Zen and the Art of Portfolio Management

As the markets tumble and all about you are losing their heads, you need not lose yours

Alex Roslin

Saturday, December 20, 2008

The Montreal Gazette

Is it finally over? The Market Horror Picture Show is lurching to a close. What fresh horrors will 2009 bring? And how can we be ready?

You know it's been tough when even the brightest minds in the investing world are running for the hills.

"What a sick beast this is," complained trader Stephen Vita in a post on his Alchemy of Trading website a few months ago. "This market is exasperating, and I'm frankly more than a little sick of the whole thing."

Even the world's richest man has gotten stomped. Warren Buffett's Berkshire Hathaway crashed an astonishing 50 percent from its high of last year to their lows of this fall's selloff, before recovering a little in the last few weeks.

But if the planet's best investor is on the run, what hope is there for us average schmoes? How can we possibly survive 2009, a year we're being told could be even worse?

Advice, as usual, is all over the place. "Hold tight, things will eventually turn around," say some. Or: "Sell now! Or you could lose everything."

Still others say, "Buy! Valuations are cheap."

Who is right?

I don't know. Nobody does.

This, I think, is the lesson of our times. Insanity is the new normal. Here's a typical market day: stocks shoot up 5 per cent in morning trading, crash 10 per cent by mid-afternoon, then rally to close even for the day.

We've seen enough of this kind of action to safely say it's impossible to know what tomorrow will bring in the markets.

So what? you ask. You knew that already. The question is, do you actually act as if you have no clue what lunacy tomorrow's market will bring?

Not if you're anything like most amateur investors. Most of those I know act as if they have some secret knowledge about the future - even when their past mistakes prove they don't.

Case in point: I was recently talking about the markets with two people who shall remain nameless - both of them sharp, careful businesspeople.

They had both independently arrived in the same pickle. They bought energy stocks at the height of the commodities boom last spring; the stocks had since crashed 80 to 90 per cent. They had lots of chances to sell as their holdings were decimated.

They never did. Why not? Well, they didn't want to miss the inevitable rally that would let them at least get their money back.

Out of pride or misplaced hope, they were ignoring some basic math. The stocks must climb five to 10 times for them just to break even-an unlikely concept in the foreseeable future. The odds are probably just as high, in fact, that those companies will pull a Nortel and be penny-stocks. Some could even fold.

The fact is both people knew they had failed miserably in predicting the future. But by refusing to sell, they were still acting as if they could predict.

I don't think they are so different from many under-water investors out there. Despite the devastation of the Crash of '08, I think too many of us are still pretty deluded about how we approach the markets.

And this is what I think separates amateur investors from the pros who trade for a living. I think it's a key for surviving the times ahead.

The traders, at least those who are successful, know what they don't know. And they act accordingly.

Meanwhile, the rest of us too often don't. We paid the price for that hubris in 2008. And we could pay again in 2009.

It's not just you and I who have a hard time making money in the markets. It's often said the best traders typically make a profit on only 60 per cent of their trades.

So how do they afford their Porsches, country villas and Brioni suits? It took me a long time to get this, but the secret isn't insider information or expensive computer trading software. They profit by controlling risk.

Risk control isn't just for professional traders, of course. Limiting our vulnerability to bad things is something we do all the time. Think about how you approach the other unknowable things in your life -the risk of STDs, theft, accidents, death.

We try to minimize the chances something will go wrong by wearing protection, locking our doors, buckling up, wearing a bike helmet when rolling down the hill in a shopping cart. And, just in case, we get insurance.

But most people seem to have a completely different approach when it comes to investing. In fact, the market may just be the place people take the wildest chances with their livelihoods, with the very fewest precautions.

Is there an investing equivalent to insuring and locking your house?

Fortunately, yes. We can minimize risk with a few simple investing rules. Such risk-control rules are common knowledge among professional traders, but they're still little-known to average investors, despite the freefalling markets.

The rules all boil down to this: If we truly don't know what grenade tomorrow's market will lob at our heads, always be ready to duck.

***

CUTTING YOUR LOSSES 101

Here are some simple risk-control rules commonly used by professional traders:

Decide when to sell before you buy: Buying is often easier than selling. When do you cash in if your stock goes up? When do you sell if it craters? Most everybody has an ouch point—even a buy-and-hold investor. Is it after losing 60 percent of your assets? Ninety percent?

The pros tend to avoid this conundrum by picking their selling point before they buy. It’s their way of admitting they don’t know what’s going to happen in the market.

A simple way is to look at a chart. Take the S&P/TSX composite index. It bottomed at 7647 in late November and has since gained 1,000 points. Not bad. If I were to buy it today, I might place my sell point (often called a “stop”) below a recent major low (like 7647) or the 20-day moving average.

Traders often set stops a little below such levels because they don’t like to get stopped out by regular market noise; they want to sell only because of a serious breakdown.

I use the same rule to figure out when to sell a winning stock. For example, I might place my stop one or two percent below a stock’s 20-day moving average and adjust upward as the price rises. That’s called a trailing stop.

The exact stop level can be adjusted based on the timeframe of the investor. A long-term purchase could use a stop 10 percent below a major multi-month low or the 50-day moving average; a very short-term trade may use a stop one percent below a recent low or the five-day moving average.

(You can view free charts of Canadian and U.S. securities, including nifty indicators like moving averages, at StockCharts.com and Yahoo! Finance.)

Size matters: Knowing when to sell tells me how much money to risk on an investment. A common rule-of-thumb is not to risk losing more than one or two percent of total assets in any single trade.

In our TSX example, say I buy the index at Tuesday’s closing price of 8742 and my stop is 7532. That equals a 14-percent loss if my trade goes sour and my stop is triggered.

A little math tells me I should invest no more than 14 percent of my portfolio in this trade if I can’t stomach losing more than two percent of my total assets (100 percent divided by half of the 14-percent potential loss).

Diversify: Stops and appropriate positions don’t help me much if I’m 100-percent invested in a single sector that goes belly-up. If my stops are hit at the same time in 10 energy companies, I’ve just lost 20 percent of my Freedom 55 fund. Sayonara, beach house.

That’s why pros often put no more than 20 or 25 percent of their assets in any one market.

Cut your losses: “To make great sums of money,” trader Paul Tudor Jones once wrote, “you first have to learn how to lose much smaller sums of it when you’re wrong.”

I had my own lesson about this last fall. I often invest with a mechanical investing system that I developed. Last summer, the market data started to hit extremes it had never seen before. Signals were often wrong and costing me money. I wasn’t down as much as the broader market, but enough to make me take a closer look at my approach to risk control.

I realized I had no rule for when the market data was acting completely out-of-line with historic precedents.

To account for this I adopted a slightly adapted version of another commonly used trading rule: If my portfolio loses more than six percent in any four-week period, I sell everything and go to cash. Call it a time-out for a misbehaving market.

I adopted this rule just in time to sidestep the worst of the market carnage in October and November.

When the time-out was over, I was set to jump back into the markets just as they rallied powerfully in late November and December.

Has the market finally bottomed? I don’t know. I do know the market can turn on a dime. And if I want to survive, I must, too.

Which brings me to another good trader’s rule: get a little Zen. Lose the pride and don’t be sentimental about an investment. It’s money, after all, not romance. Emotions are the worst enemy of an investor. If I’m wrong, I try to learn something and move on to the next idea. I think of my loss as a tuition fee.

This approach was captured nicely in the movie Kung Fu Panda. “Master!” says the kung fu teacher. “I have… very bad news.” “Ah, Shifu,” the wise old turtle replies. “There is just news. There is no good or bad.”

Hey, that really is a wise old turtle. Perhaps Mr. Buffett could use a kung fu lesson. Perhaps we all could.

Cutting Losses 101

Here are some simple risk-control rules commonly used by professional traders:

Decide when to sell before you buy: Buying is often easier than selling. When do you cash in if your stock goes up? When do you sell if it craters? Most everybody has an ouch point—even a buy-and-hold investor. Is it after losing 60 percent of your assets? Ninety percent?

The pros tend to avoid this conundrum by picking their selling point before they buy. It’s their way of admitting they don’t know what’s going to happen in the market.

A simple way is to look at a chart. Take the S&P/TSX composite index. It bottomed at 7647 in late November and has since gained 1,000 points. Not bad. If I were to buy it today, I might place my sell point (often called a “stop”) below a recent major low (like 7647) or the 20-day moving average.

Traders often set stops a little below such levels because they don’t like to get stopped out by regular market noise; they want to sell only because of a serious breakdown.

I use the same rule to figure out when to sell a winning stock. For example, I might place my stop one or two percent below a stock’s 20-day moving average and adjust upward as the price rises. That’s called a trailing stop.

The exact stop level can be adjusted based on the timeframe of the investor. A long-term purchase could use a stop 10 percent below a major multi-month low or the 50-day moving average; a very short-term trade may use a stop one percent below a recent low or the five-day moving average.

(You can view free charts of Canadian and U.S. securities, including nifty indicators like moving averages, at StockCharts.com and Yahoo! Finance.)

Size matters: Knowing when to sell tells me how much money to risk on an investment. A common rule-of-thumb is not to risk losing more than one or two percent of total assets in any single trade.

In our TSX example, say I buy the index at Tuesday’s closing price of 8742 and my stop is 7532. That equals a 14-percent loss if my trade goes sour and my stop is triggered.

A little math tells me I should invest no more than 14 percent of my portfolio in this trade if I can’t stomach losing more than two percent of my total assets (100 percent divided by half of the 14-percent potential loss).

Diversify: Stops and appropriate positions don’t help me much if I’m 100-percent invested in a single sector that goes belly-up. If my stops are hit at the same time in 10 energy companies, I’ve just lost 20 percent of my Freedom 55 fund. Sayonara, beach house.

That’s why pros often put no more than 20 or 25 percent of their assets in any one market.

Cut your losses: “To make great sums of money,” trader Paul Tudor Jones once wrote, “you first have to learn how to lose much smaller sums of it when you’re wrong.”

I had my own lesson about this last fall. I often invest with a mechanical investing system that I developed. Last summer, the market data started to hit extremes it had never seen before. Signals were often wrong and costing me money. I wasn’t down as much as the broader market, but enough to make me take a closer look at my approach to risk control.

I realized I had no rule for when the market data was acting completely out-of-line with historic precedents.

To account for this I adopted a slightly adapted version of another commonly used trading rule: If my portfolio loses more than six percent in any four-week period, I sell everything and go to cash. Call it a time-out for a misbehaving market.

I adopted this rule just in time to sidestep the worst of the market carnage in October and November.

When the time-out was over, I was set to jump back into the markets just as they rallied powerfully in late November and December.

Has the market finally bottomed? I don’t know. I do know the market can turn on a dime. And if I want to survive, I must, too.

Which brings me to another good trader’s rule: get a little Zen. Lose the pride and don’t be sentimental about an investment. It’s money, after all, not romance. Emotions are the worst enemy of an investor. If I’m wrong, I try to learn something and move on to the next idea. I think of my loss as a tuition fee.

This approach was captured nicely in the movie Kung Fu Panda. “Master!” says the kung fu teacher. “I have… very bad news.” “Ah, Shifu,” the wise old turtle replies. “There is just news. There is no good or bad.”

Hey, that really is a wise old turtle. Perhaps Mr. Buffett could use a kung fu lesson. Perhaps we all could.

Economic Crisis May Shift Society's Direction

By Alex Roslin

Publish Date: November 27, 2008

The Georgia Straight

[read it online here]

In April 1928, Canadians had the world’s fastest-growing economy. We were enjoying a love affair with the automobile. Our homes were being electrified. A new invention—consumer credit—had unleashed a shopping revolution, pushing working people heavily into debt to buy washing machines, radios, and vacuum cleaners.

“No longer,” declared Andrew Mellon, the U.S. secretary of the treasury, “[is there] any fear on the part of the banks or the business community that some sudden and temporary business crisis may develop and precipitate a financial panic such as visited the country in former years.”

Eighteen months later, Mellon was scrambling to deal with the crash of 1929. The Depression left almost one in three Canadian workers unemployed and lopped 40 percent off the gross domestic product.

Unrest gave rise to new parties like the Co-operative Commonwealth Federation, the Social Credit Party of Canada, and a powerful Communist movement. The turbulence culminated in battles between police and workers at Vancouver’s Ballantyne Pier and in Regina in 1935, which helped bring down the staunchly anti-Communist government of Prime Minister R. B. “Iron Heel” Bennett.

Meanwhile, in Europe, economic dislocation unleashed Nazism and set the stage for the Second World War.

Now we have the crash of 2008. With the main Canadian and U.S. stock indexes down about 50 percent since their peak in the fall of 2007, we are in the worst market collapse since the 1930s. According to a November 21 story on Bloomberg.com, global equities have lost more than $33 trillion this year. A prominent Russian political analyst, Igor Panarin, said in the Russian newspaper Izvestia on November 24 that the U.S. could even break up into six regions because of the financial crisis, with Alaska reverting back to Russia.

The news has been filled with increasingly panicky headlines about the latest bankruptcy or bailout package. But there has been little attention on the broader picture: what will life be like after the crash? How will society, politics, and the economy change? What can we do to help shape those changes? And what can we learn from past crises about what might happen?

Progressive economists say the current crisis may actually be an opportunity in disguise. They say it will likely spark a huge public outcry for governments to rebuild gutted social programs and restructure the flailing economy in a more environmentally sustainable way.

But such pressure is likely to clash with growing demands from financial interests for spending cuts, as the crisis decimates tax revenues and spawns yawning deficits. Already, Stephen Harper’s throne speech of last week vowed to reduce government grants, public-sector pay, and spending that is not “essential”.

Whichever side gets the upper hand, the seemingly inevitable clash could prove to be a watershed moment that decides the direction of society for generations. In the end, the tipping factor is likely to be just how bad the crisis gets.

“The more severe the crisis becomes, the more people’s minds get concentrated on what we do,” said Chris Armstrong, a retired York University history professor who has studied Canadian market history, speaking by phone from his home in Toronto.

Seth Klein, B.C. director of the Canadian Centre for Policy Alternatives, believes that history is unpredictable. “In a crisis, major changes often happen—the caveat being it could go either way. The ’30s gave birth to the modern welfare state. But in Germany, they led to fascism.”

Even before the market crisis, Klein said, western governments had grown adept at taking advantage of crises to slip in otherwise unpalatable ideas. “In the last 30 years, the neoliberal project has been amazingly effective in seizing on crises to advance its agenda and push policies that were not normally popular. They were able to do that during the disorientation of the crisis,” he said.

There’s no reason, however, that progressives can’t do something similar, according to Simon Fraser University economist Marjorie Griffin Cohen. “A crisis can be a time in which we can shape the foundations for what we want society to look like,” she said from her home in Vancouver.

“The capitalist system has almost self-imploded,” she said. “If we continue with the same structures, we will have the same world. We can set a different path. This is precisely what happened in the Depression.”

Cohen, a past chair of women’s studies at SFU, proposes investing in what she calls “social infrastructure” as a way to rejuvenate the economy and restructure society.

Her prescription is to restore funds to eroded programs like employment insurance and welfare in order to help those hurt most in the crisis and boost the economy. “The poor spend everything they earn. The rich don’t,” she said. “They [governments] have cut social programs that lessened the impacts of recessions. The programs should be redesigned, considering the need there is going to be.”

She said that another way to put more money in the hands of low-income people would be to make the income-tax system more progressive by raising tax rates for the wealthy and lowering them for the poor. This would reverse a long trend since the 1980s of making Canada’s income taxes more regressive.

Cohen isn’t convinced about one commonly proposed idea: reviving the economy by spending on infrastructure like roads and bridges. After all, she said, that would just lead to more cars, which would increase greenhouse-gas emissions. Instead, she calls for spending on “social infrastructure”, such as low-cost housing and a national daycare system, for starters. “We should be treating social infrastructure not as a drain on the economy but a boost,” she says. Case in point: in Quebec, the introduction of subsidized daycare costing $7 a day coincided with a dramatic drop in the portion of single mothers living below the poverty line, from 60 percent to 30 percent since 1997, according to a recent story in Montreal’s La Presse daily.

Vancouver economist Iglika Ivanova agrees with Cohen’s suggestions. “The crisis is likely to bring about a shift in values,” she said by phone from her Vancouver office. “I’m hoping we see individualism discredited and a stronger emphasis on collective solutions.”

Ivanova is a researcher at the Canadian Centre for Policy Alternatives and has direct experience with poorly designed economic policy, having grown up in Bulgaria before leaving to attend school in B.C. at age 17. She fears that an opposite reaction to the crisis is conceivable too. “The other possible response is for everyone to isolate themselves and disregard the collective good,” she said. “My fear is everyone feels they are on their own and the government is not going to help them.”

The good news, Ivanova said, is that Canada is unlikely to face Depression-era heights of unemployment because of the social safety net that the Dirty Thirties inspired. But she said that safety net isn’t in good shape anymore. Recent years have seen the B.C. government tighten eligibility rules for welfare, while Ottawa did the same with employment insurance and lowered payments. Meanwhile, B.C. hasn’t increased its minimum wage since 2001.

“Because we’ve enjoyed a boom, we haven’t seen the gaping holes in the social safety net,” Ivanova said. “This recession will be a test and will expose the gaping holes.

“If we create programs quickly, it will significantly shorten the length of the recession. It [the crisis] will open people’s eyes to the need for a strengthened public sector.”

Cohen and Ivanova both see this as a good time to rethink the B.C. economy’s heavy focus on commodity exports and to promote a shift to green jobs. Commodities have taken an especially big hit in the market disaster. Lumber prices have been tumbling for months, which has sent much of the province’s forestry industry reeling.

The Claymore/Clear Global Timber Index ETF, which tracks lumber prices worldwide, has dropped 65 percent since its high in December 2007. And with U.S. house prices still descending—and now those in B.C. and the rest of Canada starting to follow suit—the falling demand for lumber shows no signs of slowing down.

“I think the impact on B.C. economically could be very profound,” Klein said.

Cohen agreed: “We could have massive layoffs in B.C. Virtually nothing is being done beyond selling more raw logs. There’s just a craziness in our economy. If we’re going to pour money into the economy, why not spend it on something different?”

Ivanova, for her part, calls for a Roosevelt-style New Deal adapted to the 21st century, which she refers to as a “New Green Deal”. “I think there is an opportunity for investment in new green technology,” she said. “Take workers from forestry and other industries that are suffering, retrain them, and create new green jobs. It’s an ingenious way of turning the crisis into something positive that will solve the economic and ecological problems.”

Much is likely to depend on how the financial crisis plays out and how bad it gets. That may not be clear until U.S. house prices stop falling and authorities decide whether or not to bail out ailing sectors like the auto industry.

The Big Three U.S. carmakers are pleading with Congress for $25 billion in emergency aid, claiming that three million American direct and indirect jobs are at stake if the companies collapse. General Motors last week announced that it may not be able to meet the terms of its debt by the end of the year. The news sent GM shares plummeting to their lowest level since 1946. By last Thursday, the company’s stock had lost 93 percent since its high in October 2007.

“There is going to have to be a serious restructuring of the U.S. economy,” said former York University prof Armstrong, who describes himself as a Keynesian. (British economist John Maynard Keynes pioneered the idea of government intervention in the economy to smooth out busts and booms.)

“The auto industry probably has to be bankrupted. That’s probably necessary if it is to be truly reorganized. It’s not a happy thing to say, but the longer it takes, the more painful it will be for everybody. They have spent the last 20 years resisting raising their fuel economy,” Armstrong said.

Ironically, he said, if the U.S. does bail out its auto industry, that could be devastating for Canada. That’s because the automakers will be obliged to use government money to bail out operations in that country. Canadian plants would be out in the cold. “The Canadian operations would be the first to go,” Armstrong said. “We’re going to be stuck with all the problems here. The bailout is going to be especially terrible for the province of Ontario.”

What’s more, Armstrong said, the automakers are just the most high-profile of many industries undergoing the same cash crunch.

And those problems may get a whole lot worse if past market crises are a guide. Russell Napier studied the four major market crises of the 20th century in his 2005 book Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms.

The four down cycles lasted an average of 14 years from when the market peaked to when it hit bottom. In a phone interview from his office in Midlothian, Scotland, Napier said he believes that the market’s last peak actually happened when the dot-com bubble burst in 2000. He considers the period since then to be a long unwinding of the speculative excess of the 1990s, only temporarily interrupted by the 2003-07 market rally.

If Napier is right, the correction so far has lasted only eight years. He believes the final bottom won’t happen until around 2014.

Even the crash of this autumn has not taken market valuations down anywhere near where they fell in the past crises, Napier said. The S & P 500 stock index’s price-to-earnings ratio is now 14, down from 43 at its peak in 2000 but still well above the low in past market crises, between eight and 10. “We still have a long way to come down,” Napier said.

The good news, he said, is that he doesn’t expect that final slide to happen for a few more years. He believes that it will be triggered by the imminent retirement of the baby boomers, which he says will reduce government tax revenue while increasing demands on health-care and pension spending, all leading to big deficits and, in turn, a sharp spike in interest rates.

“There is no denying we could be facing a global depression,” said Philippa Dunne, a researcher at the New York City–based Liscio Report on the Economy, which tracks U.S. state tax receipts to make economic forecasts. “If one of the Detroit automakers goes under, it could push this into an actual depression.”

Dunne said from her office that patterns in state tax flows suggest a market bottom may not happen for another three years. Like Cohen and Ivanova, Dunne hopes an auto-industry bailout will come with strings attached that will mandate environmental benefits. “My hope is this will shift the whole thing to a greener economy.”

And Dunne already sees an inkling of a new consensus emerging: that neoliberal economic policies should be ditched. “Even pretty conservative people out there are sounding pretty Keynesian,” she said. “People will get their old theory books out and support government spending.

“Money will have to be spent one way or another. At least if it’s on something for the future, that’s where we have a shot.”

The Big Grind

Alex Roslin

Financial Post Magazine

Published: Tuesday, September 09, 2008

[read the story at the FP Mag site]

HERE'S A PREDICTION: Whether or not the world's financial markets and the global economy start to rebound this fall, someone out there will try to make a few bucks selling T-shirts emblazoned with the slogan "2008: I survived the Summer from Hell." No doubt, the shirts will be popular gag gifts on trading floors across the country. A chuckle, after all, is a good way to blow off stress. And investors have been feeling plenty of that in recent months, as turbulent markets have see-sawed or just plain sunk, and gains have disappeared in perilous downward grinds.

Indeed, in the earthy argot of aggressive traders, many market professionals have reached the "puke point" - the point at which feelings of panic and disgust keep you awake at night. And who can blame them? The conditions that exist today are a toxic mix of credit-market chaos, rising inflation fears and a meltdown in the U.S. housing sector that's knocked consumers for a loop. It's a triple whammy, and no one can figure out how to call it. Not even legendary investing guru Warren Buffett. After hitting an all-time high of $150,000 just before Christmas, shares in his holding company, Berkshire Hathaway Inc., were down 20% throughout the summer, even below the 15% year-to-date decline in the Standard & Poor's 500 Index.

In financial circles, this kind of beast is called a "trader's market," and the only clear way through is to, well, trade - buying on temporary dips or short-selling on brief rallies, keeping bets modest and, with a little luck, building up strings of incremental gains. But that's a specialist's game. For the rest of us - from fund managers to investment advisers trying to calm edgy clients to Main Street investors wondering if their retirement plans are evaporating alongside the bottom lines on their RRSP statements - everything is up for review. Should you move your investments? Buy hedges like gold? Seek safety in cash? Start shopping for bargains on equities markets? There are no easy answers. Even the pros are having a hard time getting it right. Just ask Stephen Vita, a trader and money manager in Bradford Woods, Penn., and author of the popular AlchemyofTrading.com blog.

Vita spent most of July letting his funds slosh around in cash while he searched for opportunities. Better that than take a risk on some ill-timed trade that would eat into the 15% gain he'd made in the first six months of the year. But eventually, Vita spotted prey. The week of July 14th - when the Federal Reserve Board and U.S. Treasury jumped in to prop up mortgage-finance titans Freddie Mac and Fannie Mae - had been one of the most ludicrously volatile in recent history. Bank shares were diving like seabirds, taking markets down with them. Then a raft of government measures were introduced to save collapsing banks, and the markets bounced back.

Vita, however, wasn't impressed. He was certain the bounce was a "Trojan Horse Sucker Rally," a devious little rebound that lasts just long enough to reel in the innocent and the impatient before sputtering. He'd seen several such rallies burn investors during the dot-com bust-up, and he knew what to do: At 9:38 a.m. on July 22nd - just as the S&P 500 gapped down after opening - he moved in to short-sell an exchange- traded fund that tracked the index. (Short-selling is a way to profit when a security declines by borrowing it and selling, and then buying it back later at a lower price.) This was it, Vita thought. The market was toast and he was about to clean up. But he thought wrong, and his trade went sour almost right away as the S&P 500 catapulted right back up. Vita's Trojan Horse never materialized. It was turning into something entirely different, and he was being hung out to dry. At 10:20 a.m., he glumly jettisoned his short position and ate the loss. As a final irony, precisely one minute later, the S&P 500 sold off again, giving Vita a kick on his way out the door. "What a sick beast this is," he would later grumble on his blog.

No doubt, he's not the only person making that lament.

AS INVESTORS AROUND the world struggle to develop strategies for weathering the current storm, it's important to remember one thing: To know where you are going, you have to know where you are coming from. In this case, most fingers point back to former U.S. Federal Reserve chairman Alan Greenspan and the monetary policy he and other central bankers pursued in the final years of his tenure. According to this analysis, the seeds of the current crisis were planted during the bear market that followed the tech meltdown in the early years of this decade. To fight deflationary forces in the broader economy, Greenspan lowered interest rates, as did central bankers around the world, to stimulate the economy. The tactic worked: The U.S. avoided recession - not only from the tech crash, but also from the slowdown that followed Sept. 11.

Within a relatively short time, however, the emergence of China and India as economic powerhouses gave new life to Western economies. Demand for commodities like metals, steel and energy to fuel new Asian factories translated into strong job creation and wage growth in Europe and North America. Meanwhile, the influx of inexpensive televisions, computers and other goods kept consumers happily filling local malls.

Boom times were returning. Yet inflation was surprisingly absent. And with no immediate need to raise interest rates - and with the twin crises of the tech collapse and the Sept. 11 attacks still fresh in his mind - Greenspan kept them near historic lows. The result was a surplus of liquidity in the economy looking for places to go. Its first stop: the housing market, where it ignited the U.S. real estate boom. Adding fuel to the emerging flames was the fact that banking had undergone successive bouts of deregulation in the United States, turning the once stodgy debt markets into a speculative free-for-all. In addition, it set the stage for the real estate bubble, the subsequent subprime mortgage meltdown and the ensuing credit crisis.

But the real estate bubble was only the first problem. When cracks began emerging in the housing market, excess liquidity went looking for a new home and found it in commodities. By 2006, prices were beginning to surge in metals like nickel and copper. Dramatic psychological thresholds were crossed in January of this year as oil broke US$100 a barrel for the first time. A few weeks later, gold followed, breaking through the US$1,000-an-ounce market. But however exciting these trends may have been at the time - at least for those invested in such assets - they were unsustainable. Coupled with the disaster in financial markets stemming from a meltdown in credit markets, the boom in commodities delivered a double whammy to world markets, sending them into deep downward spirals. By summer, they were awash in grim market data - increasing inflation, economic contractions and rising unemployment.

These days, a mere glance at market charts will show you how rough things have become. Most of the world's major equities indices are in clear down trends, largely a result of the sledgehammer the credit crunch has taken to economies around the world. Japan's Nikkei Stock Average was the first to start its downward spiral, beginning in the summer of 2007. Major U.S. indices and European bourses followed this past winter and spring. Only the TSX has been a holdout. Its results haven't been good, but over the past year, it has at least shown itself capable of recovering from perilous lows - just above 12,000 points in January - to post record highs above 15,000 in June. Even with corrections in June and July, its year-to-date decline of 5% in mid-August was less than half that of its peers. It's not pretty, but the TSX at least has a pulse.

But even if the Canadian market is somewhat better off than its global peers, it still presents more questions than answers. How long will it be before we start seeing signs of recovery? Will markets get worse before they get better? What should investors do now, and what should they expect in the months ahead?

No one can answer those questions with any precision. But most experts agree that if you're looking for signs of recovery, don't hold your breath. For starters, the U.S. economy - still reeling under a real estate meltdown that saw housing prices fall 16% over the past year while inflation is running at 5.6% - appears unlikely to offer near-term respite. And now that Canadian housing prices have started to fall, too, concern has spread north of the border about the broader economy.

That said, not everyone sees impenetrable gloom. Take Lex Kerkovius, a portfolio manager and senior research analyst at Calgary-based wealth manager McLean & Partners, for example. In a late July newsletter, he identified 10 indicators that world markets had bottomed. Among his top observations: The U.S. market downturn is now a year old and getting long in the tooth, based on historical averages of length and depth of losses; the commodity sell-off this past summer, which drove oil prices down 20%, to approximately $115 in mid-August, has weakened some of the barriers that have been restraining economic growth; job losses in the U.S. have been lower than in previous recessions; and market bottoms are typically characterized by extreme volatility.

Kerkovius stopped well short of calling for a turn in the markets, and his outlook isn't shared by everyone. (Meredith Whitney, the Oppenheimer & Co. analyst who rose to prominence last year for her calls on bank losses and writedowns, continues to predict wreckage among U.S. bank stocks, for example). But market strategists or financial advisers aren't recommending investors get out altogether and park all their money in cash. More often, their statements point to opportunities in finding value in beaten-up stocks that are rebounding, as well as prospects in sectors with decent fundamentals.

Commodities, for instance, remain a promising long-term investment, in spite of the sector sell-off this summer, which has left investors with flat year-to-date returns. Oil remains a top pick. In a recent Forbes commentary David Dreman, chairman of New Jersey-based Dreman Value Management, advised investors to buy shares in oil and gas explorers if they didn't already hold them. His reasoning? Some companies with strong reserves are trading at low multiples, an indicator that their shares are ripe for price growth when the markets settle. What's more, analysts have been tending to base their estimates on $100 oil - well below prices that oil hit during the sell-off - which Dreman says could cause some pleasant earnings surprises in the next quarter or two.

CIBC World Markets economist Peter Buchanan offered a similarly positive assessment in a mid-August market strategy report. His report noted that oil's summer price drop was still not as severe as the decline that followed Hurricane Katrina in 2005. Global demand, he continued, will likely remain strong, due in part to the rapid rise of car cultures in Asia and the Middle East. And finally, he dismissed the notion that speculation was the driver behind this year's rapid increase in oil prices. Instead, Buchanan pinned the spike on a broader trend - that demand is threatening to outstrip supply, with emerging markets picking up slack that may be resulting from the U.S. economic slump.

Bottom line? The summer pullback "should prove no more lasting a detour in oil's five-year bull run" than other recent corrections. Likewise, Buchanan was positive on gold, even though it was down considerably from its peak of $1,000 an ounce earlier this year. Other analysts, meanwhile, point to the fact that gold remains a traditional safe haven and a hedge against a dropping U.S. dollar, which has sunk to new lows against major currencies this year.

In addition to market fundamentals, some investors are watching for historical market cycles, one of the most famous being "The Best Six Months" cycle. Developed by legendary investor Yale Hirsch, founder of the Stock Trader's Almanac, this investing tactic is based on the observation that nearly all market growth in the U.S. occurs between Nov. 1st and April 30th in a given year. According the 2008 addition of the almanac, now edited by Hirsch's son, Jeffrey, a $10,000 investment in the Dow Jones Industrial Average in 1950, reinvested every year during the best six months, would now be worth $578,410. The same amount invested during the other months would have grown by a mere $340. According to Don Vialoux, a former RBC Investments analyst and author of the DVTech Talk investing newsletter, says similar favourable periods, along with "sweet spots" for other assets, occur on markets worldwide. On the TSX, the best months occur between the end of September and the end of April. Between 1998 and 2007, those months returned an average of 9.3%. Vialoux says the patterns work because of recurring fundamental events. Markets tend to stumble in early fall due to tax-loss selling, for example, then get buoyed by earnings reports, consumer confidence as Christmas approaches and year-end bonuses flowing into tax-sheltered investments. In Vialoux's analysis, fundamentals are "lining up very, very nicely" for a seasonal play in equities and financials in the fall.

In the end, however, the markets will reveal their secrets, their patterns and their surprises as they unfold. And no one can know how they'll turn out. If that were possible, making any money by trading securities would be impossible. Things will get better, but until they do, the wisest of investors - regardless of the theories or sectors they follow - will all have one strategy in common: risk management - knowing when to cut losses and never risking more than a limited amount of their asset base in a single trade. If there's one sure way to stay out of trouble in a turbulent market, that may be it.

TAGS: market timing, seasonality, Don Vialoux, gold, crude oil, Stock Trader's Almanac

Commodities Cautiously Optimistic

by Alex Roslin
Kitco.com
Tuesday, July 15, 2008

While stocks continue to suffer their bloodbath, precious metals bulls have cleaned up in recent weeks. Gold and silver have marched back close to their March highs, while copper briefly poked to a new high in July. Is this the launch pad for a new run-up in bullion prices? Will gold stay above $1,000 this time?

Trader positioning as reported in the weekly Commitments of Traders reports is a little mixed at this point, but my read is that it has been suggesting more U.S. dollar weakness, which would translate into higher commodity prices. Here are some highlights from the recent data, as reported by the U.S. Commodity Futures Trading Commission:

• The "smart money" commercial traders in U.S. dollar index futures sat at a bearish extreme in their positioning during all four weeks of June. They were more net short than any time since Oct. 2006 as a percentage of the total open interest. Recall that this was just as the greenback broke down from a half-year trading range between 83 and 87 and started the plunge to unprecedented lows. (On Monday the index was below 72.) In fact, the commercial traders haven’t been this negatory since May 2004 in relative terms (in comparison to their historic positioning). In mid-June, they were more than three standard deviations below the moving average I use for my U.S. dollar trading setup. By the latest COT report for the week of July 7, the commercials had backed off a little and were 1.4 standard deviations below the average, but in absolute terms they are still at the levels seen in the fall of 2006.
  
  
• There is a strange divergence between my silver and gold data. In silver, the commercial traders have really hit the brakes, increasing their net short position to a one-year high. In fact, they haven’t been this bearish in relation to past data since Dec. 2006. Meanwhile, the large speculators in gold, whom I trade alongside, are blithely bullish—more than one standard deviation above the moving average for this setup.
  
  
• So how to make sense of these conflicting signals? I've been trading with a new rule for a few months that helps me figure out what to do. I saw that I’ve got six highly correlated commodities setups. I take a trade only when the signal agrees with the majority of these setups. As an example, right now, four of the setups are bullish (gold, copper, platinum and crude oil), while two are bearish (silver and heating oil). This means when my silver setup went to bearish on July 7, I ignored it and happily held onto my gold long position. It is, however, possible that the short signal of the silver setup—and the fact that there are two bearish holdouts among the six setups—means some short-term volatility is in store for commodities.
  
  
• This cautionary note is further amplified by the fact that my copper setup is turning bearish for the open of July 28. Note that the copper setup works with an eight-week trade delay, so this signal actually took place with the May 27 COT report. Since then, the setup has gone back to bullish, with a long trade due for Aug. 25.

It’s a Bull, Bear, Recession, the End. No wait! It’s a…

Has the market got you confused? You’re not the only one. Even the experts are having trouble coming up with the right designation

By Alex Roslin
Investor’s Digest of Canada
May 16, 2008

So it is a bear or not? This has been the question rattling investors for months. Some analysts say the answer might finally get a whole lot clearer very soon as markets near key inflection points on the charts.

The debate isn’t new nor has it been easy to resolve as soaring volatility catches investors in wrong-way trades. When markets sold off sharply in early 2007, some technical analysts were quick to declare the bull market was over only to see major stock indexes worldwide snap back and power to record highs. Oops.

Then, when markets got kneecapped in last summer’s credit crunch, many technicians emerged again to pronounce the bull really dead this time. Alas, just as the panic really set in last August, markets rebounded nicely.

Since last fall, however, stocks have veered around drunkenly in a yawning trading range, with volatility shooting through the roof, making the debate even harder to resolve. “What a sick beast this is,” wrote professional trader Stephen Vita in a post about the volatility on his AlchemyOfTrading.com website.

Mark Arbeter, chief technical strategist at Standard & Poor’s Equity Research Services in New York, says the wild seesaw action is worse than the 2000-02 dot-com bust. “Someone asked me, ‘Have you ever seen anything like this?’ Not as long as I’ve been around. At least in 2002 there were some decent trends that developed. It wasn’t up, down, up, down,” he said.

But some analysts say the charts are now starting to point to some bullish signs for the markets—though their optimism is still tempered by a lot of caution.

By one of the most commonly accepted definitions of a bear market—a 20-percent price decline—the bull does lives on by the skin of its teeth. The S&P/Toronto Stock Exchange composite index lost 18 percent from its July high to the low in January—short of bear market territory—and has since recovered most of that decline.

In March, the S&P 500 traded briefly 20.2 percent below its October high after news emerged that investment bank Bear Stearns had almost gone bankrupt. But the day’s close was above that crucial threshold.

Tom Bulkowski, a guru of technical analysis and author of The Encyclopedia of Chart Patterns, says he would have turned bearish if the S&P 500 had closed the day below the 20-percent line. As is, he believes it’s still too early to tell which way the trading range will break, though he leans to the bullish side.

Bulkowski has studied thousands of commonly watched chart patterns and done what no one had systematically done before—actually figured out if they work. He can tell you how often a pattern leads to an upside breakout and how far it’s likely to go up. He also likes to study how often breakouts fail and what happens then.

He sees markets like the S&P 500 (tradable in Toronto with XSP) forming a particularly bullish pattern since the beginning of 2008—an “ascending triangle.” This is when a rally keeps stalling at a certain level—called overhead resistance—but each time it sells off it doesn’t fall as far as last time.

In 900 such patterns he studied in bull markets, 74 percent resolved themselves with an upward breakout, says Bulkowski, who publishes stats on dozens of chart patterns at his website and blog, ThePatternSite.com.

The target for such breakouts is for prices to rise by the same amount as the height of the triangle. This happens three-quarters of the time, Bulkowski found. In the case of the S&P 500, that would mean about 130 points, or a 10-percent gain. Such a rally would take the index to around the next area of overhead resistance—the previous highs of last December.

In an especially bullish sign, XIU (the iShares Canadian SPX/TSX 60 Index Fund) and HXU (the Horizon BetaPro S&P/TSX 60 Bull Plus ETF) succeeded in breaking out upward from their ascending triangle patterns in mid-April.

Also on the plus side, Bulkowski notes a slew of bullish-looking “inverse head-and-shoulders patterns” developing slowly in recent months in global markets like Japan, Brazil and Australian iShares ETFs. (Of these, Japan’s market is tradable in Toronto with CJP.)

By mid-April, these indexes were nudged up against key inflection points as they strained to break upward. “They’re struggling to push through that resistance,” Bulkowski said.

Bulkowski remains super-cautious, however, and advises watching developments like a hawk. That’s because upward breakouts from ascending triangles don’t always last and can result in what he calls a “throwback”—a price decline back into or very close to the triangle.

Such fakeouts happen 57 percent of the time. “A lot of these will throw back. It could be that this is just a bear market rally. We don’t know which way it will go. The market is saying it’s not convinced,” Bulkowski said.

At S&P, Mark Arbeter is also getting more optimistic. “Stocks still have some major overhead supply to deal with, but it certainly feels like we are starting to get better traction climbing the wall of worry,” he wrote in a note in mid-April.

If there’s a rally, will it rocket on up to new highs? That’s going to be the key test, Arbeter says. He believes markets are likely to keep churning in a trading range for much of the rest of the year—a kind of “mini-bear”—then finally break out to new highs by year-end. One reason for his bullish tilt: investor sentiment has hit bearish extremes, which usually suggests a market bottom.

That’s also the opinion of Ron Meisels, president of Montreal-based research firm Phases & Cycles. “The doubters and skeptics seem to be everywhere, either advocating staying away from the markets until the negative news peters out, or even more actively talking down the markets with projections of dramatic new lows to come,” his advisory said in a note in early April.

“It’s all music to our bullish ears.”

Meisels noted that markets have held above their January bottom despite a slurry of bad economic news. However, he expects a “highly selective” and “tepid” rally compared to 2002-07. He projects unimpressive, single-digit rallies for the S&P 500 and other U.S. indexes, but better results for the TSX, which he sees eventually hitting 16,000.

But Meisels is still cautious, saying the TSX “may have to do considerable work” to overcome overhead resistance. “The bullish picture remains intact provided the S&P/TSX Composite Index remains above its March lows.”

[TAGS: bull market, bear market, recession, Mark Arbeter, Tom Bulkowski, Ron Meisels]

Magog's World Crumbles

Bitterness and recrimination follow when Quebecor World closes down the town’s most important job provider

Alex Roslin
Saturday, April 19, 2008
The Montreal Gazette

Pierre Goulet had a feeling something was up when he went to work at the Quebecor World printing plant in Magog on Monday, March 31.

He never imagined the bright chilly spring day was his last working at the plant where he had been hired 27 years before as a lift operator at age 16—the first and only job he had ever had.

Instead, what he expected was the beginning of bargaining season on a proposal a new union contract. The existing contract was set to expire in June, and Goulet, the husky 43-year-old president of the plant’s union, was the man who had to negotiate a new one on behalf of the plant’s 380 employees.

To say things were up in the air was an understatement. Quebecor World had filed for bankruptcy in the midst of a financing crunch, the slowing U.S. economy and a soaring loonie.

What’s more, the company had just lost a big contract with Rogers Communications Inc. involving 70 titles like Chatelaine and Maclean’s.

The math was simple, and Goulet was under no illusions. “There is less product to print, and we had too many printing presses. We know that,” he said over a beer in a café in the community of 24,000, which sits on the shore of picturesque Lac Memphrémagog at the foot of the Mont Orford ski hill.

Just the same, Goulet was hopeful the contract talks would go well. The lost printing jobs weren’t handled at Magog, and the last two contracts in 2001 and 2006 had been negotiated amicably, he said.

In fact, the Magog plant was anything but a hotbed of union-management strife. It was widely known in the community that labour relations at the plant were excellent. The union rarely filed official grievances, and everyone seemed to get along like family.

In many cases, family is exactly what they were. Goulet’s wife worked at the plant 25 years as a press feeder. His two brothers had gotten jobs there after being laid off at other plants in the region that had closed in recent years—part of a wave of 2,000 manufacturing job losses to hit the community of 24,000 in the past three years.

A dozen other members of Goulet’s extended family also worked there. “Almost everyone was the same. It was a family at Quebecor World Magog.”

Many employees had been at the plant since the beginning in 1971, when Quebecor Inc.’s founder, the late Pierre Péladeau, built the ultramodern Magog facility, enabling his then-fledging firm to land its first U.S. magazine printing contracts and helping to launch the company as a media conglomerate.

With good salaries by standards in the region—averaging $17 to $18 an hour—Goulet said, “It was the job in Magog. We would tell people, ‘Hey, I work at Quebecor.’”

**

That Monday morning at the plant, Goulet sensed something was wrong right away. The normally cordial managers seemed to be avoiding him.

Finally, he was invited into a room where senior Quebecor World executives told him the plant was closing. “When?” he asked. “Immediately. We’re in the middle of stopping the equipment.”

Goulet headed to the cafeteria, where the rest of the employees had been gathered and told the news. Some came up to him later and wept, he said. “It was a very painful day to see people 50, 55 years old come to your office and cry.”

The news hit Magog like an avalanche. “They had good salaries,” said Yvan Morin, a Magog electrician whose father used to work for the plant as a subcontractor.

“People are talking about it a lot, especially with what’s happened lately with the other closings. It just doesn’t end.”

Luc Lepage, a vice-president at the Magog Ford dealership, said one of his employees has two kids who lost their jobs at the plant and 30 to 40 of his clients worked there. “It’s hard for them to stay in the region and find a similar job,” he said.

“It affects us much more than the closing of a tourist operation, where there are a lot of minimum-wage jobs. We need something else to support the economy or we will transform slowly into a town only for retirees, which is already what’s happening.”

At a Subway restaurant neighbouring the plant, where many employees were regulars, employee Jonathan Leclerc said only a handful have popped in since the closing. “I know some people are disappointed and others are angry because the company didn’t give any notice. People learned about it that morning,” he said.

The next day, Magog Mayor Marc Poulin held an emotional press conference at which he said he was “extremely frustrated” with the company. He said the Memphrémagog regional development centre, of which he is president, had tried unsuccessfully to meet Quebecor prior to the closing in order to discuss ways to help the plant financially. He said the offer had been rebuffed.

“Pierre Péladeau, who believed in Magog, today must be turning in his grave and crying,” he said.

“The first reaction was a feeling of desolation and eventually frustration toward the company,” said Denis Roy, a retired RCMP officer who is interim president of the 400-member Magog-Orford Chamber of Commerce and Industry.

“They didn’t respond to the community.”

Two days after the mayor’s press conference came a sharp retort from Pierre Karl Péladeau, the son of the Quebecor patriarch and currently president of Quebecor Inc.

In an open letter to the mayor published in the Sherbrooke Tribune newspaper, “I was surprised to read and hear your comments,” he wrote. “Your references to my father are in bad taste.”

Péladeau went on to blame the closing on the plant’s union. The company had approached it in 2004 and 2005 in order to renegotiate the union contract. In exchange for upgrading an older printing press, he wrote that the company had wanted to cut the number of operators at the plant’s four printing presses.

“The union didn’t want to hear about it. Faced with this refusal, the managers of the company decided to make the investment elsewhere where it would be profitable,” he said.

“You would have rendered a much greater service to your community if you had used the prestige and influence of your office to denounce the organizations that render it impossible to make the investments essential to the survival of our businesses.”

Péladeau also said it wasn’t true that the company had ignored the community, noting that the plant’s director, Patrice Asselin, had indeed met the head of the regional development centre, Ghislain Goulet, to discuss the community’s suggestions.

Péladeau’s missive set off another bomb in the region. Ghislain Goulet (no relation to the union boss) retorted that the company didn’t respond to any of the community’s proposals.

“They didn’t look at solutions before closing the plant. The plant hadn’t seen much investment in years. We were open to discussing technological assistance, tax credits, acquiring the building and renting it back to Quebecor World,” he said.

“Both sides—management and the union—told us labour relations were very good. That’s why we were so surprised by Mr. Péladeau’s letter.”

Back at the union, Pierre Goulet said he was devastated. He said the company hadn’t needed the union’s permission for the proposed layoffs.

As well, he said other Quebecor plants that had attempted to reduce the number of operators on the printing presses had found themselves with manpower shortages.

“Because they couldn’t lay off a few people, they laid off nearly 380?” Goulet asked in disbelief. “They needed an excuse.”

What also irked Goulet was media coverage suggesting the Magog plant had been inefficient and aging.

In fact, he said, only one of the plant’s four presses needed an upgrade, while low employee turnover over three decades had honed a skilled workforce. Many employees had been proud to share their knowledge within the company, he said, with 20 percent joining various workplace committees devoted to improving operations.

“The company’s most productive plant in Quebec is Magog, even with our older equipment,” he said.

“If they had said it was the economic situation, that would have been fine. But what makes people in Magog feel bad was to hear we were unproductive and obsolete. If they are bankrupt, it’s not because of the workers. The management is responsible for keeping the company afloat, and they didn’t have the vision.”

Quebecor World spokesman Tony Ross refused to comment on the Magog plant’s productivity level, saying only that the closing wasn’t related to productivity or any lost printing contracts. “It was part of a retooling and restructuring program that was started three years ago.”

He also praised the plant’s employees. “It was a very good workforce at the Magog facility. If there are openings at other Quebecor World facilities, we will consider hiring them.”

Ross wouldn’t say whether other plants will be closed as part of the restructuring, but noted the process will be completed this year.

**

After Péladeau’s letter, Goulet called an assembly of the plant’s union members. Now, he didn’t know if the close-knit town would pin the closing on him. “I have to see them every time I go outside in Magog,” he said. “My whole family lost their jobs. That’s a lot of pressure.

Nervous, he arrived at the community hall two hours early in order to prepare his speech. “I wanted them to be proud of what they had done, so they could walk with their heads high.” He said the meeting went well. “Working for these people was my honour.”

Meanwhile, the Quebec government has responded with a $1-million fund to help the local economy.

But days later, there was more bad news for the community when reports suggested CSBS, a 100-employee bed linen manufacturer in Magog that is also under bankruptcy protection, was now unlikely to reopen.

Goulet said he is optimistic employees have the skills to find new jobs. But most will have to leave Magog to find decent salaries, he said.

Goulet, who has been appointed to a local “revival” committee exploring ways to revive the region’s economy, is himself thinking of moving to Montreal with his wife and three kids to find work.

“I don’t know what will happen with the village of Magog.”

[TAGS: Magog, Quebecor, Eastern Townships, Pierre Péladeau]

Please, Make Up Your Mind!

Savvy Investor
Nobody is quite sure if the bull market is over and the bear has emerged from hibernation. One thing for sure: market volatility is driving some analysts and investors crazy

Alex Roslin
Monday, April 7, 2008
Montreal Gazette

If this is a bear market, it doesn’t seem so horrible.

Markets have actually blasted off since some analysts declared a few months ago that the five-year bull run was over.

The S&P/TSX composite index gained 13 percent since its January low as of late last week, while the S&P 500 index was up nine percent since mid-March.

The much-maligned financial sector is actually outperforming handily, with the U.S. BKX Bank Index up 15 percent since its March 17 intraday low.

Not bad for a bear market.

Ah yes, but who can forget what came before. The U.S. housing disaster and debt crunch last summer unleashed violent market selloffs and volatility unlike anything seen since the dot-com crash of 2000-2002.

By last January, the TSX composite index had lost 18 percent since its high of last October. And that was the least of the market woes.

On the morning of Monday, March 17, stocks seemed primed for an especially nasty plunge—with some analysts invoking fears of a full-blown 1987-style crash—after word emerged that the U.S. Federal Reserve Board had had to step in to engineer a bail-out of troubled investment bank Bear Stearns.

After lunch that day, the S&P 500 briefly traded below 1260, more than 20 percent below its October high. That prompted a slew of declarations that the leading U.S. equity index was now in a bear market, most commonly defined as a 20-percent price decline.

Other market sectors fared even worse. Despite the powerful rally of recent weeks, the BKX Bank Index is still down 31 percent from its peak back in Feb. 2007.

Overseas, Japan’s Nikkei Stock Average has gotten drilled since its high of early 2007, falling 28 percent.

But with the world’s major stock indexes now climbing back from the brink, debate is raging among analysts about whether the bull is, indeed, really over.

Some say the other shoe has yet to drop, with U.S. home prices showing no sign of stabilizing and reports suggesting banks and securities firms have declared only one-third to half of their expected housing-related writedowns.

“The U.S. economic slowdown is not over and risks are to the downside,” said Montreal-based BCA Research in a note in late March.

The long-term charts of the markets also tell a sobering story. As markets sold off sharply in early January, the TSX, S&P 500, Nikkei and other major world equity indexes all busted down below the major long-term uptrend lines that had defined the bull market, technically ending their multi-year uptrends.

The indexes also saw another key technical setback. Their 200-day moving averages, a closely watched indicator, turned decisively downward for the first time since the bull began in 2003.

In a note in January, John Murphy, a U.S. pioneer of market-chart analysis, declared a bear market had been confirmed because the major U.S. indexes had just fallen well below their earlier lows set last August when the subprime disaster first hit.

In late March, he said to expect a brief “bear market rally” lasting one to three months, but that would eventually fizzle out.

“Whenever the intermediate rally does run its course, an eventual retest of the recent lows appears likely,” he wrote.

“So while the market is looking better over the short- to intermediate-term, its longer range trend is still in danger.”

Not all analysts are so despondent. Ron Meisels, president of Montreal-based research firm Phases & Cycles, also predicts a rally, but he says it will be more lasting. He believes the TSX, hovering around at 13,500 late last week, will soon run up to test its December and February highs around 14,000, then eventually power up above the highs of last October around 14,500. His final target is 16,000.

In a note in late March, he said the path of least resistance for markets is upward for due, ironically, to extreme investor and advisor pessimism. He noted a survey by research firm Investors Intelligence had found 43 percent of financial advisors were bearish, compared to only 31 percent who were bullish.

“A plurality of bears in this indicator appears very infrequently and usually coincides with major market turns or significant rallies,” Meisels wrote.

Some analysts just wish the market would make up its mind. Mark Arbeter, chief technical strategist at Standard & Poor’s Equity Research Services in New York, said he has never seen such crazed market volatility, even during the dot-com crash.

“I hate this kind of market,” he said. “You get faked out and suckered. I don’t care if it goes down or up, I just want some kind of trend.”

Arbeter believes the market has entered “a mini-bear,” but he added: “I think it’s less important what you call it than where you’re sitting with your money.”

In the short-term, he agreed with Meisels’ contrarian logic that investor sentiment has hit a pessimistic extreme that will likely buoy markets.

Key near-term levels to watch, he said, are the recent highs set this winter and last fall—areas likely to offer strong resistance where markets are prone to fail, provoking more pullbacks.

Other negatives holding back rally attempts, he said, include those major trendline breakdowns and the downward slopes of the indexes’ 200-day moving averages.

In the longer run, Arbeter sees the extremes of bearishness as a good omen. Instead of an out-and-out downtrend for the market, he foresees several months of sideways action followed by an eventually breakout to new highs by year-end.

“When sentiment gets that bad, probably it’s a sign the worst is over.”

[TAGS: bull market, bear market, moving average, trendlines]

Lust for Lustre

ANNALS OF IRRATIONAL EXUBERANCE
Gold Bugs Bug Out
Investors in love with shiny stuff are forever blowing bubbles

Alex Roslin
Wednesday, March 26, 2008
Business Observer
The Montreal Gazette
[original story]

It's a great time to be a gold bug. With gold punching above $1,000 U.S. an ounce for the first time ever this month, small-time investors are pouring into gold.

And despite bullion's lofty prices, gold bulls say this is just the beginning as concerns about the subprime apocalypse drive investors to safe-haven assets.

Frank Holmes, CEO of U.S. Global Investors, predicted recently gold would soon top $2,000. Even wilder forecasts surround silver, which briefly peaked above $20 an ounce earlier in March. One gold-market website cited some analysts who insisted silver would explode to $135 to $200.

It reminds me of the last days of the dot-com craze in the late 1990s when the talking heads on the financial news extolled the virtues of ridiculously overpriced Internet companies that would soon prove to be worthless.

Remember the book DOW 36,000, which predicted the Dow Jones Industrial Average would soon triple in value?

That was in Oct. 1999 when the Dow was at 10,000. Alas, it peaked at 11,900 just three months later, then did a swan dive to below 7,500.

Now I'm not suggesting gold is as worthless as a dot-com shell company. Historically, an ounce of gold has always tended to be worth about the price of a men's suit. So you can be reasonably sure it will at least put some clothes on your back.

On the flip side, gold is probably subject to more speculative craziness than nearly any other market. This is after all the metal that helped inspire the Spaniards to settle the Americas and spawned sundry gold rushes.

For some reason - maybe because it's so shiny - gold drives lots of folks to wacky extremes. Gold bugs got their name from a movement in favour of the gold monetary standard in the 1890s, whose supporters wore lapel pins of small insects.

For many gold bugs, holding bullion is actually as much a political decision as one about investing. They don't believe in paper money, central banks or have much fondness for liberal ideas like the welfare state.

I see them as the market version of those backwoods survivalists who like to stock up on canned goods and ammo.

The most hardcore gold bugs have been proselytizing for bullion for a long time. Some have actually been waiting for the current gold ramp-up for the past 28 years, ever since 1980 when gold spiked to nearly $900 before it crashed and spent the next two decades ambling around between $250 and $500.

I recently had the pleasure of getting acquainted with some of these folks through a market blog I write. When I reported that my trading system had given a sell signal for silver, I got about 150 livid emails and blog comments-10 times the usual number for anything I'd else written.

"Dear Dufus," one started. "Gold and silver are buys not sells. ... Please get it right to save what is left of your reputation as a financial commentator."

"DUMP SILVER?!?!? Are you nuts?" another wrote. "You have to be crazy my man-get a clue about what's going on! SERIOUSLY-GET A CLUE !

One said, "Good luck with your future. I just bought more gold at $1,000.00/oz and may think about selling it at $1,650.00/oz."

What's supremely sad is to hear of small-time investors loading up on gold just as it again made record highs. I wonder how many were aware that gold and silver are some of the most volatile markets on the planet.

Here's what happened in May 2006: gold had nearly tripled in price to $730 from its 2001 low around $255. Like now, there was lots of talk it would inevitably rise far higher, perhaps to $3,000 or more.

Then, in the space of a month, gold crashed 26 per cent to $540. After that, it stubbornly seesawed up and down for over a year.

Now how do you think a typical investor reacted? Clearly, a good many sold at or near $540. We know that because this is the price where gold stabilized, signaling an end to the initial corrective selling pressure.

Many others would have held on for several months, but finally threw in the towel and took their loss in order to put money to work in the stock market as it took off in late 2006 and early 2007.

And that's when the major selling pressure in gold would have ended, allowing its price to finally break out of its long trading range last summer and unleashing the current ramp-up.

In other words, the latecomer little guys likely didn't participate in most of the recent rise.

Fast forward to today. After gold hit an intraday high of $1,033 on March 17, it crashed 12 per cent in three days. Sure, gold could double in price to $2,000. The question is, can you afford to wait another 28 years before that happens?

Alex Roslin is a journalist and active trader. His market blog is at COTsTimer.Blogspot.com.

[TAGS: gold bugs, gold investing, bullion, precious metals, market bubbles, silver]