A line in the Sand?

Well you haven’t heard from me in about 10 days, the reason why, nothing to do. The averages pulled back because of the Egypt and the Libya crisis. As of tonight the markets are interpreting the oil as concern but one of manageable. Saudi Arabia has stepped up to ensure oil output production. We also found out that the USA has the largest oil reserves in the world, even more that Saudi. So what do we trade now? The short answer is it’s not what we trade but how we deploy money into trades. The SP500 topped at 1350 just a few short days ago. It pulled back and bounced constructively off the 40 DMA. We are in a nice area of buying of some of our old leaders but only to a small starter and comfortable position. The IYT (Transportation) is still under the 20 and 40 DMA. This is of concern because as we talked about it before the TRANSPORTS lead the recovery and currently they are not leading.

Pick some of the old leaders, CRUS, RVBD, CAT, JNPR, LULU and SLV. Purchase in small starter positions. Watch the SP500, NDX, IYT and DBC. We need to see the SP500 break 1350. If it touches it and falls back this could be the making of a double top and very concerning. Pay attention to recent tops in your purchases, if they act like what I just described then you got to be concerned and sell.

Market Update

AAPL CRUS RVBD JNPR tech in general, Tech is going through consolidation recently. AAPL is not a falling knife but is just pulling healthily back. It will not be a falling knife until it breaks the 25 DMA on high volume, AAPL is not doing this, just orderly selling at this point know reason to panic and definitely not worth shorting. Some of our other TECH trades are moving sideways not up not down but in a small box. I think if you believe in the the recovery thesis and Monetary policy that BANK, TECH and Transports are going to lead then you have to sit on your hands. Pick your well defined stops and keep your knife handy if you have to cut your positions. For right now I got a cautious green light with higher stops in place just under support.

What is QE2 or even QE1?

QE or Quantitative Easing is our Federal Reserve current monetary policy. What it amounts to in it’s very simplest form is The Federal Reserve printing money and getting it out into the economy “Flooding” the economy with cheap money. To understand it in simple economic terms is as basic as this. If the Economy is growing to fast and interest rates are to low it is possible that inflation will raise product prices. The FED will slow down the money supply and increase money rates, making money hard to get. In our current economic time we have very slow growth and businesses are not able to get money to expand. Without expansion our economy cannot expand, hire workers and the economy cannot grow. The FED is making it easy for businesses to get money to expand. An easy metaphor would be a car, you want to go faster and you press on the gas, you want to go slower you take your foot off the gas a press on the brake.

How does the FED do this? They simply print it. Yes the FED has the power to just print dollars. If low interest rates are not enough to get business to take out lines of credit or loans, then the FED can just print more money and auction it off. Sounds simple enough but there are many negative things that can happen when the FED takes this extreme approach. One of the things that happens is that every dollar you have in your pocket has a value. If the FED keeps pumping money into the economy your dollar in your pocket become less in value because it’s easier to get. It’s simple supply and demand. Another negative by product is inflation.

As your dollar becomes less valuable it purchases less and less. Some times, in extreme situations countries have had to devalue their currency. When a country devalues their currency the old money is worthless and a new currency is put into circulation. We are not there yet. A falling dollar is very bad. The decreasing value of the dollar is bad because it purchases less and creates fabricated inflation.

The FED controls inflation by controlling the money supply. But wait, Currently the FED policy is QE which means increasing cheap money supply. If you have been at the supper market lately you know food prices are going up. So inflation should be creeping up too. The FED by using huge amounts of QE is possibly going to create a giant inflation problem at some point. We know this is happening because we can monitor it by looking at commodities. DBC, is the commodity ETF and has been raising. BAL is the cotton ETF it has been spiking. Clothes prices are heading higher! GLD, SLV the gold and silver ETF these two have been increasing for the past 2 years. People use gold and silver to off set inflation and keep it for safety. This trade has been going on for two years!

Hyperinflation is on it’s way because of FED policy how do we play this and make money off of it? Commodities, Countries and farmers will be trying to buy fertilizers at a lower cost so DBC, POT, AGU, MOO, MON and IPI are great fertilizer plays. DE and CAT make the farming equipment that plows the fields to make more crops. GLD, SLV, X, FCX and AKS are the metal plays. Transportation, IYT is the transportation ETF, CSX, KSU and UNP are the product movers. Finally, if the recovery is for real financials will have to be prosperous. JPM, MS, GS, BAC and C are the banks to follow.

CRUS trading alert.

CRUS: Has an underlying bid. If CRUS can hold above 25.00 with some decent volume it could possibly be on it's way to 27.00. The stop loss is two fold. For a short term breakout play the stop loss of 24.25 should be in place. This possible current breakout needs to take place in the next few days for it to be valid. CRUS is not in a confirmed breakout yet. For a longer term outlook as CRUS trades in it's current range 22.00 should be used as the stop loss.

Are you part of the recovery?

If you’re a market follower you know that the recovery is slowly under way. We know it’s underway because the market, DOW, SP500 and NDX are trickling up. We have crossed some important resistance numbers and the market is holding, then bleeding up. DOW 12,000 and SP500 1300 were psychological numbers that have been breeched. Dips are being bought and investors instead of wondering when the pull back will be are now beginning to wonder why they are not in because they don’t want to miss an equities increase. The risk trade is picking up steam.

So how do we pick sectors or stocks to get interested in this market so we don’t miss out? Well we head to the charts and find out what is at support or trickling up. We need to start at the top and work backwards. We know the market is trickling up because looking at the DOW, SP500, NASDAQ, QQQQ and SPY. They all are moving from left to right in an upward trend. They are all, on each and every brief pull back bouncing directly off the 20 or 40 DMA. This is how we know that pull backs are being bought and the up trend is in tack. We also need to look at Volume, which has been average to above average. Volume is probably the most important indicator and predictor of buyers. Big institutional buyers will keep volume up, they are smart not to tip the scale though they buy in very average conservative amounts “stealth amounts” not to tip their hands.

We also need to know what early recovery sectors are doing. Early recovery sectors are banks and transports. Let’s go to the charts! XLF and IYT are the Banking and Transport ETF’s. Looking at them we find that the XLF is in a nice up trend and that the IYT the transport sector is sitting at important support. Well, we need both for recovery. We need transports because the transports are product movers. We also need to think inside the transports what would be the most important transport, first tell of the moving of products? Rails! Rail move the products first and then the trucking sector. Everything trickles down!

We know the Banking sector is in an uptrend currently so we now need to determine what will the Transport sector will do. Looking at the Rails CSX, UNP and KSU are 3 good companies to follow. CSX is in an uptrend, UNP and KSU are sitting at support. UNP and KSU are both great companies that may start to move up based on our thesis that the recovery is underway. These companies are sitting at their 20 or 40 DMA will begin to bounce and move up if the recovery is underway.

Inside the XLF some good candidates are MS, JPM, BAC, C and GS. Some are doing better than others looking at their technical charts. Why banks? Banks lend money and invest it. Without banks business can’t get money to expand and hire.