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10252010 October 25, 2010

Posted by easterntiger in economic history, economy, financial, gold, markets, stocks.
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Weather Report  10252010

Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 50%  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 10/25   +7.667, +9.71, +14.77, -5.09

(3wks ago/2wks ago/1 wk ago/this week)

The news stories over the previous month have devoted lots of time, once again, convincing us of the perils of ‘missing the boat’,  now that we’ve seen the best September since 1939.  For only the first time since May have these indexes exceeded some repeated reversal points in July and August.  Part of the basis for the ‘good September’ claim should also note that the month began within the range of 4 month lows.

Truly enough, these indexes returned near to 5 month highs, which were, so far, near or slightly above the highs of the year.

These levels are all only within the same range through which they fell in the early fall of 2008 and are far below the highs of that year.

From the prior report last month

No bullish momentum is truly reliable until it can reach and hold or exceed the following levels, near the highs for the year.

S&P500 – 1200            Dow Industrials – 11,000

Anything else (lower than these levels) is still within the relatively narrow 4-month ‘trading range’

I had also referred to an upper range that these indexes had failed to break 4 times since the mid-May mini-crash.  Even though that upper range has now been exceeded, ((1) on the 5th try, (2) in a narrow range of stocks), it has only succeeded in marginally matching the previous highs of one month before.  Hence, the announcements of the ’5 month highs’.  These highs themselves are only marginally higher than all of the highs reached over the past year.  So, there’s the appearance of lots of activity, little measurable upward momentum, unless measured against recent lows of 2-3 months before.  (A chart of the S&P500, Dow 30, etc. appear like a high diver suspended in mid-air without motion)

The S&P topped out last week at 1185.  It has added another 9 points this week, at least to the high of the day on Monday before retreating.

This translates to reaching 106% of the 200 day moving average, compared to reaching 113% of this same average in April.

The Dow Industrials did manage to hit 11247.60 last week before reversing and adding another 70 points earlier in this week before retreating.

This is also 106% of the 200 day moving average, versus 111% of the 200 DMA in April.

Overall, the high-low range is still intact and now has extended to 6 months.

Another factor in these price levels that can’t be ignored is the heavy selling being conducted by so-called ‘insiders’, who are the executives in large corporations.  You would think that these would be the people with the ‘inside’ knowledge of where things are headed.  You would be correct.

In a nutshell, insiders have sold many times more in stocks at these so-called multi-month high levels than they’ve bought.  If insiders are selling, then who is buying?  The simple answer is that these purchases are by so-called ‘retail’ investors, those who pay full price for stocks, etc., and who characteristically are more accustomed to making their decisions based upon instinct or emotion, rather than through the mechanics of a sound investment decision.

According to a source which tracks stock sales versus purchases by insiders, insiders bought $1 worth of stock for every $2018 worth that they sold.  This is even higher than the much-heralded ‘best September in 71 years’ where there was $1169 sold for every dollar purchased.

Table of Insider Selling versus Insider Buying <—press here for the chart.

I actually recall reading of a case of heavy, insider selling several years ago by Michael & Susan Dell (yes, THAT Dell), when stock prices for Dell were between $40 & $45 per share.  Yet, in spite of the so-called recovery, prices are now only as good as $17.50 per share for almost 2 years, having fallen to a little as $7.84 last year.

Was their selling at over $40/share in 2005 simply a matter of chance or was it more deliberate, to avoid lower prices?  You decide.

To match your investing mindset to the reality of how it’s done by professionals familiarize yourself with two terms

Accumulationacquisition of a large number of shares of a stock or a security ahead of the buying by the general public by knowledgeable investors who intend to hold them for a major price rise, the largest amount of which occurs at major bottoms

Distributionthe process by which the most knowledgeable investors sell their shares to the general public, to less informed speculators and to others willing to pay top prices.  They offer their shares as current or nearby prices so as not to push the prices down while they are selling(!)

Distribution occurs at each of the multi-month or multi-year highs during this ‘recovery’ economic period.   Some selective accumulation occurs at bottoms as well.

Additionally, to measure rising prices in stock indexes, oil, new highs in gold, silver or other assets without accounting for the continuing drop in the dollar to 15 year lows against the Japanese yen is much like our bragging about the increasing value of your home compared to other houses in your neighborhood, without accounting for the fact that your entire neighborhood has lost value when compared to other neighborhoods.

To reiterate, September was noted prominently as the best September for stock prices since 1939.

The Dollar moved downward throughout the month of September, shedding almost 8% of it’s value.

Four months ago, in May, it was noted that the drop in stock prices made it the worst May since 1940.

The Dollar moved upward sharply throughout the entire month of May, rising approximately 8%.

Therefore, corrected for the decline in dollar value, these appearances of higher index values are deceptive.  If you ignore the movements in the dollar in forming your judgments, then you’re only looking at a part of the total picture.

Why does the dollar continue to decline and why does it influence the appearance of higher prices?

The world’s currency markets are adjusting to the Federal Reserve emphasis on policies which will increase the supply of paper money, through ‘stimulative’ (loose) rules between our central bank and other central banks in the world.  The only way to respond to extra supply is to raise the relative value of other currencies which are not increasing their supply, at least for the time being.  Since it would now take 108 U. S. dollars to purchase what 100 used to purchase a few months ago, then everything that is valued in dollars, such as the stocks in the Dow Industrials, the S&P 500, as well as commodity purchases, valued in world terms, such as oil and gold, must show higher dollar values.  They do not, however, show correspondingly higher values in all other currencies.  These very same commodities or other securities might in fact fall in value when they are priced in other currencies, and at the very same period in time.

The higher than normal F fund position is to anticipate the end of the stock selling, where insiders will then use their stock sale gains to safely position in fixed rate instruments, causing bond prices to rise and interest rates to fall even further than their 55-year lows of recent months.

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