Range Bound, Rolling Over
Research for Online Investors

by John Dalt

11/15/11

Turn out the lights, the party’s over.  The market is sitting on the head of a needle, which way does it fall?  On one hand over 70% companies have met or beat earnings estimates in the just completed quarter.  On the other hand, the eurozone is falling apart.  Interest rates are firing higher across the board.  The contagion is spreading, and it is becoming obvious the politicians cannot keep up with the changing landscape.

German Chancellor Angela Merkel and other eurozone leaders have started talking about a “two tiered eurozone” and how countries can exit the eurozone.  Both of these concepts would have been unthinkable just a few months ago.

This morning I saw that the American Association of Individual Investors (AAII) reported 44.7% of respondents to their survey are bullish on the stock market for the next six months.  That is the highest reading since last January.  How many times have you heard “The market is going to rally into the end of the year?”

Evidently, a lot of people believe in a year-end rally, even while the eurozone is falling apart.  To a certain extent, I do too, but it scares me.  Retail investors get toasted by believing in popular opinion.  The more they believe, the bigger their losses.  We have referred to it before as the “Overloaded Boat” or “Crowded Room.”

When everyone gets on one side of a boat, it tips over.  When a room gets too crowded, everyone can’t get out the door in an emergency.  Simply put, when the music stops, there are not enough chairs for everyone!

None of this may matter to you, if your investment horizon is 50 or 75 years.  In that case, follow Warren Buffett.  He just released his 13F and initiated a large position in IBM over the last year.  Does that mean you run out and buy IBM today?  It is trading within 2% of its 52-week high.  Buffett will buy a company he wants at a fair price, perhaps even pay a premium, like he did for Burlington Northern, but I can assure you he didn’t pay $188 dollars per share for IBM!

Most of us are concerned about a shorter time horizon that Warren Buffet.  Here is a chart of the S&P 500 for the last six months.

On the right side of the chart notice the lower highs every time the market bulls try to take us higher.  We also have higher lows, as the market is building a “wedge.”  The market will eventually break out of this wedge.  History tells us the breakout tends to go in the direction of the longer term trend of the market, which is down.

Also notice the declining Stochastic readings at the top of the chart, and the downward slope of the MACD in the lower box.  The black line is trending under the red line, leading it lower.

If you haven’t already, now might be a good time to sell some of your winners and prepare your list of stocks to buy at attractive prices.  Like IBM.

Mailbag:
Good article and I might point out there are already over 25,000 miles of existing pipelines in western Nebraska that do not have the mechanical integrity that the Keystone XL pipeline will have.—Long-Term subscriber C.J.

John’s reply:  Opposition to the pipeline is not about the water, that is just a ruse.  It is about importing tar sands oil from a stable country which might allow the U.S. to avoid a price shock because of Middle East unrest.  The environmentalists will not be happy until we live in huts and ride bicycles.  Except not in National Parks.  We can’t have roads there.  In their world, you have to hike to enjoy nature’s beauty.  I don’t know how anyone will be able to go on vacation with no oil, but that is just a side issue.

Quote:
There are only two mistakes one can make along the road to truth; not going all the way, and not starting.---Buddha

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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