Over the last few months, I have been a steady believer that the market's strengths far outweigh its weaknesses. I haven't changed that conviction at all.
The flood of stories coming out the last week or so, by financial writers of just about every cut of cloth there is, have been anything but supportive of my beliefs (obviously). So, it looks like I am pretty much alone with what I have to say today. Be that as it may, here we go.
First, the words I wrote in my August 7 column are still quite valid. "…, can't we please keep all this in some sort of rational perspective?" I said those words to emphasize that in difficult times the calm heads wind up being the ones least harmed by the difficulties. That is not rocket science, just common sense.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.]
More to the point, I said in that column that until we see the 12,500 level, this pullback is still what can only be classed a mild one. After that point, we can become concerned.
At the12,000-12,150 level, we must hold the classic Fibonacci pullback mark of 61.8 percent, a percentage point that has proven to be a key support level in just about every rally pullback and large decline since the early 1960s.
Story Continues Below
If we can hold this final Dow 12,000 Fibonacci level, when and if it is tested, the up move that follows will be very, very substantial. Break this level and the decline could likely be a big one.
At this point, I could trot out all sorts of facts and figures to make just about any point I wanted. Some companies have had good earning reports, I could say. Some companies have had bad reports. Some of the government surveys say we are doing great. Others say we are walking a tight rope.
But, unless I was trying to support a pre-determined thesis, these facts and figures really don't mean much. (Frankly, that is the way I look at most reports and data. The impact of any one of them is of little lasting importance to the market. Did you ever buy a long-term investment because the confidence level for a particular month was up? Hope not!)
But there is one thing the market really does understand. Markets go down when there are more sellers than buyers and they go up when there are more buyers than sellers. That truism is all that should be important to you, too. At the moment, there are clearly more sellers than buyers, but it is still a somewhat mixed bag, as some days there are more buyers than sellers, too. The preponderance is not yet a steady one like it was in the last big rally from July 2006 until last month.
All of this is to say that, if you really want to get a picture of what is going on in the markets, FIRST look at the charts. As long as the chart is friendly, a long position (holding stocks in your portfolio) is generally just fine. But, if the chart is not friendly, take immediate steps to protect your portfolio values.
And, of course, always give deference to your investment horizon. If you buy for the investment value over the long term (several years or more) versus buying for a quick profit (several weeks or months), your interpretations of the chart will be very different. So, be clear on what time horizon applies to your analysis before you begin.
Some Needed Perspective
But, before I get into the charts today, let me make a few comments about all the turmoil of rumors and avalanche of opinions that are roiling about us. I don't often use these pages to wax philosophical, but indulge me if you will. Thanks!
Today, there is finger-pointing galore going on in financial circles, as well as chest thumping and sharp verbal arrows being fired at just about everyone in positions of importance in the financial arena. The Fed chairman, the securities rating agencies (Moody's, S&P, etc), the Treasury Secretary, the bankers, the brokers, and even the President of the United States are all fair game in this moment of discontent.
Everyone has to blame someone else for the problems they are suffering. Whether it is a significant investor, a big money manager, or financial writers and commentators, they are all weighing in on how poor a job has been done by the authorities. But the laws of economic activity have not changed and the buck still stops at your checkbook.
You know, this current blip in the market is all because a simple rule was not respected in the first place. KNOW YOUR CUSTOMER. It is as simple as that. If all the accusers had done their proper homework, there would be no problem today.
Let me give you a short allegory. If you had lived in a small town in middle America 50 years ago, here is what the subprime problem might have looked like on a very small scale.
A Short Allegory
A resident of the town, a respected business man, we will call him Bill, went to the hardware store and asked for some credit to buy material to build an addition to his home. The hardware guy was glad to give it to him. After all, thought the hardware owner, Bill is a respected fellow in the town.
Later, Bill went to the lumber company and asked for credit to buy lumber to do the job. The lumber yard owner thought, well of course, Bill is a respected member of the town. He's good for it.
Two weeks later Bill visited the next town about 10 miles away and bought two new cars on credit. The car dealer was well aware of Bill's reputation and had no hesitation in selling Bill the cars.
Then, Bill had a landscaper from another town nearby come and do over $15,000 in beautiful landscaping at his home. The landscaper also did the job on credit, as he had heard a lot about Bill over the years and figured he could trust Bill. By now, Bill's house was really becoming the most elaborate and beautiful one in town.
Well, about 4-5 months later, the hardware man began to wonder why he hadn't seen Bill recently. He also noticed that Bill hadn't paid anything on the bill he owed. He decided to finally go see Bill and talk about the balance due. He found that Bill was out of town just then, on a trip to a place they called Las Vegas, so he decided to wait. But, in the back of his mind there was that uncomfortable feeling. Finally, he decided to ask around about Bill just a bit.
What he found was that Bill had a lot of other outstanding credit he just never knew about. Alarmed, he visited the others and then they all realized that Bill's credit levels were way out of whack. Bill just didn't have enough money to cover all his charges to them. Of course, they all finally confronted Bill and it was plain that now there was a real problem for all of them.
Back To Perspective
Today's subprime loan problems are just about like this allegory. No one asked questions until it was too late. They all depended on the reputation of their buddies and asked no needed questions. Fatal mistake.
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Now, let's get back to my earlier comment on a bit of perspective. All the folks that are complaining today, all of them, have a huge amount of experience in the financial business.
All of them have made millions from their work and all were happy to invest in what are now being called sub-standard securities. But, where were they and their vaunted expertise when they should have been asking the tough questions of their buddies between 1998 and 2004 concerning the "new" type of securities being offered at often precious triple A ratings?
Didn't anyone think to ask where the history for such ratings came from? One question would have revealed the ratings were based on little or no active credit history. Shouldn't they have asked just a few such simple questions? I think so. But, the commissions and bonuses were very tempting and they all, (well not all, here and there some did back away — my hat off to them) jumped in with both feet.
Yet, today they are the first to condemn, say the biting "I told you so" and generally fill the TV airways, printed page, and electronic media with their scolding, and condemnations. Wouldn't perspective say to them that they should give some space in here to evaluate and consider the best steps to take to help contain the problems they clearly were accomplices in creating? Again, I think so.
Now To The Charts
My caution to you is the one I have given to you often in the last several months: Don't get caught up in the verbal typhoons going on out there. Look at your portfolio holdings and evaluate them in the calm of a quiet office or family room.
Do you see problem stocks (ones that are down by over 20 percent or more) that might either be totally sold outright or reduced in total dollars invested to avoid further erosion? Do you see the possibility of adding to some of the long-term positions if certain stocks fall to what you consider true value levels? And do you find that maybe some hedging of positions with put options or short selling offers the better alternative than a wholesale selling of major portfolio positions?
Yes, these are the better questions to ask today and here is why. The chart below tells the story. Its analysis is exactly what I outlined in my column of August 7 and before that in the column of June 22. The chart STILL says that there are several truly key supports that have yet to be tested. The Dow 12,500 level is an important 50 percent retracement level. Below that the 12,150-12,000 level is crucial support.
Click here or on the chart to enlarge
I have said and repeat that I believe that the 12,500 area will hold up as the key support over the next 4-6 weeks (generally the "area" is defined as 100 points above/below the 12,500 level — allows for some "fudging" by chart guys like me, basically).
I also think that the current turmoil will have greatly subsided by then and we will have a much better picture of what the current events really mean. Holding the 12,500 level, or the 50 percent retracement level, will be a very important event, as I believe it will signal the beginning of what will be a 3-4 year rally to the 19,000-20,000 Dow level.
Can I be wrong? Of course I can. There are no perfect scores in any of the analyst books and any writer or commentator that speaks as if they are the ultimate answer man should be avoided. But, the point is that UNLESS there is a major change in the power of the move that started in 2003, the analysis says stay with the power of this big move.
My Super Chart Keyline is currently at Dow 11,895. Unless that level is broken for a period of six consecutive weeks, the big move is still on.
Now here are the main numbers, without any of the gloom and doom or the "run for the hills" hype. We are still well above the "mild pullback support" at the Dow 12,750 area. As I write this, we are at Dow 12,900 in the late afternoon of August 15. Traders are trying to see if the "magic" round number of 13,000 will hold. Frankly, it is not terribly important one way of the other.
The "mild" pullback level at Dow 12,750 (see the chart), however, is important (we are not far from that level as we speak) and the "fairly standard pullback" support at Dow 12,500 (50 percent of the rally from 11,000 to 14,000) is even more important.
If the Dow 12,500 level breaks (my guess, at the moment, is it will hold — about an 8 confidence level on a scale of 1-10), then it will be white knuckle time as we try the all important 12,150 area with the 12,000 "magic" even number likely being the crucial support.
If that breaks, and today it is only about 105 point from my truly vital Super Chart Keyline, then the break of my Keyline could signal a major market turnaround. At this point all portfolio holdings should be reduced to a 20 percent level invested in your portfolio. Just get to cash and wait until the next major market turnaround to the upside.
If we did have a major market turnaround, I suspect that a test as low as the Dow 10,500-10,700 area could ensue, a point brought out by the granddaddy of all financial writers Richard Russell several days ago (Yes, I do read other writer's stuff, but not very many, just the masters).
He pointed out that this level is a 50 percent pullback for the entire move that began in the middle of 2003. That move started at about 7100-7200 and ended this year at 14,000. So, even if we do break the Keyline, we still have a fairly good road map of what to expect, don't we? Isn't that what investing is all about, getting the best road map you can at the moment to help make investing decisions?
So, now you know what the charts are saying. And remember, these charts were made by millions of investors that spent untold hours studying and making their decisions to buy or sell. No one can hype the charts. I always listen to facts and charts are the ultimate facts in this business.
So, that's about it for today. Again, I urge you not to let the noise affect your investment studies. Keep the levels of support discussed above in mind as you consider whether to buy or sell and take your time. Go here now on how to protect yourself from the subprime crisis and which investments you should buy now to profit.
This noise will be going on for the next 4-6 weeks, at least. Unless we break vital supports that you now know all about, you will be fine. And I do hope your coming investment week is a good one. In the meantime, keep in touch. I do! See you next week.
Editor's note:
Sir John Templeton first warned of market, housing crash – Read More Here
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
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