be on better footing than some others, such as CFC (Countrywide Financial), C (Citicorp) and WM (Washington Mutual).  Because they are merely the best of an otherwise suspect crew, I will maintain tight stop loss orders at the prices where my system would indicate a “sell” signal.  Worst case, I will encur 2-4% loss for any bank that does pull back.  Best case, there is an enduring rally and we benefit by 10-20% in a few weeks.  All four banks are trading near 50% (or below 50%) of my calculated fair value, so the upside potential is significant. 

International ETFs with “buy” signals this morning included FXI (Shanghai Index), EWH (Hong Kong Index), EWY (Korea Index), EWS (Singapore Index), RUS (Russian Index) and EWZ (Brazil Index).  I bought EWY, EWS and EWZ early in the day.  Again, as with the banks, very tight stop loss orders have been placed because these ETFs remain very close to the “sell” signal price.

Happy investing, but stay on top of things.  The wild ride is probably not over. 


Buy banks now?

November 12, 2007

The carnage in financials is setting up the mother of all buying opportunities, especially for banks.  The bottom for financials will come when there is a perception that the unkowns about the mortgage crisis will be coming to an end.  That will probably not occur for a few more months.  However, if you wait until you are sure all the bad news is known you will probably be buying banks and other financials 25-30% above the bottom.  It will be better to buy 2-3 months before the bottom than 2-3 months after.

Has the market bottomed?

November 12, 2007

Market turbulence the past three months has people wondering how much more pain will still occur.  The most probable outlook for the next few days (or weeks) is a test of the intraday low on the DJIA (12,455 on 8/16).  If that test fails the next likely support level is around 11,900.  If that fails, ultimate support should be around 10,575 which is 25% below the recent high.

If there is a succesful test of the 8/16 low, the market will probably rally to year end, reaching somewhere around 14,500 on the DJIA.  What is a successful test?  The DJIA has an intraday low of 12,455 +/- 300 and then has three consecutive closes after the lowest intraday low above that low.

If the 12,455 test fails, look for another test at 11,900.  If the 11.900 test fails, the market will probably fall through year end.  The ultimate low for this cycle might not occur until early 2008.  If we actually go into a recession, the market might not rally significantly until mid-year or later.  In this scenario the best investments will be in ETFs that are short the dollar (long other currencies), some European stocks, especially Russia and eastern Europe and utilities.  Other than the above, emerging markets will probably not do well during the early phases of a US recession. 


November 12, 2007

This blog will discuss various issues regarding financial planning and investing.  I hope you enjoy it.