Much has been made of the similarities between current times and the Great Depression.  The first leg down of each crash creating fear that a complete financial collapse was imminent, only to be averted by massive liquidity fueling hope and optimism, at least for a short time.  If history does indeed repeat itself (and it often does in the stock market), then there is reason for Great concern. 

We’ve now completed the first big crash (in the latter half of 2008), followed by the first big retracement of around 50%.  Now, just like then, there are many that feel we’re out of the woods with some talking heads even calling for a new bull market.  A 50% retracement rally in less than a year will do that.  Nobody knows how all this plays out, but with the growing debt issues, the coming increase in taxes, growing government control and the and the fear of skyrocketing inflation down the road, it’s not exactly conducive to a rip roaring economy. .. and you can’t ignore the similarities to 1929.  At the very least, we’ve got an extremely bumpy road ahead and it’s going to pay to be extremely cautious in the coming years.

Below is a great video done by Adam Hewison of Market Club taking a look at the stock market in 1929 vs 2010 through the Dow.  He brings up a good point that many baby boomers have already been hit hard once, recovered much of losses and will likely do anything to protect what’s left of their nest egg which includes exiting the stock market completely.  Perhaps that’s a train that can’t stopped no matter how much money the government throws at it.

Click to view the video

As I mentioned in the last market health blog post, the market has turned to the bearish side and I have two videos for you taking a look at this important index.  One video is from me, taking a look at all the important support and resistance levels on the weekly, daily and hourly time frames of the SPY (S&P tracking ETF) and the other is from Adam Hewison of Market Club taking a look at the S&P 500.  He highlights the fibonacci retracement as well as his proprietary trade triangle technology to determine how to play this market in the coming weeks.  We both come to the same conclusion.

Click the image to view Adam’s video

Click the image to view my video

The following was a note sent to my premium members tonight and wanted to pass it along to my blog readers: 

It’s safe to say the bulls have run out of gas.  It’s always interesting how the market begins to show signs of deterioration in certain leaders and sectors before the big plunge takes place.  Over the past couple weeks, we witnessed the China plays begin to crack.. it began with the high flying water plays, moved to the solar names and today it was the wind energy stocks.  In hindsight, I regret a bit not taking more off the table in the China names.  I thought increasing the hedge with FXP would be enough.. not quite enough.  I still have a longer term view of these stocks and they will all benefit big time as China pours billions into green energy.  However, I may look to ease up if I can get some decent bounces back to resistance levels. 

As you know, I have been increasing overall short exposure in the past week as those distribution days began to pile up.  Today was the fourth in less than two weeks which culminated in the Dow taking out key support levels of the 50 day moving average and the upward trend off the March lows.  Today was the most significant day of selling I’ve seen since the end of October.  I certainly thought the market was topping out then, so I could certainly be wrong again, but when I see this kind of distribution I will play accordingly and adjust if I’m proven wrong.  Along with the Dow taking out the 50 day moving average with heavy volume, the S&P has taken out an important level of support of the upward trend line off the July lows.  It still has support of its 50 day moving average, but downward momentum would indicate that it probably wants to test that 1100 level in the coming days. 

So, in light of the moves of the past two days, the strategy of the portfolio has shifted and that is to get more aggressive with short exposure into the rallies.

You can see the Dow taking out minor support around 10500 today and major support of the 50 day moving average with heavy sell volume.  More Dow analysis here.

The S&P is still holding its 50 day moving average but probably not for long considering today’s downside momentum.  More analysis of the S&P here.

I think it’s safe to say there is a lot of crap training out there when it comes to the stock market basics, especially if it’s free.  Well, every once in awhile there is a great free course that comes along that actually provides some great content without the fluff.  It’s important to note that this stock market training course courtesy of INO goes beyond the basics to some degree so some aspects may not make much sense right now to the newbie…  That’s ok.  Sign up for it, save it and go over it a few times.  You might even think about coming back to it every few months as you develop your stock market skills.  Below is an outline of the course, but if you’re ready to get started now, you can get it right here

Not Just The Stock Market Basics – “The Secrets Of Professional Floor Traders” Trading Course
Get the FREE course in its entirety here

1.The Right Attitude

- Be focused
- Money Management
- Cut the Loser, Let the Winner Ride

2. The Trend is Your Friend
- Buy on the dips in a bull market, sell into rallies in a bear market
- The importance of knowing the big trend and working in
- Two key mistakes beginners make in reading trends

3. Chart Patterns – Trading Gaps & Watching For the Reversal

- Gaps reveal clues to strength and weakness.. know the different types
- Which “key” chart pattern reveals a top or bottom is near?

4. The Most Reliable Chart Patterns Revealed
- Some of my favorite chart patterns revealed in this lesson.  If you read no other lesson, be sure to read this one.
- Here’s one example:

5. Adding the Moving Averages To Your Arsenal
- Perhaps the most basic and certainly one of the most important technical indicators to place on your charts
- In my opinion, this lesson should have been expanded further but it’s a decent introduction
- Discover Adam’s technique for deciphering a trend change using multiple moving averages

I’m Ready, Get Me The FREE trading course!

6. Point & Figure Charts
- not many people use point and figure charts anymore, but some still swear by them
- Adam believes it provides clearer signals and he shows you how to read them in this lesson

7. Helping To Identify A Top & Bottom – The RSI Indicator
- the best way to configure RSI
- how the RSI is calculated
- find out how the RSI reveals that top or bottom is close

8. One Of My Favorite Indicators – Stochastics
- another oscillator that can help identify a top and bottom
- how to use stochastics to spot a top and bottom
- careful of using stochastics in this kind of market..

9. The Average Directional Movement Index (ADX)

- the oscillator indicators such as RSI, Stochastics don’t work as well in strong trends
- the ADX can help keep you in a strong trend
- when the ADX hits this number and turns down, time to get off the train!

10. Market Cycles

 - this particular lesson discusses commodity cycles, but there are many other market cycles at play
- this is probably a good area of research for you
- I’ll get you started.. historically, the strongest period of the stock market is typically in the month of Nov – Jan.  May and  September are usually poor months.  Some individual stocks even have definitive cycles.

This really is one of the best free trading courses around, so you owe it to yourself to check it out.  Get it here.

I wanted to post an email I sent out to my members last night, going over the case for a bull vs bear market.  Comments are welcome and appreciated!

What a yo yo couple of weeks it’s been with the market bouncing around in a fairly tight trading range.  The market doesn’t know what it wants to do up here and that makes it difficult for a trader to know what to do as well.  I still think the best strategy up here for most people is to move more to cash, lock in gains quickly if your playing momentum stocks and stick to dividend payers if you’re planning on holding for a longer time period.

The case could certainly be made on the bullish and the bearish side, but in my opinion when you make the case for both, you have to give the advantage to the bearish side up here.  Let’s a take a look at both.

The Bull Case

- Market still trading up around the highs of the year despite quite a bit of bad news (ie the quick recovery off Dubai debt concern)

- entering a month that is historically a bullish time for the market

- liquidity, liquidity, liquidity.. this could really go under the bullish case and bearish case (are we creating another bubble fueled by excessive risk?)

- the recession is over! (ok, I say that with some sarcasm, because I don’t truly believe we’re out of the woods and I get sick of hearing the argument that the market will continue to move higher because the coast is now clear.  It isn’t and most of the good news has been built into this market now)

- there must be a few more points to make the bullish case, but I’m not coming up with them.  Send me your best bullish case and I’ll have a little something for you. 

The Bear Case

I think we’re all aware of the economic concerns out there such as inflation (down the road), rising unemployment, BIG government, rising taxes, etc, so I’ll just discuss the technicals for the bear case

- trouble at key resistance levels around Dow 10500, Naz 2200 and S&P 1100

- S&P and Dow hitting big resistance of the downward trend line off the 2007 highs (I’ll draw out these charts at the blog soon)

- volume continues to diminish to the upside

- Dow, Naz, S&P back into overbought territory on the weekly charts

- small caps are broken as revealed by the break down in the Russell 2000

- US dollar stabilizing as it hits big support of 2008 lows (a rally could derail the market)

- the financials failed at key resistance today as revealed by the XLF (high volume reversal at 50 day moving average)

What do you think? Have I missed anything?  Can you make a stronger case for the bull side?  I’d like to hear your opinion and I’ll publish the best responses over at my blog. 

As for the action today, we got some hefty selling there in the last few minutes of trading ahead of the jobs number in the morning.  Is that move forecasting an awful jobs number in the morning?   We’ll find out.  The rumor this morning was the White House knows the report and unemployment ticked up.  The White House denied the rumor and the market rallied a bit.  We’ll get the truth in the morning. 

The market just remains in a tight range right now with two straight days of failed break out moves, but still with lots of support below.  I’ll be keeping a close eye on the resistance levels of the highs of today and the support levels of the 50 day moving averages – at Dow 10000, S&P 1080 and Nasdaq 2100.

The government is pouring billions into the technology.  Cisco CEO John Chambers said it will be bigger than the internet.  The opportunity for investors is indeed BIG and now there’s a diversified way to play “it” – the smart grid revolution.

There are quite a few useless and overlapping ETF’s out there and this industry is in need of a major shakeout, but every once in awhile a great ETF comes along and the First Trust/Clean Edge Smart Grid ETF (GRID) is no exception.  The ETF aims to track the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index and is a modified market cap weighted index which includes companies that are primarily engaged in all components of the smart grid – from the meters, to the network, to energy storage to software. 

The fund aims to focus primarily on smart grid plays by weighting those companies deemed as smart grid “pure plays” much more (80%) than big companies with a fraction of their business in the smart grid arena (weighted at 20%).  For example, a company like Itron (ITRI) is going to comprise a much larger portion of the ETF than a GE would. 

:: >> Get More Analysis On the Smart Grid ETF (GRID) Here

The ETF is comprised of 29 companies, but here are the top 10 holdings.  Companies must have a minimum float adjusted market capitalization of $100 million and a 3 month avg daily dollar trading volume of $500K.

Other smart grid plays included are AEIS, COMV, DGII, ESE, BGC, GE, ITLN, ITC, MTZ, PIKE, SATC, VMI, WCC, ABB, CBE, JST, TLVT, SI, NGG

Here’s a prospectus of the Smart Grid ETF (GRID)

After just two days of trading, the Smart Grid ETF (GRID) offers plenty of liquidity, trading 200K shares today.  I’d imagine liquidity will continue to improve rapidly in the coming months for you short term traders out there.

Whatever credibility Dick Bove of Rochdale Securities has left can now be thrown out the window.  It won’t matter at CNBC or Fox Business though, because for some reason he’s considered a guru analyst in the financial sector.  Following Wells Fargo’s (WFC) earnings yesterday morning, he was on CNBC with the following comments before the market opened:

At the beginning of the segment he said Wells Fargo “has its loan losses under control” and that they “should be able to grow revenues by increasing loan volumes”.  At the 1:20 mark he said Wells Fargo was one of the three financial companies that “should do well in the market today and lift all financial stocks.”  To close out his thoughts on the financials, he called Wells Fargo a “standout”  with those earnings numbers.

Now fast forward a few hours later to about 30 minutes before the market close yesterday.  Bove issues a surprising Sell rating on Wells Fargo, downgrading the stock from Neutral.  This morning he was on Fox Business explaining his Sell rating.  Here are the highlights from his comments about Wells Fargo:

- not expanding its loan book
- margins on loans being sold going to come down
- big increase in loan losses through the beginning of next yeare
- unsustainable gains in their hedging portfolio
- will take about a year to get its position back where it should be

In response to the flip flop, Bove defended himself by saying he didn’t have all the results when he went on the air.  Then why are you making an analysis?!  Why not just say give me a few more minutes until I have all the facts.  It’s irresponsible and reckless behavior at best. 

Amazon (AMZN) just made a terrific move after the bell today, making its largest purchase ever.  It’s acquiring Zappos.com for about $890 million in stock (based on today’s closing price) plus another $40 million in restricted stock and cash.  Zappos.com is the leading online shoe retailer that did a billion bucks in revenue last year and continues to grow at an exceptional pace despite a slow economy.  Considering the kind of valuations that are placed on the likes of Facebook and other social media sites that have trouble monetizing, $930 million looks like a good deal for Amazon. As for Zappos.com, you have to wonder why they didn’t attempt the IPO route with the market improving.  If the margins are thin at Zappos then perhaps this is a better deal for them.. we shall see.  It will be interesting to see a breakdown of the financials of Zappos.com in future earnings reports of Amazon. 

I’m a big fan of Zappos.com and won’t buy shoes anywhere else.  Great customer service.  Free shipping both ways and a huge selection.  They will continue to operate independently as a wholly owned subsidiary of Amazon with current management in place.  If Amazon is smart, they’ll let keep it that way. 

Both companies are big on customer service, making the purchase a good fit.  Here’s a video that Bezos did for Zappos employees discussing the importance of the customer.

>>> Click Here For Your Free Amazon Analysis

Wow, now that’s what I call an oversold bounce.  I was expecting some retracement of the selling off oversold conditions last week, but not of that magnitude.  The recovery was such that the much discussed head and shoulders top has failed as all the indices broke out from 4 week long down trends.  Of course, those that dismiss chart reading as voodoo are using the move as proof that technical analysis doesn’t work.  What they forget to include in their argument is that technical analysis is used as a probability tool to increase your odds of success.  The patterns don’t always work and some work better than others.  In this case there may have been so many people calling this top (myself included), that it was setup for failure.  After all, the market generally moves against the herd. Just about every hour over the past couple weeks, the H&S top was discussed on CNBC.  It’s something I discussed last week and was a bit concerned about, but the move of last week still surprised me.  That was some serious resistance to work through and the market sliced through with ease as shorts scrambled to cover positions.   

The move of last week is a game changer with bulls now back in control, especially if this jolt higher is digested in an orderly manner.  Let’s keep in mind that we moved from oversold to overbought quickly last week with the market looking a bit tired Friday, so probably setting up for some kind of pull back. That would provide an opportunity to continue to lighten the load on the short side and add high quality breakout stocks on the long side. 

Read Entire Post “Head Fake Head And Shoulders Top, Indices Break Out” Here