Reading inversion tea leaves
What do the ‘Tea Leaves’ tell us, “The sky is falling”? No, she waits, shakes the cup again… “Is the sky the limit?” That’s the answer we want!
If investing and trading were so simple, we could visit a Reader for a few bucks and know exactly what the future holds. Unfortunately, if you ask three readers what their sheets say, you get three totally different professional opinions. Consistency is not his forte.
First, I have never made public prophecies about the future direction of the economy or the market before and I do not intend to start now. Also, I’m not a stock market bear, I’m not a bull, I don’t have silly buttons to push that make all kinds of silly noises to tell you to buy, buy, buy, and my dartboard really is a dartboard and not a stock selection device. I don’t think Chicken Little has ever been a good forecaster and I don’t think the world will end tomorrow. But 25 years of market watching experience tells me that there are some things that individual investors should be concerned about.
Let’s filter out the pervasive, sensational noise about every current tick in the market, up or down. We’ll leave that to the Talking Heads with their TV cameras and their cup of tea; it gives them something to do and keeps them from bothering us. We want to focus on the big picture, the major events, and how these events are likely to affect the economy and ultimately the future direction of the market. Hopefully, you can get an idea of what may be about to happen and how you can prepare.
Let’s look at some of the main factors.
For example: Unemployment, Foreclosures, Housing Market, Mortgage Crisis, Dollar, EU and Gold, just to name a few.
It’s not rocket science, plain common sense says that the housing market won’t improve until foreclosures stop being a problem and foreclosures will continue to be a problem as long as unemployment doesn’t improve. With 25% of homeowners currently behind on their mortgage (owing more than the property is worth), the light at the end of the tunnel for foreclosures continues to be attached to a large moving object with a very loud hiss.
As you know, the foreclosure crisis did not go away. That is, all those junk mortgages that were packaged up and given to the unsuspecting, were not paid in full by the happy owners, the money is still owed; there was only a small adjustment to the accounting method, so they now look better on paper. Let’s move on to another indicator.
With housing, mortgages and foreclosures as a backdrop, now think about the price of gold. As you know gold has been on the up and continues to hover around $1400 per ounce. You have to ask yourself, what would cause this? Realizing that supply and demand ultimately set the current price, the obvious increase in demand for this precious metal probably isn’t because your dentist has been extremely busy filling cavities or your jeweler has been planning increased traffic of holidays. So that really leaves only one logical conclusion. Concern about the currency, the green back specifically, and more particularly, its value. Forget the few novice traders who jump into buying gold at current prices hoping the price will double overnight and they get rich quick, if they don’t lose their money there, they will lose it elsewhere. It is your destiny. What we are concerned with is the big picture. And the big picture tells us that this is not a good indicator for the economy, to say the least.
There is an old saying: “If you want the truth, follow the money.”
Aside from currency concerns, investors concerned about gold theft, or Mr. Bernanke and his proverbial helicopter distributing greenbacks to everyone but you and me, what are the pundits doing?
You know, the ones that should be ‘in the know’ and get an idea of what the economy is likely to do and what effect it will have on the market, not to mention the effect it will have on your company’s stock price. I might add that I find it interesting that giant companies like Microsoft, Hewlett Packard, and others have recently been in the news finding and hiring the best economists from places like Harvard. Why would they develop such a sudden interest in economics professors?
On top of that, let’s see what the real experts are doing with their stocks.
Insiders, of course, are the officers, directors, and major shareholders of a company. Those who know first-hand the orders, sales, projections, etc. They are also required by law to report almost immediately to the SEC whenever they have bought or sold shares of their companies.
Well guess what? They have been in a selling frenzy. Selling shares of their companies at a record pace not seen since early 2007. Let me remind you that this was just a few short months before the Great Recession began.
Vickers Weekly Insider Report analyzes internal data each week and calculates a ratio between the number of shares these reported executives have sold that week and the number they have bought. Vickers Weekly says that, over the past four decades (40 years), this ratio has averaged between 2 and 2.5 to 1. Any reading above 2.5 to 1 is an above-average sales pace for experts, and it should also be an eye -opening for the investor.
Now keep in mind that these experts were selling at a record pace in early 2007 and hold your breath before you read what this buy-sell ratio was in the second week of December 2010. 7.07 to 1. In other words, corporate pundits are generally selling more than seven shares for every one they are buying. Just to show that this is not an anomaly, just two months ago the sell to buy ratio was 5.29 to 1 and it has obviously gone up ever since.
Another factor that the individual investor should take into account when thinking about the “big picture” is bear markets. I know, no one wants to think about the market crashing and sucking an average of 29% of their investment account value and then having to wait a couple of years to get back to par. But like it or not, for the last 100 years there has been a bear market on average every three and a half (3.5) years. They come like clockwork, last an average of 18 months, and then leave investors waiting a couple more years for the investment account balance to go back to black. Do I need to remind you that the last bear market started in 2007? You do the calculations.
So what should I do? I’m not suggesting you call your broker and sell yourself, and I certainly don’t want to sound like Chicken Little, not my style. But I do believe that you need to pay close attention to the market indices, adjust the stops, prepare for the worst, and hope for the best. When I wrote the books ‘Charting and Technical Analysis’ and ‘Common Sense Investing’, this current market scenario is exactly what I wanted to prepare the individual investor for. And more importantly, how to avoid the dredge of portfolio decimation caused by market crashes. Another very important thing to remember is that your financial advisor will never tell you to sell. Protecting your investment money is solely his responsibility. So, educate yourself on how to invest and be well-informed to make your own investment decisions or keep your hard-earned money safe in the bank. It’s your choice.