So what’s a trader to do?

http://www.ino.com/info/553/CD4064/&dp=0&l=0&campaignid=3

Regardless of how you feel about gold, this market presents some great trading opportunities that you can capitalize on using our “Trade Triangle” technology.

Now, hard-core gold bugs will not subscribe to this method of trading as they prefer to buy physical gold and hold onto it or bury their bars in their backyard, and to be honest with you, there is nothing wrong with that belief.

I’ve been asked to update our outlook on gold, so I thought that today I would make a short video to share with you some of the points I see in the current market.

http://www.ino.com/info/553/CD4064/&dp=0&l=0&campaignid=3

As always, our videos are free to watch and have no obligation. The only thing that we ask is that you share your views on our blog. The views can be bullish on gold or bearish on gold, the choice is yours to make.

Enjoy the video,
Adam Hewison
President, INO.com
Co-creator, MarketClub.com

Everything is great! Happy days are here again… Right?

So is the DOW, S&P, and NASDAQ all going to keep going higher forever? Or are the teachings of a dead mathematician going to reverse this juggernaut of a market?

In my new video I show you exactly what I mean and how the these indices could be very close to a very important tipping point.
Click here to watch!

This is without a doubt, one of the most important videos I have ever made and if you are concerned about your financial future, you don’t want to miss it.

Small-caps benefit from a change in investor sentiment toward risk.  During bad economic times, investors predictably seek safety with large-cap stocks, which are most likely to be entrenched in their respective marketplaces.  But when business begins to pick up, small caps stand to benefit more than their larger brethren, which can be demonstrated by the larger total returns from small-caps than from large-caps.

Another popular small-cap performance metric can be gleaned from the performance of the Russell 2000 index, which reveals an 8.9% return since December 31, including dividends, compared with a total return of 5% for the Standard and Poor’s 500 index during the same time.

To get more free stock picks, just go to Top Trading Picks and sign up our newsletter… We pick the best stocks, and send them to you by email, 100% free… Sign up now!

Why the interest? Because that’s where most of our stock trading ideas are going to come from.

Just a quick explanation…. these EPS estimates are built on the assumption that the index is a company itself, consisting of one share. More importantly, the red lines are the actual earnings per share, except when framed by a yellow highlight, which indicates it’s a projected value.

The horizontal blue line is last quarter’s (from whet we know so far anyway) earnings per share. I plotted it primarily to show you where operating earnings stand in relation to where they used be. In both cases, we’re close to 2007’s and 2008’s operating earnings levels… an encouraging sign.

In any case, here’s a look at the S&P 600’s aggregate results.

S&P 600 Small Cap Index, With Earnings

And, here’s a look at the S&P 400.

S&P 400 Mid Cap Index, With Earnings

It’s an interesting reality check, as many investors have convinced themselves that no company will ever turn a profit again. Not only will they, they actually have been! While I still feel the 2010 EPS projections are too aggressive, in light of the real results we’ve seen in 2009, they aren’t completely out of line.

On that note, you should know these numbers are based on operating results, and not GAAP results… which is where all those ‘one-time charges’ can take a toll. The actual GAAP results data isn’t available at this level, but based on the divergence between operating and GAAP results that I’ve seen for the S&P 500, I’d guess that the actual GAAP/reported earnings will be rolling in at about 30% below the operating results you see here. Prior to 2007, that disparity was only on the order of about 5% to 10%.

Still, even if the true bottom lines for these companies are only about 2/3 of the earnings estimates we’re seeing here, that’s still something worth investing in.

None of this will halt the short-term pullback that was set into motion last week, but this is bullish in the bigger picture.

I won’t be able to take care of the whole shebang today, but I can dive into the facts regarding the unemployment rate, new unemployment claims, and continued unemployment claims.

Just to set the tone, I think too many people are convinced – thanks to the media – that the job market is still on its death bed. It’s still rough, but have you seen the trends for ongoing and new claims? They’re both waaaaayyyyy down from peak levels reached between February and May.

Now, it would be unfair to not mention that fact that unemployment benefits have run out for the recession’s earliest victims. They have, which certainly has been some of the reason for the declining continuing claim levels…. some ex-workers simply need not bother to request unemployment. But new claims? New claims are – you know – new. They’re falling too now. (And even the expiration of benefits for those who were first laid off doesn’t fully explain the move from peak levels around 6.9 million per week versus the sub-5 million readings we’re seeing now.)

More importantly, these drastic pullbacks in new and continuing claim levels are consistent with the ends of recessions. And the extent to which we’ve seen this happen of late is more than we can chalk up to volatility. It’s a trend, and one that points to better days.

I know there are a lot of gloom-and-doomers trying to convince everyone otherwise. That’s fine. Just know the facts. If falling unemployment claims aren’t a sign of better days, it would be the first time in the last seven recessions that’s been the case.

But what about unemployment? It’s still high, after all.

Fair enough, but gain, the FACTUAL HISTORY says high unemployment can linger for months of note more than a year after the official end of a recession. Prior to 1990, unemployment rates tended to fall right as the recession ended. In 1990 and 2001 though, unemployment rates continued to rise even though the recession was over…. for more than a year in both cases. So yes, there is such a thing as a jobless recovery.

Bottom line? Ignore the data at you’re own risk. I know the ‘but this time it is different’ argument has been floating around. I distinctly remember the same thing being said in 2001, and vaguely remember the same being said in the early 90’s. Those scenarios may have been different, but it didn’t stop the market from rebounding.

On the chart below, the beginnings of recessions are marked with red up arrows, and the ends of them are marked with green down arrows. Or, they’re highlighted with light blue shading on the S&P 500 index portion of the chart. It’s amazing how the market consistently rebounds months before the recession officially ends. Click here for a larger and longer-term version of the chart below (which only shows limited time and detail).

Unemployment and Claims Trends

Though being adaptive is always important, so is being patient. I don’t expect to change this model until Q2 of next year. So, on with it.

Style and Cap

• Small Caps – Underweight
• Mid Caps – Overweight
• Large Caps – Neutral
• Value – Overweight
• Growth – Underweight

Before even looking at the chart, I’ll warn you of one key exception to the model…. I’ve still got a feeling that large cap growth has a place in – selectively – in most portfolios despite this basic plan. These picks have to be large cap growth though… not mid cap growth, nor large cap value. The premise is the same I brought up on 17th.

As for the others, it’s difficult to make out, but we are indeed seeing rotation into the ‘overweight’ categories, and rotation out of the ‘underweight’ ones. I have the benefit of zooming into more recent charts, where that rotation is more evident.

Style & Capitalization Rotation - 12/07/09

Sectors

• Basic Materials – Neutral/Underweight
• Industrials – Overweight
• Financials – Underweight
• Technology – Overweight
• Cyclicals – Neutral
• Energy – Neutral
• Non Cyclicals – Underweight
• Healthcare – Neutral
• Telecom – Overweight
• Utilities – Overweight

(The overweight/underweight counts are not matched one-for-one.)

I think the basic materials are overbought, which should be a drag on those prices for a while. The only reason I keep them around is as an inflation hedge. Don’t get married to them for that reason though…. inflation may not happen at all, and is likely to be contained if it does. At least wait for a pullback before stepping in.

Financials? They’re still paying the price for running too far, too fast earlier in the year.

Telecom and utilities were the bottom dwellers, but both have started to come out of their funk and outperform other sectors. I think that’s a trend that will continue for a while. A high-movement telecom name shouldn’t be hard to find, but a utility stock with big prospects may be tough to come up with (though I’ll take dividends in lieu).

Sector Rotation - 11/07/09

The current portfolio is not there yet, but you can expect to see our picks move the portfolio towards something like this (it’s hard to strategically diversify with only four stocks). After a healthy pullback, we’ll continue migrating into some of the names mentioned on our watchlist, with a preference for the stocks that bring us closer to the model allocation.

This is where we stand as of today.

Current Allocation - 12/07/09

Dollar Versus Yuan

Got it? OK, good, since it’s the basis of a quick discussion.

If you’re not an avid watcher of exchange rates and think the United States’ complaint about China’s manipulation of the yuan/dollar exchange is just sour grapes, check out the nearby chart – there can be no doubt. Since mid-2008, the exchange rate has barely wavered from $6.80/1.0 yuan. Point being, the accusation is a valid one.

You may have also heard China agreed to let the yuan fully value rather than leave it adjusted at lopsided exchange rates. I hope you didn’t believe it though. China has little to gain from doing so, but lots to lose if the country does so. For that reason, I don’t begrudge their decision to leave it as is, and simply pay lip-service to President Obama’s request …. even if mere politeness.

The impact this has on you is a pretty simple one – China’s still going to be a net exporter compared to the United States. American companies relying on exports to China will find little relief, while Chinese companies will continue to find American customers.

Unfortunately, there is no ‘cure’ for the yuan/dollar problem other than good old-fashioned reinflation of the sawbuck’s value. As the dollar gets stronger, so too will the yuan, which means its other trade partners besides the U.S. will also have a hard time affording Chinese goods. Though the U.S. is China’s “whale”, the country can’t afford to outprice itself to the rest of its customers.

In any case, that’s a quick snapshot of what’s going on, and a little evidence that China’s not yet done what they said they’d do. And, they probably won’t. (I wouldn’t either.)

Consumer Credit Levels Down

You’re not imagining it – consumers have access to less credit than they did a year ago. They have less credit than they did 15 years ago. These charts from Briefing.com show the year-over-year percentage  changes or the total dollar reduction of revolving and non-revolving credit.

There’s no room for interpretation here…. credit is indeed contracting, which does not help any economic recovery effort. Take a look at the charts, then keep reading.

Consumer Credit Month-to-Month - 11/05/09

Consumer Credit Year Over Year % Change - 11/05/09

Before you blame the banks, credit card issuers, and ridiculously-tightened lending standards though, you should know something else….

The TED Spread

TED Spread - 11/05/09

I’m not going to get into the mechanics of what it is and how it works. I’ll just describe the TED Spread as the difference between interest rates for 3-month T-Bills and the 3-month LIBOR rate. The LIBOR rate (London Interbank Offered Rate) is what banks charge each other for short-term loans. Its importance to ussimply that the TED spread measures the lending market’s overall perceived credit risk.  The lower it is, the lower the perceived general risk is to lenders.

As you can see on the nearby chart (from Bloomberg.com), the spike in the TED Spread in late 2007 and most of 2008 has been negated; the TED Spread is back to where it was when things were just fine in 2006 and early 2007. Point being, it’s not like banks and lenders are pushing people off their doorstep.

LIBOR-OIS Spread

LIBOR-OIS Spread - 11/05/09

Similar to the TED Spread, the LIBOR-OIS Spread is an indication of the perceived availability of funds for short-term loans… the one’s that keep thing running smoothly in the interim for banks while they go out and sell bigger, longer-term, and less liquid loans. Again, lower is better.

As the nearby chart of the LIBOR-OIS Spread (also from Bloomberg.com) shows, it’s not like banks aren’t liquid either. In fact, banks are more liquid (cash heavy) now than they have been in years… including the middle of last year (right in the heart of the implosion).

Bottom Line

My point is, not that the banks deserve a pat on the back, but we need to be careful about blaming them for the easing of consumer spending. They’re done their fair share to stifle it, but that fact is, credit is there for those who need and want it. Consumers just don’t want it. I can’t say I blame them given the situation, but unless they start spending, this is going to be a very long recovery process.

The consumer credit levels (not the two ’spread’ charts, but the two consumer credit charts from Briefing.com) are now the missing piece of the puzzle. Those two charts will need to rise for the economy to truly start growing again.

As for what you can do with this information as an investor, there’s not a lot you should be doing with it immediately. I’m not one of those gloom-and-doom pundits that assumes we’ll never recover. In fact I see more upside than downside for the economy at this point. However, this should be data and information you keep in the back of your head, before you dig in deep with assumptions and significant capital.

Bluntly, the economy isn’t nearly as healthy as some folks think it is, simply because consumers don’t want credit.

To that end, I’ve decided to do some aggregating work to define something I know plays a role in sector rotation, but something I’d yet to actually put on paper. In short, I’ve laid out the ‘average’ sector leaders during various stages of the market and economic cycle. That’s the image you see below.

A couple of thoughts…

First, yes, I know the market’s cycle isn’t synchronized with te economy’s cycle. That’s because the market trades about 6 to 9 months ahead of the economy. (That’s why I consistently ask the question “Do you think stocks actually trade at what they’re worth?”. They don’t.)

Second, while I love models and tendencies since they give me an edge, I hate exceptions, and I suspect there are plenty of them to this model. That’s why I have no intention of abandoning my current sector rotation methodologies, since they’re based on reality (emerging momentum) rather than history (which is assumption); I think the right answer is probably somewhere in between the two.

Anyway, the table should be of some value to you, but I would caution against making it something of tremendous value. I’ll certainly incorporate its themes, but I get married to nothing.

Market, Economic Cycles