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The Dow Industrials

April 27, 2007

The Smart Profits Report: Issue #416
Friday, April 27, 2007

The Dow Industrials: The “Sell In May” Theory And Where The Markets Could Head From Here
By Jim Stanton
Technical Analyst, Mt. Vernon Research

13,132.

Another day… another new record high for the Dow Industrials, as the index blasted its way past 13,100 today - just one day after cracking the 13,000 mark for the first time in its history.

To put its recent run in perspective, remember that the Dow Industrial’s one-day, 416-point tumble occurred on February 27. That left the index at 12,216. Just 41 trading sessions later, it’s tacked on 916 points - an average of about 22 points per day.

There’s no doubt about it… this market is hot right now. Perhaps too hot. And you need to beware of getting burned.

You see, the market’s run has made many folks giddy, to the point where some almost expect the market to keep rising indefinitely, dishing out quick n’ easy gains in the process. But stock markets don’t simply rise without pausing for breath - especially at this time of year.

That’s because there’s just a few days to go now until one of the market’s most notoriously sluggish periods…

Shakespeare With A Twist: Beware The Ides Of May

In Shakespeare’s play Julius Caesar, a fortune teller warns Caesar to, “Beware the Ides of March.”

It turned out to be a profound warning - and I’m going to use a little poetic license here and pitch it forward by two months and apply it to the stock market instead.

You’re probably familiar with the old Wall St. adage, “Sell in May and go away.” Over time, this has proved to be an equally profound piece of advice, which basically states that the stock market endures its worst-performing period from May through October.

And May is just four days away…

To demonstrate the strength of this theory, just take a look at the statistics, tracked by the Stock Trader’s Almanac from 1950 to 2004:

  • If you’d invested $10,000 in the S&P 500 on November 1 each year and sold off on April 30 (historically the stock market’s best six-month period of the year), you’d have walked away with $349,165.
  • But if you reversed the process and invested your $10,000 each year during the May to October timeframe, after 54 years, you’d have ended up with a gain of just $7,102.
  • That’s a difference of 4,817%.

Impressive numbers - and proof that the cyclicality of the markets and seasonal tendencies should not be dismissed. In 2006, for example, the S&P 500 concluded a six-month rally by topping out at 1,326 - right on cue in early May. The bears then took control, pushing the S&P down almost 8% over the next six weeks.

But there are always exceptions. And in a surprising reversal of the historical trend, the bulls raced back and fired the index up 13% from a low of 1,220 in mid June. And despite occurring in a mid-term election year when the market usually sinks, the rally continued and ended up exceeding the early May highs.

So what’s on tap this year? Here’s what my charts are telling me…

Breaking Down The Dow And S&P 500

In my market update to you on March 17, I said: “… with the Dow Industrials, Dow Transports and all the small-cap indexes having all notched up new all-time highs over the impressive 7-month market rally, my pattern recognition system has projected higher targets. And although these stock market milestones have yet to be reached, my intermediate to longer-term analysis tells me that the February highs will eventually be taken out.”

The chart patterns were spot on. By the week ending April 20, all the indexes had made new highs for the year but the question is: Where do they go from here?

Since mid March, the S&P has rallied almost 9.5% and is getting overbought. However, it has yet to reach my longer-term upside targets, along with most of the other indexes - and although they’re getting close, May (and a potential selloff) is just around the corner.

  • Dow Industrials: The next minimum upside price target on the Dow Industrials is around 13,125, but it could reach the 13,200 area before the bullishness subsides.
  • S&P500: Below is a daily chart of the S&P 500. As you can see, my pattern recognition system projects the next upside target to be around 1,500. Again, though, with the momentum we’re seeing, it could trade up to the 1,510 area before the rally runs out of steam.

S&P 500 Chart next upside target at 1500
Chart Courtesy of Trade Navigator Software: http://www.genesisft.com

The Bottom Line: Dow Industrials & The S&P

Here’s the bottom line: If the Dow and S&P move up to their next minimum upside targets between now and mid/late May, the “Sell in May and go away” scenario may turn out to be a good move this year.

But it will also depend on how the Nasdaq and smaller-cap indexes are performing at that point. At the moment, the charts patterns on the Nasdaq 100 and Nasdaq Composite are pretty complex, so determining their upside targets is much more difficult.

If the Dow and S&P begin selling off prior to reaching the upside targets mentioned above, the indexes are probably going to correct and then consolidate for a while before heading back up to those target prices.

The “Sell in May” theory shouldn’t be your sole reason for taking action. Like any other indicator, it’s just one of a number of tools you can use to make your investment decisions.

For now, however, all the equity indexes are flashing intermediate-term buy signals. But with corporate earnings season winding down in May, there’s a decent chance that the markets could top out over the course of the month.

Good trading,

Jim Stanton

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Today’s Smart Profits Cribsheet

  • As a technical analyst, Jim Stanton uses pattern recognition to identify bullish and bearish trends in both indexes and stocks. It’s a vital tool in determining when a breakout or pullback is set to occur. For more information, check out Smart Profits Issue #317: Continuation Patterns: Cashing In On Technical Analysis.
  • Shares of Apple (Nasdaq: AAPL) blew past $100 for the first time today following a blistering earnings report that saw profits surge 88% to $770 million ($0.87 per share) on revenues that climbed 21% to $5.2 billion from a year earlier. The company cited a 36% jump in Mac computer sales (to 1.5 million) and a 24% rise in iPod (to 10.5 million) sales for the bulk of the growth. Apple shares ended the day up $3.49 (3.6%) to $98.84. And with the company’s new iPhone product set to hit the market in June, the company again confirmed that it expects a further boost in sales. Current forecasts put iPhone sales at 10 million in 2008.
  • In the oil world, industry behemoth ExxonMobil (NYSE: XOM) said it enjoyed its best first-quarter performance ever - despite profits slipping well below Wall Street estimates. For the January-March period, profits rose 10% to $9.3 billion ($1.62 per share), compared with $8.4 billion ($1.37) in Q1 2006. Revenues fell from $88.9 billion a year ago to $87.2 billion, due to crude prices being $5 less now than in the first quarter of 2006. That was well short of analysts’ estimates that called for revenues of $100 billion.

Related Articles:

  • The DJIA Index: As The Dow Goes 14 For 16, Beware The Momentum Indicator Warning Signs
  • The Dogs Of The Dow: Forget the January Effect & Kick Off 2007 With Some Rebound Profits
  • Dow Theory: The Most Important And Powerful Concept In Technical Analysis

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The DJIA Index

April 25, 2007

The Smart Profits Report: Issue #415
Wednesday, April 25, 2007

The DJIA Index: As The Dow Goes 14 For 16, Beware The Momentum Indicator Warning Signs
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

On Monday, the Dow Jones Industrial Average or DJIA Index dropped 42 points. It was just the second time in 16 trading sessions that the index finished down.

With the DJIA Index making new all-time highs and the other major indexes (S&P 500, Nasdaq and Russell 2000) all peaking above their February highs, the market is on a real tear.

So what’s not to like?

Actually, there are several momentum indicators and chart patterns that are throwing up warning signs here. And while these aren’t strong enough to imply that you should jump off the bullish bandwagon completely, they do call for a few days of caution. Let’s see why…

The DJIA Index: A Trio Of Warnings

  • The "Tick Index" Just Raced Higher: The Tick Index is a very short-term indicator that is based on an easy measurement: The number of stocks trading on an uptick minus the number trading on a downtick.

    The Tick index tells us whether traders are taking the offer or hitting the bid - and the magnitude of buying or selling strength. High numbers mean investors are buying many individual stocks at the offer at any given moment. Conversely, large negative numbers mean sellers are willing to sell at the bid price.  And last Friday, we saw the highest closing tick since mid-March (>1300) and another big intraday tick reading. Both point to a market that has reached the "frothy" level.

  • Markets Are Overbought On Most Momentum Indicators: When a market moves upward this strong and this fast, it’s not unusual that it will show up as overbought on the momentum indicators. That’s exactly what we’re seeing now in the Relative Strength Index, stochastics, plus others. I’ve illustrated this for you on the Dow Industrials chart in the Chart of the Week section below.

  • The Russell 2000 And Nasdaq Are Not As Strong As The DJIA Index: While the DJIA Index has powered to new all-time highs, the Russell 2000 (the proxy for small-cap stocks) and the Nasdaq have just barely exceeded their February highs. This tepid response to the recent three-week rally is important. Ever since the stock market’s strong run, beginning in July 2006, these two indexes have performed the best. But to have them both make a muted response to the Dow’s recent big surge is a clear warning sign.

What Goes Up Must Come Down

There’s no doubt that the stock market has proven to be exceptionally resilient over the past four-and-a-half years. But even strongest markets like the DJIA Index need to take a breather sometimes.

As my good friend and business partner Christopher Castroviejo says, "A high jumper needs to flex his or her knees in order to jump higher. And the current signs point to the need for at least a short-term flex down for this high jumper of a market."

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Cribsheet

  • The Dow Jones Industrials quickly shook off Monday’s decline and resumed their torrid pace yesterday, with the index rising 34.5 points to 12,953.94 at the close. Good news from both Dupont (NYSE: DD) helped propel the index forward after the company reported a 16% jump in first-quarter profits. IBM (NYSE: IBM) also cheered investors by saying it will boost its quarterly dividend payment by one-third ($0.10) and will kick its buyback plan into high gear by buying $15 billion worth more shares. This sent IBM shares up $3.28 (3.4%) and accounted for 26 points of the Dow’s 34-point up move.
  • Elsewhere, a 15-year water rights dispute in Montana is finally over. The Montana Reserved Water Rights Compact Commission and USDA Forest Service were haggling over the ownership of federal water rights on national forest land. But while this proves that federal and state authorities can resolve water rights disputes, many other states aren’t so lucky. In fact, in New Mexico alone, over half the state is locked in legal battles over water rights. The story is the same across the entire southwestern U.S. To read more about how this opens up some explosive investment opportunities - and the company perfected poised to take advantage by closing a deal worth $408 million, and a 102,000% return on its capital, follow this link. 

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The Chart Of The Week

This six-month chart of the Dow Jones Industrial Average (.DJI) shows two interesting items.

First, we see what could be shaping up as a classic "prairie dog top." This is where the market makes a new high and then drops quickly lower, just like a prairie dog sticking its head out of its hole and then jumping back down.

Secondly, we can see that the stochastics are clearly showing overbought conditions that is ripe for a correction.

DJIA prairie dog top and overbought conditions

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The Water Industry

April 20, 2007

The Smart Profits Report: Issue #414
Friday, April 20, 2007

The Water Industry: Water Wars Begin On The World’s Most Precious Resource
By Karim Rahemtulla
Investment Director, Mt. Vernon Research

You need it. I need it. Every single person in the world needs it. It’s without doubt the most precious commodity on the face of the planet. There is nothing more important to basic human survival.

But the world is struggling to cope with a very serious shortage - one that is approaching “crisis” level. Even in America’s own backyard.

I’m talking about water and the water industry - a massive $460 billion global market.

Population Overload… Water Undersupply

Whether it’s washing your hands, taking a shower, or pouring a glass of water, we take clean, fresh water for granted and use it without thinking.

But here’s the problem: 97.5% of the world’s water is seawater, unfit for human consumption. That leaves just 2.5% of fresh water resources for the world’s 6.5 billion people. Moreover, just 0.1% of all water is actually available to use. Most of it is locked up in glaciers, groundwater, and soil.

By 2025, the world population is expected to rise to 9 billion. But the global demand for fresh water exceeds supply by 17% already, according to the Population Institute, with World Bank figures showing that water demand is doubling every 21 years.

And don’t bet on suddenly discovering any more water either. There’s no way. We have a fixed, finite amount.

For the water industry, it’s simple economics: More people = more demand = less supply. So it’s no wonder natural resource prices are exploding - a trend that means investors have some massive moneymaking opportunities.

In fact, Fortune magazine says: “Water promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations.” Even Vanity Fair has hopped on the bandwagon, running a major water article in this month’s issue.

So let’s take a look…

Water Rights In The American Southwest

Water investments are surging in popularity. On Wednesday, MFS Aqua Managers in Australia launched the MFS Water Fund, whose portfolio includes water utility companies and water technology firms, as well as companies that run the water infrastructure and water rights.

Here in the U.S., you can invest in several water-based ETFs - such as the PowerShares Water Resources Portfolio (AMEX: PHO). Had you invested back in July 2006, you’d be up 24% by now.

But while those investments can produce some decent profits, you have to zone in more specifically if you want the real investment gems. And the most compelling and lucrative idea right now is lying deep in the desert of the American Southwest.

As you know, this region is home to some of the most arid desert in the world. Nevada is the driest American state. And compounding the issue is the fact that Nevada and Arizona are two of the fastest-growing states in America. The facts tell the story:

  • Since 1990, the population of Nevada has surged over 107%. That’s greater than the retirees who migrated to Florida. Nevada has been the fastest-growing U.S. state for 19 straight years.
  • Over the next 20 years, Nevada’s growth rate projected at an astounding 74%. Las Vegas will triple in population by the middle of the 21st century.

On top of that…

  • In 1922, the Colorado River divided 17.5 million acre-feet of river water among six southwestern states. Today, it averages only 11.7 million acre-feet per year… for an ever-increasing population.
  • Every drop of the Colorado River is now used 17 times, herded through 49 dams and dozens of pipelines and canals, until drying up from excess use before ever reaching the Gulf of Mexico, its original destination.
  • Water tables in Phoenix have dropped 400 feet in the last 50 years.
  • CNN says: “The drought gripping the West could be the biggest in 500 years, with effects in the Colorado River basin considerably worse than during the Dust Bowl years.”
  • In Mesquite, Nevada, officials say that at current growth rates, the city will run out of water in three to five years.

Simply put, there isn’t enough water for everyone. The U.S. government reports that a majority of states will face water shortages over the next decade - not including droughts - and says the water infrastructure problem is potentially the #1 internal problem that America faces today.

And fresh off an 11-year drought, states like Arizona, Nevada and California are now fiercely fighting for water and water rights. And according to NPR, you can obtain a permit to drill an unregulated well in Arizona for a mere $160… and then do whatever you like with the water. Savvy businesses are gobbling up those permits - and triggering a huge legal scrap…

Water Wars

Canadian land developer Wind River Resources (trading on the Toronto Stock Exchange) is one of those companies. Trouble is… it plans on shipping the water straight out of Arizona to those thirsty folks in Mesquite, Nevada, who are willing to pay big bucks for the water.

While that’s great news for Wind River - and other similar companies - Arizona isn’t too thrilled with the idea. It has pressing water-shortage concerns, too. And situations like this are sparking an almighty tug-of-war in court over water rights.

Canada could also be involved in another trilateral scrap next week when government officials from America, Canada and Mexico hold the two-day North American Future 2025 Project in Calgary. Up for debate: How the continent should tackle its increasing water shortages and whether they can devise “creative” solutions to combat “profound changes” in the water industry in the U.S. and Mexico.

This might include large-scale water exports from Canada, which possesses plentiful fresh water supplies. But Federal Environment Minister John Baird has already stated that, “Canada has no intention of entering into negotiations regarding the issue of bulk water exports” and is “committed to protecting water in its natural state.”

The Spigot Is Open And Ready To Pour Profits

Bottom line: The water industry could be the greatest investment of the 21st century. And positioning yourself in companies that are fighting to solve the problems could be one of the greatest investments you could make.

Right now, the companies in pole position to make significant returns are the ones that own water rights - with the profits filtering to savvy investors.

Good investing,

Karim Rahemtulla

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Today’s Smart Profits Cribsheet

  • Right now, water shortages currently affect 80 countries, with 40% of the world’s population without access to clean water or sanitation. Within 50 years, over half of the entire global population will be living with water shortages.
  • In America, the water pipes that supply older cities such as New York, Washington, Chicago, and Los Angeles are 80-100 years old. They’re now beginning to decay rapidly and the American Society of Civil Engineers estimates that over the next 2 decades, it will take $1 trillion to repair or replace these worn out water pipes.
  • Since 1994, one company has specifically targeted water and water rights in the thirsty American Southwest. It’s gobbled up land and water rights in this profit-packed region to such an extent that it now owns 1.3 million acres in Nevada, Colorado and Arizona. What’s more… it’s about to sell those rights for 1,285 times the original purchase price. That’s a 102,000% profit, and will immediately inject $408 million into its coffers. Another four major deals are already in the pipeline, so for full details, read the special “just released” report here.

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Successful Trading Rules

April 18, 2007

The Smart Profits Report: Issue #413
Wednesday, April 18, 2007

Successful Trading Rules: Top Trader Michael Guido Reveals 3 Timeless Trading Rules
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

When my business partner alerted me to a Trader Monthly article, featuring Société Générale’s head of commodity trading, Michael Guido, it was immediately one of those “must-read” pieces. You see, I’m constantly fascinated by the thought processes of top traders around the world. And when it comes to top traders, Michael Guido is definitely in that category, having traded for several major hedge funds in his 39 years, and has now landed a prestigious job with the huge French bank’s U.S. operations.

One of the most remarkable and revealing things that I find about guys like Guido is that many of them share similarities in both philosophy and practice. So let’s take a look at how his top three successful trading rules could affect your bottom line - starting today.

While Michael Guido’s successful trading rules aren’t new, they are timeless and extremely useful. Let’s look at each rule and how we can apply them:

See The Big Picture

I could rephrase this rule as: “See the complete picture.” This essentially means that you must look at trades from both a technical and fundamental perspective. As Mr. Guido’s states: ” Any trader with a foot in only one camp will eventually get his comeuppance.”

Every good trader I know follows this rule. I can count the “purely technical” or “purely fundamental” ones on one hand.

So if you focus on the fundamental analysis, remember that while it’s a very useful method, it’s not the only one - and you must not simply follow it blindly. Apply Guido’s first rule by mixing in some technical tools - especially for timing your investments, so you avoid jumping in or out at the wrong time.

Take Note Of The Key Numbers

Massaging the numbers to fit your theory is a sure path to disappointment (or disaster). To avoid this, you must watch key market indicators like price volume and open interest to make sure you don’t endure the frustration of getting into a trade after the market has already fully priced the event or news into the stock.

And again, if you combine this with some numbers from technical analysis, you’ll get the complete picture. For example, make sure you…

  • Don’t buy just below key resistance areas.
  • Don’t set your stop-loss points just above key support.
  • Know the difference between “stopping volume” (high volume that indicates the end of a trend) and “breakout volume” (high volume that accompanies a breakout or breakdown).

Forget About Being Right

Mr. Guido’s counsel: “Never trade with the mentality of, ‘the market is wrong; I’m right.’”

Many investing mistakes can be traced back to “the need to be right.” Failing to adhere to stop-losses and hanging onto your losers is a major source of trading pain that results from “the need to be right.”

But you can combat this pitfall in a very simple way: Make sure you have a simple trading plan. If you have a written reason for everything you do in the markets, your emotional “need to be right” will be exiled to other endeavors outside of your trading activities.

Improve Your Results with Successful Trading Rules

Learning from folks that have already paid their “trading tuition” is a prudent way to consistently improve your own results. And these three trading rules, although simple, are highly effective, and come from one of the world’s best moneymakers. So try to fold them into your own trading plan.

Great trading,

D.R. Barton, Jr.

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Today’s Smart Profits Cribsheet

  • Water is the one critical commodity we simply cannot live without. But supplies are running dangerously low. Water shortages currently affect 80 countries and by 2020, the world will have two billion more people who will require 20% more water than is currently available. Within 50 years, over half of the global population will be living with water shortages. In fact, millions of residents in America’s arid Southwest are already desperately short of water. Fortune magazine labels water investing “the oil of the 21st century,” and the Xcelerated Profits Report team has identified an incredible opportunity for you to take advantage. Stay tuned for more details coming soon…
  • Not only are major investment firms like Société Générale and Goldman Sachs paying top traders multi-million dollar salaries, they’re also “… pouring unprecedented sums of money into computers to find faster and more inventive ways to outsmart their competitors,” according to Monday’s Financial Times. For two years now, one group of investors have had privileged access to a deadly accurate computerized trading system that has produced gains of 68% in a day… 85% in just over a week… 108% in 5 days… 92% in 9 days… and 50%, 75% and 106% gains… all in under a month. Click this link for more details.

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The Chart Of The Week

Two weeks ago, we showed the chart of the iShares MSCI Australia Index (AMEX: EWA) and noted the Aussie market’s strength, relative to its U.S. counterpart. True to form, Australia has stayed strong and rallied almost 7% in the last 10 trading days.

Australia staying strong & rallying 7% in 10 days

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Point & Figure Charting

April 13, 2007

The Smart Profits Report: Issue #412
Friday, April 13, 2007

Point & Figure Charting: An Accurate Way To Spot Key Stock Trends
By Mark Whistler
Small-Caps Specialist, Mt. Vernon Research

I’m about to share with you one of the oldest and most trusted ways to chart a stock’s current performance and accurately pinpoint its future movement.

You won’t hear about this technique very often (certainly not on those “one-size-fits-all” financial TV shows anyway). But if you add it to your toolbox, you’ll be able to buy low and sell high in a new and dynamic way.

I’m talking about Point & Figure charting. Let’s see how it works…

Plot The “X’s” And “O’s” And Become The Vince Lombardi Of The Stock World

Long before computers became commonplace in industrialized America, Point & Figure charting was a key element of investment analysis. Even legendary investor Charles Dow, the pioneer of Dow Theory, used it to track of his positions.

Simply put, it cuts out the “noise” of the stock market. Unlike candlestick, bar, or line charts, it immediately allows you to see “pure trends” in the stocks you follow.

The beauty of Point & Figure charting is that anyone can do it. All you need is any given day’s stock prices. In the old days, you needed some graph paper and a pencil, too. But today, computers do most of the work for you.

Point & Figure charts are primarily made up of “X’s” and “O’s.” An “X” indicates that the stock price is moving up; an “O” shows a stock moving down.

What makes Point & Figure charts unique is that there is no structured measurement of time, like there is on normal charts. The movement is solely dependent on price action, because the stock must close above or below a pre-defined unit - otherwise known as “box size.”

So what is box size?

How Box Size Determines Price Movement

On the vertical axis of a Point & Figure chart, each box denotes a price. For example, if the box size was $1, the price would increase in $1 increments - $25, $26, $27, etc.

Box sizes vary depending on the price of the stock, though Stockcharts.com publishes a great breakdown of the norm:

For example, let’s take Lifecell (Nasdaq: LIFC), which is currently trading around $25. If the stock closed above $25 yesterday, it must close above $26 today in order for us to add another “X” to the column. If the stock closes at $25.75 today, we would not add an “X,” since it did not close above our pre-defined “box size” of $1. So you might not see an “X” or an “O” marked on the chart each day.

There’s just one more ingredient to Point & Figure charting…

Reversal Reveals Trend

This is where Point & Figure charts become very effective at identifying stock trends.

When a column of “X’s” or “O’s” has started, a new column can not begin unless the price moves beyond the predetermined “reversal amount.” The reversal amount is how many boxes the stock must backtrack over before a new column is started.

Because most Point & Figure charts are based on a “three-box reversal,” small price hiccups or stagnation in the stock’s movement is disregarded, thus removing the day-to-day market fluctuations of normal charts.

For example, in a $10 stock, if the box size is $1, and the stock moves up slightly more than $1, above $11, then we would add an “X” to the chart. So if we use a traditional “three-box reversal,” the stock would have to fall $3 before we would start a new column of “O’s.”

Here’s how it all looks, using Microsoft (Nasdaq: MSFT) as an example. Note that time is measured as 1 through 9 from January to September, while A to C represents October to December.

As you can see, Microsoft moved up through January of 2007, but than began to fall in early February.

However, the column of “O’s” didn’t start until the stock dropped below $28, which didn’t occur until the final days of February.

Then, in the second week of March, Microsoft closed below $27, thus requiring us to add the fourth “O,” denoted as a “3″ to indicate the first “O” in the month of March.

At present, we cannot add another “O” to the column until Microsoft closes below $26. Conversely, we won’t start a new column with three “X’s” unless Microsoft closes above $30. If Microsoft closes above $30 we would add three “X’s” to the chart in the $28, $29 and $30 boxes - indicating the “three box reversal.”

Okay, so now you’ve seen what a Point & Figure chart looks like, let’s see how we’d apply the technique to an actual trade…

Point & Figure Charting In Action

Take a look at the below chart of Google (Nasdaq: GOOG).

The first thing that immediately jumps out from the Point & Figure chart is an easily identifiable short-term downtrend in Google’s stock, denoted by the declining red line on the upper right of the chart.

And the Point & Figure chart is telling us that if we’re thinking about buying shares, there will be upward resistance in the $482 area. But in February, Google also broke support of its 6-month trend at $458. So the chart also indicates that buying Google here may not be prudent, as the stock is trading in the middle of that range and could go either way.

Savvy investors who follow Point & Figure charts know that buying when the stock is near support at $338, or waiting for a confirmed breakout above its resistance at $482 before jumping in, may be a safer way to invest in Google in the near-term.

Really, Point & Figure charts allow us to take a step back from the fluctuations of regular charts and see the bigger picture in an easily understandable format. They’re best used when looked at in conjunction with normal charts, just so you are aware of the smaller price movements. But by revealing larger, “pure” trends, they show you more ideal buy and sell points without the confusing chatter of commonplace daily charts.

Good investing,

Mark Whistler

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Today’s Smart Profits Cribsheet

  • Mark Whistler recently released his second book, Trade With Passion And Purpose, which explores an area of markets that most investors never look at: Our emotions in relation to investing. After over a decade of professional trading, Mark spent two years researching psychology and philosophy as they apply to the process of buying and selling stocks. Including interviews with some of the world’s most successful traders and business people, Trade With Passion And Purpose provides the essential information you need to take your investment performance to the next level. For more information, please visit this link.
  • Whether you use moving averages, Fibonacci retracements, support and resistance points, relative strength, or the Point & Figure charts that Mark talks about here, technical analysis allows you to work with the market, not against it, by pinpointing trends, breakouts and entry/exit points more clearly, so you can take maximum profits.
  • At the Smart Profits Report, technical analysis forms a key part of the investment strategies that our professional traders use every day to make money in the market. In fact, our resident commodities expert Lee Lowell has used the concept to help him rack up an 85% winning average for his readers in 2007 alone. Just a few hours ago, Lee locked in a 34% gain in 14 days on coffee options. To find out more about how you can cash in on one of the financial world’s fastest-growing areas, please follow this link.

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The Economy of India

April 12, 2007

The Smart Profits Report: Issue #464
Friday, October 12, 2007

The Economy of India: GDP Growth Is Exploding And Stocks Are Surging… Is It Time To Bet On India?By Karim Rahemtulla
Investment Director, Mt. Vernon Research

At long last… After spending the last 29 hours on various planes and stuck inside airports, I finally made it to Mumbai, India last night.

Let me tell you… it’s hot here. And I’m not talking about the weather. The Bombay Stock Exchange hit a new all-time high today and is approaching the 19,000 level. That’s almost double where it was this time last year.

Great news, you say. Well, yes and no. Although the economy of india and its stock market are flourishing right now, the rapid growth is scaring many investors. And that’s why I’m here. I’m leading an investment research trip, taking in the country’s hotspots, examining its rapidly emerging market, meeting with several companies, and separating the wheat from the chaff when it comes to India’s lucrative investment potential.

Here’s the scoop…

India’s Economy: Dynamic And Energetic… But In Need Of Some Upgrades

India is a dynamic country. The place is teeming with life and energy. Foreign funds are pumping money into India’s economy at a record pace and stocks keep rising. There is almost certainly an economic miracle happening here.

But the country is also exploding at the seams. The roads are a mess. The power grid is a mess. Everything is a mess.

I noticed it as soon as I set off for my hotel, the Taj Mahal Hotel in Mumbai, where I am writing this column to you now. It’s a fabulous place, but despite being just 15 miles away, as the crow flies, it took an hour-and-a-half to get there. My crow needs to find a new route!

The thing is, city officials have talked about finding a new route to the airport for ages. They’ve talked about a bridge over the bay. Some say this will be an 8-lane monster, making the journey just 20 minutes. I say: “You said the same thing 25 years ago. I don’t care if it’s 8 lanes or 12 lanes… for heaven’s sake, just build it!”

So what’s happening elsewhere?

Keeping The Dream Alive, But The People Are Just So Darn Productive!

India’s equivalent of the “American Dream” is still alive and well… and you can make money here. But a critical factor is often left out of the equation. Contrary to the investment public’s opinion, the poor in India are still poor. And they will stay poor for a while to come. Making money is tough for those folks.

The middle class may also be in for a rude awakening. Turns out India has hopped on the productivity bandwagon. My good friend and Quantum Fund manager Ajit Dayal tells me that productivity has increased five-fold over the past decade. While that helps to keep economic expansion motoring along for now, it’s not a good sign for a country that needs to create more jobs in order to boost overall wealth and continued growth.

Young, Emerging And Illiquid: Beware India’s Economic Liquidity Trap

On our first day here, we wasted no time in getting down to business. In presentations made to our group of investors, one of the most interesting observations is one that you often see in young, emerging markets or stocks, and it holds true for India: It is an economically illiquid market.

For example, Ajit will only look at companies that trade at least $1 million in share value per day for a year ($1 million, not 1 million shares), otherwise he considers them a liquidity trap. Out of the 7,000 stocks that trade on the Bombay exchange, you wouldn’t think that would be much problem. But you might be surprised. Guess how many fit his criteria?

Just 284.

Yes, there is money to be made from India. And we’ll be making our bets. But with odds as low as that, we won’t be taking chances until our odds improve. The market just can’t handle it right now. On the next correction, we’ll be buying, but not at these levels.

Stay tuned. I’ll report back soon, with the best sectors in India at the moment.

Karim Rahemtulla

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Today’s Smart Profits Action Center

  • Following 9.1% first-quarter GDP growth, India’s economy blazed to a 9.3% second-quarter gain. The vital manufacturing sector led the way, with an 11.9% increase in output versus a year earlier. Construction grew 10.7%, while farm production rose 3.8%. Not surprisingly, the Bombay Stock Exchange has reacted positively, surging from 13,827 at the start of 2007 to 18,814 today - a 36% jump. Over the past three months alone, it’s up 25%. And because India’s economy is based more on domestic consumption and investments, rather than exports like many of its other Asian neighbors, it’s handling the fallout from the U.S. subprime meltdown much better.
  • India’s strong growth is filtering to its citizens. The ranks of the middle class have tripled to 300 million over the past two decades. However, the central bank has raised interest rates three times this year in order to squash inflation.

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Global Markets Investing

April 11, 2007

The Smart Profits Report: Issue #411
Wednesday, April 11, 2007

Global Markets Investing: Get 300% More Bang For Your Investment Dollar And Diversify Your Portfolio
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

It’s a fact that money flows to where it’s treated best. That means most investors tend to invest their money close to home, or in the “best known” places. And for most folks reading this article today, that means investing in the U.S. markets. But it also means you might be missing out on the best returns.

Over the past few years, many economists and authors have talked about “globalization” (or the global economy). But most investors still limit their investments to vehicles in the U.S. or ones that are highly correlated to the U.S. market, rather than looking towards global markets investing. And as we shall see below, that’s a huge mistake.

Let’s take a look at the performance of the U.S. market versus other regions of the world - and how you can diversify your portfolio with a simple click of a mouse.

Global Markets Investing: Strength On A Global Scale

The past nine months or so has proven to be a strong period for the markets. Yes, we saw a sharp pullback that hit all the global markets at the end of February - but it came after a remarkable rally, and the decline was relatively brief.

So while many investors panicked, it’s worth remembering that stocks are still in positive territory since late June/early July 2006.

However, as the chart below shows, it’s been more positive for some than for others - with the U.S. not the best place to invest your money.

The chart shows the relative performance on a percentage of price basis for the S&P 500 (red line), Asia-Pacific, excluding Japan (the dark blue line), Latin America (green line) and Europe and Asia, excluding Japan (the pink line).

S&P 500 versus the global markets

As you can see, the worldwide equity markets have performed strongly since they made lows last July. And it doesn’t take a rocket scientist to see that while the U.S. market has given investors some nice returns, it’s lagged the world’s strongest regions by a considerable margin.

But what if you missed the bulk of the market rally over the second half of 2006? As the chart below shows, you could have still scooped some gains this calendar year. But again, you can see that the other three regions outside the U.S. have performed much stronger.

Global economy much stronger than US markets

“Globalize” Your Portfolio And Take Advantage Of The World’s Financial Muscle

There are many viable investment choices outside the U.S., which can help boost your overall returns. Here are a few suggestions on how you can take advantage of strength in other parts of the world:

  • Exchange-Traded Funds (ETFs): Simply put, ETFs track the performance of a class of assets. This can be anything from regional stock markets… an individual country’s index… commodities… or stock sectors. The global charts above are from the following regional ETFs: iShares MSCI Asia-Pacific ex-Japan (AMEX: EPP), iShares S&P Latin America 40 Index (AMEX: ILF) and iShares MSCI EAFE Index (AMEX: EFA), which tracks Europe and Asia, excluding Japan.

If you want your investments to track a specific country’s market, however, you could opt for ETFs like the iShares MSCI Japan Index (AMEX: EWJ) or the iShares MSCI Australia Index (AMEX: EWA) among many others. The beauty of ETFs is that they incorporate the best characteristics of both mutual funds (in that they’re highly customizable) and of stocks (they trade just like stocks on the exchanges and have very low transactions charges when compared to mutual funds).

  • Beware Global Volatility: It’s important to note, however, that while regional investing can bring you great returns, some markets also carries extra risk. For example, the Latin America ETF is much more volatile than a U.S. index fund, and you must consider this volatility when determining what size position you want to take (remember… the higher the volatility, the fewer shares you can safely trade).
  • Dodge The Domino Effect: The global economy is a reality. So bear in mind that other regions are inextricably linked to other markets around the world. For example, widespread selloffs - like the one we saw on February 27, 2007 - will likely affect all markets, albeit in varying degrees. Therefore, make sure your portfolio isn’t overly exposed to one particular investment area.

With several international markets outperforming those in the U.S., it’s not surprising that investors pumped almost $50 billion into foreign large-cap funds in 2006 alone. So if you’re looking to get more bang for your buck, you’d be wise to diversify your portfolio holdings to take advantage of this foreign strength.

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Cribsheet

  • Foreign large-cap funds have chalked up 19% to 21% annualized returns over the past three years, compared with 9% to 13% annualized gains for U.S. large-cap funds, according to Morningstar. Emerging market funds, which focus on investments in countries like China and India, racked up an impressive 28% annualized gain over the same period.
  • Management consultants AT Kearney recently ranked China and India as the top two places in the world to invest. It marked the first time in history that the U.S. dropped to third place. To find out more about how you can take advantage of these explosive emerging global markets, please visit this link.

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The Chart Of The Week

XLU continues rise within broader choppy markets

In March, we mentioned in this space that the Utilities Select Sector SPDR (AMEX: XLU) - the ETF representing the utilities sector - continued to rise while the broader market endured choppiness. As long as this remains the case and the market is undecided on direction, this traditional safe haven will continue to do well.

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Investing in Commodities

April 6, 2007

The Smart Profits Report: Issue #410
Friday, April 6, 2007

Investing in Commodities: Four Reasons Why Commodity Investing Is Better Than Trading Stocks
By Lee Lowell
Futures Options & Commodities Specialist, Mt. Vernon Research

Here’s a question I get asked all the time by friends, colleagues, and attendees at the investment conferences I speak at: “Why do you gravitate more toward the commodity market, while trying to stay away from stocks?”

Great question. And a simple answer for it.

While many people make a pretty good living trading stocks, and have increased their net worth, I’ve personally found that in my 15 years of being a professional trader, the wealth I can build up from investing in commodities greatly surpasses stock market returns.

Let me explain why I think the commodities world offers more financial advantages than stocks - and with the April 15 tax-filing deadline almost upon us, tell you about one pretty big tax break that you get from investing in commodities, too…

A Quartet Of Stock Investing Snags

Remember… I’m speaking from personal experience here. By no means am I trying to dissuade you from trading stocks. I’m just giving you the reasons why commodities have worked for me over time.

And when I say the “stock market,” I’m referring to individual stocks, not the broad market as a whole, as measured by the Dow Jones or the S&P 500. When I put money in the stock market, it’s using investments that track the broader markets - such as ETF options on the Dow Diamonds Trust (AMEX: DIA), the Nasdaq 100 Trust Shares (Nasdaq: QQQQ) or the SPDRs (AMEX: SPY).

That’s because when it comes to individual stocks, there are clear pitfalls…

  • Earnings Reports: We all know that every three months, publicly traded companies are compelled to release their quarterly earnings results. These announcements often cause a spike in volume and volatility and send shares up or down considerably.

Logic dictates that when a company reports blowout earnings, shares should soar. And when the numbers disappoint, the stock should fall. But it often doesn’t work like that - not when investors are prone to “buy the rumor; sell the news.” How many times have you seen a company report great numbers… only for the stock to drop like a stone? While it makes no sense, the reaction revolves around whether or not the company met analysts’ earnings projections. This makes no sense. More to the point… how do you trade profitably when things like that happen?

  • Government Reports: If it’s not individual earnings reports, you’ve also got the uncountable array of government reports. GDP growth figures… the CPI and PPI inflation numbers… Federal Reserve interest rate announcements… employment data… real estate market numbers… manufacturing figures… retail sales results… consumer sentiment. The list goes on. And with each announcement, stocks can react unpredictably and irrationally.
  • Underhanded Executives: Just when you think a company is rock solid, it suddenly implodes because one or two shady executives are cooking the books at the shareholders’ expense. Enron is a prime example, and we’ve also seen other high-profile companies like WorldCom, Adelphia and Tyco collapse for this reason.

I know this is a very small fraction of all the companies on the stock market. But the fact remains that the stock market isn’t as safe as it once was. Do you ever truly know if these guys are running the show properly, or abusing your hard-earned money?

  • Analyst Opinions/Brokerage Grades: If you’re looking for a short-term spike or fall, you can trust the thousands of analysts to provide one, simply by opening their mouths. Whether it’s an upgrade or downgrade, whenever these so-called experts pass on an opinion, sheep-like investors often follow whatever they say. Trouble is… different research firms put out a different view of the same stock every week, which jerks the price around like a yo-yo. It’s very difficult to get a true feel on how a company is doing.

These drawbacks are enough to make me think twice about investing too heavily in stocks and stick to the commodities markets instead. Here’s why…

A Quartet Of Commodity Benefits

The commodities market is one of the fastest-growing areas in the investment world. And it offers some major advantages over stocks that you might not have considered before. Let’s take a look…

  • Outside Influences Are Minimal: With commodities, you’re not investing in something that is bombarded by as many outside influences that the stock market is. Nor are you buying a piece of a company that is run by a few individuals. You’re investing in raw materials and actual physical products that are used for everyday consumption.

We’re talking about oil, natural gas, coffee, sugar, cocoa, orange juice, gold, silver, and copper. All these commodities trade on designated exchanges throughout the U.S., with most of them located in New York and Chicago. And the way you can participate in these markets is through the futures and futures options markets.

  • Commodities Aren’t Run By Corporations: If you despise corporations, then the commodities world offers you a sanctuary. They’re all free from corporate control. There’s no boardroom drama. You’re simply taking a position against the other side.

You see, there’s one main economic driver that affects physical commodities: Supply & demand. That means the focus is on inventory levels and growing cycles.

For example, will a drought in the Midwest affect corn and soybeans? Will hurricanes in Florida and the Gulf of Mexico hit natural gas and orange supplies? Will frost in Brazil lower the coffee crop? These are just some of the factors you need to take into consideration when investing in commodities.

And since weather forecasting technology has become more sophisticated, we can make better predictions about the future direction of these commodities.

  • Commodity Price Moves Are More Predictable: Having been in the trenches as a NYMEX market maker, I can tell you from personal experience that price movements in the commodity markets - whether up or down - are much more predictable and methodical.

This is because when you don’t have so many sources spewing out conflicting data, you get a better handle on the moves.

And even though large hedge funds have invested heavily in commodities lately, they haven’t had a long-term directional affect on the markets. Yes, they can push a market up temporarily, but the commodity markets are so large, they can encompass all types of players pretty seamlessly. So when it comes to chart analysis and looking at inventory and growing cycle data, it makes for more predictable movements.

  • You Get A Better Tax Break When Investing In Commodities: Another compelling reason to invest in commodities is the favorable tax treatment they receive, compared to stocks and stock options.

Since many of us trade on a short-term basis (less than one year), commodities and commodity options have all their short-term gains split on a 60/40 basis. That means 60% of short-term gains are taxed at the lower, long-term capital gains rate, while the other 40% is taxed at your higher, ordinary tax rate.

Compare this to stocks where all short-term stock gains are taxed at your ordinary tax rate - sometimes as high as 39%! That makes a huge difference come tax time. However, remember to consult with a tax professional before jumping head first into commodities, just so you’re clear on the situation.

All these factors add up to why I like investing in commodities over trading stocks. I’ve been doing it very profitably for 15 years - and plan to do it for many more. If you’d like to jump on board, too, and receive my personal commodity recommendations each week, please take a look at the Cribsheet below.

Good investing,

Lee Lowell

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Today’s Smart Profits Cribsheet

  • If you think the stock market is the only route the riches these days… think again. The commodity markets are just as lucrative - if not more so. And the world’s mega investment houses and brokerages know this. Firms like Goldman Sachs have forked out massive $2 million signing bonuses to lure top floor traders to do their bidding for them in the commodity market. That’s because when you know what factors can move a market… when it’s going to happen… and how to play the move, outstanding profits are up for grabs in a very short time.
  • And if you have a professional commodity trader on your side, you’re on the fast track to these profits. Having spent 15 years trading commodities (including six years as an actual market maker at the NYMEX), Lee Lowell has the crucial experience that tells him when a commodity is overbought or oversold. So far in 2007, he’s racked up an 85% win rate for his readers, including a 33% gain on natural gas in just 13 days. For more information, check out this link.

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Euro vs Dollar

April 4, 2007

The Smart Profits Report: Issue #409
Wednesday, April 4, 2007

Euro vs Dollar: The Three Technical Factors That Point To A Dollar Rebound
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

On Monday night, I watched the University of Florida basketball team repeat as NCAA champs. In a tournament that featured numerous close games, Florida failed to provide any nail-biters. Its closest win on the road to the championship was seven points, and there was never a game that was in doubt going into the waning moments. Love ‘em or hate ‘em, that’s a run of total domination.

But while the Florida Gators were on their historic march to victory, within the euro vs dollar currency wars, the dollar has been taking a beating. The euro has eclipsed its December highs against the greenback and has its sights set on the historic highs of 2005.

Of course, this has prompted many pundits to roll out the usual “dollar is dead” rhetoric. But there’s one big problem with all the “death of the dollar” talk.

The only logical replacement for the dollar as the world’s primary currency of commerce is the euro.

But unlike those dominant Florida Gators, the euro (and the underlying economy of the European Union) is far from a strong performer.

Let’s take a look at the current dollar woes - but also why it might not be time to throw the greenback under the bus just yet.

The Dollar Is Down… But So Is Volatility

While the euro is re-testing its two-year highs versus the dollar, it’s doing so in a very quiet fashion. Take a look at the chart below, showing the euro in dollar terms. As you can see, the old highs from early 2005 are still 300 “pips” away. In currency lingo, a “pip” is the minimum move that an exchange rate can make (usually to the last decimal place) - which in this case is the euro/dollar cross rate).

Euro vs. Dollar: the euro in dollar terms

The chart also shows three other key points:

  • Euro Rising Strongly: With the euro rising strongly, the dollar is now at its weakest level against the euro in two years.
  • Volatility Dropping: Volatility (the red line on the bottom half of the graph) is at its lowest point in the past five years. This means trading activity in the current environment is very measured and controlled.
  • Momentum Fading: The MACD (Moving Average Convergence-Divergence) indicator at the bottom of the graph shows that as the price makes new highs, momentum is falling and diverging, failing to confirm the higher prices.

The bottom line here is that the technical picture does not cry out for a drop in the dollar.

In fact, it looks like the stronger technical case could be made for a near-to-intermediate term recovery for the dollar.

So Much For A European “Union”: How Long Can Euro Resist Regional Woes?

For each of the potential financial woes facing the U.S., it would be easy to identify one or two problems of equal or greater magnitude in the European Union.

Start with the issue of its still-fractured governance and move onto the region’s employment and GDP growth issues, and you can see that the dollar is certainly not struggling. In fact, the euro currently seems to be only benefiting from an “any currency except the dollar” mentality in the world markets.

Yes, it’s true that the dollar is far from a so-called “safe haven” right now. But the greenback also isn’t likely to fall off the cliff any time soon. And while it’s very prudent for you to diversify your portfolio outside the dollar, getting rid of all dollar-oriented exposure is certainly premature right now.

Great trading,

D.R. Barton, Jr.

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Today’s Smart Profits Cribsheet

  • Dollar in the dumps? Not quite. The greenback chalked up a one-month high against the Japanese yen on Tuesday, and also rose against the euro and Swiss franc. The move came after a National Association of Realtors report indicated some surprising strength in the U.S. housing market, and dented the chance of a Federal Reserve interest rate cut. In addition, one group of traders sold 200 million euros at $1.3350 - a move that helped drop the currency 0.25% against the dollar on the day.
  • The speed with which the global currency market changes makes it tough for the average investor to keep up and capitalize on the moves in this exploding investment area. Think about it. By the time you wake up tomorrow, any of the Asian currencies or the euro could have ballooned or tanked overnight - giving you no chance to take action.
  • But did you know that you can cash in on the red-hot currency market and turn $10,000 into $410,889 without ever having to place a single trade on the foreign exchange? In a recently-published report, this Monaco-based investment expert will show you how he created a fortune by using a powerful strategy that requires just one transaction per year in foreign assets. Apply it today… and you could enjoy a 114% annual compounded return. Visit this link for full details.

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The Chart Of The Week

The Australian market is one of the world’s strongest at the moment - and one of the few that has notched up new highs after the global melt-down in late February.

The Australian market notching up to new highs

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