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Financial Markets at Critical Junctures

The market technically is at critical junctures right now. Stock prices are at the point of very possibly getting squeezed to an upside breakout as some have forecasted, and to a downside breakdown as some have forecasted including myself, and what the market is showing currently. I don’t see fundamental, technical or sentiment information supporting higher stock prices right now, but technical fundamental analysis, and even more important sentiment indicators showing that the market is heading lower before heading higher again. I would also suggest that these major index support levels I’ve listed below may not hold either with more downside from these levels longer-term. See more reasons to be at least cautious below and or short-selling right now.

March 14, 2011 Major Index Price Support Forecasts

DJIA – 11,839.93 to 11,485.37

S&P 500 – 1,227.95 to 1,156.06

Nasdaq – 2,557.06 to 2,382.12

Is the Bear Market Back? Reasons to be Cautious at Least

Oil and Stock Prices

Oil prices fell on Thursday and Friday, and stocks did too. Lower oil prices help global growth, and higher oil prices slow down global growth. Seems to me the oil market is saying if global growth slows down due to high oil prices or any other number of economic problems it won’t support oil prices at these levels for very long. In my opinion, I don’t think global growth can handle oil at prices above $100 plus for very long, and if so, oil demand destruction will set in eventually causing lower global growth, and eventually lower oil prices to match up with that growth. Deflation first, inflation later as I’ve always said.

Global Broad Market Sell-Off

The selloff last week was a global broad market selloff. The global markets have been on an uptrend for the last two years. From my perspective it’s been a bear market rally from the October 08, 2007 market top to the March 02, 2009 low especially in the USA and Europe. Asia and the other emerging markets are now almost in lockstep with the developed markets showing that what affects the major countries of the world affects the rest of the emerging growing world too. Even with the higher growth rates of the emerging markets, doesn’t necessarily mean higher stock prices in those markets. I’ve have yet to see different markets decouple for a sustained period of time. They always seem to follow the broad global markets in the long-term no matter what their good and bad news is or it’s different this time story is.

European Union Sovereign Debt Problems Still There

Europe financial skeletons in the closet are making noise again with Moody’s Spain debt downgrade and the entire ECB sovereign debt problems re-awakening with the recent news. It seems the financial markets forgot about this very serious debt issue unfolding and not over with yet in Europe. I suggest the same is coming for the USA eventually too. It’s going to take years to clean up the sovereign debt mess, with some of those countries possibly ending up in default in my opinion.

China’s Surprise Jump in Trade Deficit

China’s increasing trade deficit is another worry for the global economy now. China had an unexpected $7.3 billion trade deficit report last week. China has been for the last 3 years plus, and still is now trying to slow down their economic growth. A friend of mine in China who’s not a financial analyst says it’s only a matter of time when the China real estate market in the Metro areas declines much more. China real estate prices and rents in the China metro cities are “crazy” in relation to earnings he says, and if there is a China and or global slowdown, he sees China real estate prices and rents heading much lower. If this happens, it could put a big squeeze on the Chinese government, the Chinese banks that hold the debt, and the economy as a whole. Famous short-seller Jim Chanos might just get his wish of a bigger China selloff. I don’t like the idea of short selling China myself, but I wouldn’t be buying just yet either.

2009 – 2010 Stock Price Rebound Too Far Too Fast

The rebound in stock prices in the last two years has been too far too fast compared to the actual economic growth in the same time period which is still the same as it was three years ago. With the severe selloff that market saw during 2007 – 2008, it’s normal to have a rebound back to test the selloff breaks which are now major resistance levels. The market is at those major resistance levels now. Because of this, I see at least near-term downside pressure in stock prices, and longer-term price downside if the bigger picture long-term fundamental issues don’t get worked out fast enough to support sustainable long-term economic growth.

Priced for Perfection?

The markets are showing more high-risk low-reward conditions now from my technical analysis. The market is showing no margin of safety in case the bulls are fundamentally wrong, in which I think they are wrong. The USA market seems to be priced for perfection with the bears in hiding after this two year bull-run in the markets. I remind all the bulls that buying into a breakout after an already extended bull-run, can easily end up in a fake-out break-out, trapping new long positions. I think professional money managers know this well suggesting more selling is to come. Retail investors take note and use caution taking on any new buy long positions here.

Over-Valued Market Valuation Now?

Market over-valuation is here with the S&P500 dividend yield below 2%, and cyclically-adjusted earnings at 24 times compared to the 16 times historical average. I suggest looking at earnings estimate revisions from Zacks Investment research for the best individual stock opportunities in the markets right now. Most stocks follow the broad market, but a select few buck the broad market. Zacks Ranks Earnings Revisions can help you find to select stock by stock picks. Analysts with their earnings estimate revisions can go up and down with the psychology of the time so your due diligence is crucial at this time I recommend. With the market prices up these last two years, some analysts have been increasing their company earnings estimates. The reality is that earnings estimates and their revisions can skew the analysis of any company with a false sense of future price performance confidence. Buying in on positive earnings estimate revisions and or real earning report increases is not necessarily a guaranty of increasing stock prices so be careful there.

Amateurs Want To Be Right and Professionals Want To Make Money

The retail public has been buying more stock this last year which is another possible sell indicator. History has shown in the past that the public gets in, and out of stocks at the wrong times, buying near the tops and selling near the bottoms. Here’s the difference between an amateur armchair retail investor trader and a professional one. Amateurs want to be proven right most of the time. They will take huge drawdowns in an attempt to prove themselves right on a stock buy. Once they’ve taken more drawdown than they can handle financially and mentally, usually 50% or more, they throw in the towel and admit defeat. Professionals on the other hand understand losses are a part of the game, and have a system to deal with increasing losses. It’s called stop-loss. Depending on the stock, and it’s volatility, the stop-loss amount to admit defeat and save your investment trading account is 8% loss per stock from the purchase price, even it’s a Blue-Chip stock. Stop-loss is tool to effectively manage money in the markets. Professionals use stop-loss, and retail investors need to use it more if they want to save their accounts.

Record Insider Selling Lately

Insider selling during the 4th quarter 2010 hit multi-year highs. Since then insider selling has stayed strong. Insider selling or buying is not a stand-alone sure-fire way of knowing where the price of stock is going, but there’s no one better who knows about a company’s future earnings prospects than its board of directors. If they are selling, and especially big block selling, you should be paying attention, and very possibly selling too. You can always buy back the stock at any time that’s for sure.

Fundamental and Technical Analysis? Review the Current Market Sentiment Even More

Notice how all these reasons I’m citing to be cautious above are not just all about fundamental or technical analysis, but also about a very important aspect of the markets called sentiment or you can also call it market psychology. Money managers are saying it’s a bull bull bull again. Well of course. One point is that if they don’t they might be out of a job if the redemptions empty their mutual fund their managing. With everyone a bull again, that’s one indicator of many to possibly be ready to move to the other side and fast in case the market tips too heavily to one side for too long. When everyone is leaning to one side for a sustained period of time, it might be prudent and very profitable for you to start reviewing the option of moving to the other side before if and when everyone else does. If you are fortunate to see a reversal opportunity, and take a reversal position, and then the reversal moves in your direction, it can be exponentially profitable with the reward-risk ratio of it very large in your favor, meaning the stop-loss to the take profit areas of the trade are extremely favorable. Reward-Risk ratios of 3:1 plus are great. In a market like this right now, some of the Reward-Risk ratios to the short-sell side may be approaching 5:1 to 15:1 which is quantum huge. Remember, successful investing trading is about knowing what price you’re entering at, your stop-loss price you will exit at with a small loss in case the position goes against you, and your take profit target areas to book a profit. This is total trade entry and trade management to be successful long-term in investing and trading the markets. Investing and trading without a system is a plan for failure. If you want to succeed in the markets long-term, learn and manage your investing trading systems on a regular consistent basis.

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