Monday, May 18, 2009

Volume 3, Issue #39

-Lou Betancourt
Publisher of StreetAuthority & TopStockAnalysts Digest

Also in Today's Issue...

If you have been a reader of my weekly Market Reports, you know that I have been warning you about the growing likelihood of a market correction in the next few weeks. This week, the market moved a step closer (see Turner CrossOver Oscillator, below). Once the Composite Index of this chart 'crosses over' the Short Sell Index, the directional trend will have moved decidedly Bearish. When that happens, I will be buying a number of inverse ETFs and will be shorting the market. The crossover could occur this coming week.

My Money Show Observations...
Last week, I spoke at an investment conference known as the Money Show where thousands of investors descended on Las Vegas seeking investment advice. It was a humbling experience to see so many people crowding in to hear my philosophy and rules for investing. At the beginning of each of these sessions, I would ask for a show of hands from the audience on their opinion of the market for the next 90 days. I asked:

How many believe the market is going to move substantially lower?

How many believe the market is going to move substantially higher?

How many believe the market is going to stay more or less the same?

How many do not have a clue where the market is headed?

About 5% believed the market is headed substantially lower. This was a bit surprising, since I normally see the Money Show audiences a bit more negative on the market than most.

About 5% believed the market is headed substantially higher. This did not surprise me. Rarely do these audiences believe in a raging bull market.


About 20% believed the market was going to stay substantially the same.

The rest... about 70%... didn't have any idea where the market is likely to be headed. Normally, I see about half of an audience respond to this question. This year, investors seem to be more than a bit confused about the market's direction.

Of course, no one knows for sure where the market is headed, but as an individual investor, it is always important to have a well thought-out investment strategy for the current market. It becomes more than somewhat problematic to establish a clear investment strategy with no clue about a market direction. About the only way to invest in the stock market without any idea of a market direction is the buy-and-hope strategy, where you buy a stock and hope it goes higher. Most investors know that a buy-and-hope strategy can be catastrophically bad, as evidenced by what happened to so many investors' life savings last year. And I suspect the buy-and-hope methodology won't perform much better this year... especially if a major correction occurs within the next few weeks.

On a 110 year chart of the Dow, it is clear that we are in a "Consolidation Period" where the Dow will likely trade between a low of about 8,000 and a high of about 14,000. Before this Consolidation Period is over, we could easily see one or two more runs to 14,000 and runs back toward 8,000. These kind of market gyrations are devastatingly bad to a buy-and-hold strategy.

As such, it is important to do your best to ascertain a market direction. This is why I provide you with my "Market Forecast" each week in these reports. These weekly forecasts are not a crystal ball that never fails, but by watching the changes in direction of the market, I have found these charts to be uncannily accurate.

This week, it looks like the market is creeping up on a potential correction. It would not surprise me to see the market retrace 50% or more of its gains since the March 4 low. Some pundits are expecting the market to fall below the March 4 low. Some are expecting the market to move back above 14,000 before another major correction. I believe this last scenario is highly unlikely.

But, the market could easily move higher before it corrects. One of the wonderful thing about markets just prior to a correction... everything looks bullish and share prices are zooming higher. It is a good time to make money, but be prepared to take profits. Remember... it can be bad to get out of the market too soon, but it is many times worse to get out of the market too late.

I am buying this week, but I am very cautious.

My Investment Strategy
Until the market corrects, which could be any time, I plan to stay about 30% long and 70% cash. Once the Composite Index moves below the Short Sell Index on the Turner CrossOver Oscillator, I will be buying inverse ETFs and raising stops on my positions that will move lower in a Bear market.

I continue to be a buyer this week, but all of my limit orders for this weekend are about 10% below Friday's closing prices. The Nikkei is down nearly -3% at this writing and the market dropped 120 points from its high on Friday. If the market rebounds from last week, I will raise my limit order prices and get more aggressive about capitalizing on the continuation of an overbought market. When I do buy, however, I will be setting stops at about half or less of an Expected Move.

Have a great week in the market!

--Mike Turner
StreetAuthority.com Analyst

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