I've Found the Market's Newest Timing Indicator

By Jeff Clark

Tuesday, November 8, 2011

Move over Goldman Sachs. There's a new canary in the coal mine.

Ever since Bank of America gobbled up Merrill Lynch (or was forced by the Feds to stomach it), I've been searching for a new leading indicator for the short-term direction of the stock market. For nearly 20 years, I used shares of Merrill Lynch as the proverbial canary in the coal mine.

Merrill was a wonderful market timing indicator. If the market was going to rally, shares of Merrill Lynch rallied first. If stocks were due for a drop, Merrill would signal it ahead of time. I often wrote about Merrill's canary-like attributes (here, here, and here). And I mournedthe day the shares stopped trading in September 2008.

Ever since then, I've been in search of a new canary. At first, the banking index fund (BKX) looked like a good candidate. But I found it moved with the market, rather than ahead of it.

Then I started using Goldman Sachs (GS). That worked OK for a while… But Goldman is not a true canary. It's a blood-sucking vampire squid, as Rolling Stone's Matt Taibbi once famously called it. And its performance as a leading timing indicator has been disappointing.

So I kept searching for a new canary… And I finally found it.

ExxonMobil (XOM) – the oil industry behemoth – is a leading market-timing indicator, and the market's new canary.

I've been following the minute-to-minute action in XOM shares for several months. The action is remarkably similar to the way shares of Merrill Lynch used to trade. If the market is rallying and shares of XOM start to pull back, sure enough, the stock market pulls back moments later. If stocks are falling and XOM begins to bounce, the market bounces, too.

So if you want to profit off the short-term direction in stock prices, pay attention to the action in XOM. It'll give you an early clue as to where things are headed.

I don't know exactly why it works this way. Likewise, I never exactly understood why Merrill worked so well as a leading timing indicator. But you don't have to know why something works to profit off it.

Merrill Lynch was a profitable canary for more than 20 years. I'm looking forward to a long, prosperous relationship with ExxonMobil.

Best regards and good trading,

Jeff Clark

How to Act on My Most Urgent Warning

 By Brian Hunt, editor in chief, Stansberry & Associates


For much of the past few years, I've been issuing a warning you'll never see in the mainstream press… and most likely never hear it from your broker.

Folks who have heeded my warning have saved a lot of money this year… and should continue to do so.

The warning is that contrary to popular belief, there's little difference in owning stocks or commodities these days.

If you make the popular move of buying a basket of commodities with the belief that you're diversifying your portfolio, you're badly mistaken. You're not diversifying your risk… You're actually "doubling down" on a risky bet. You're betting all will be well with the world and its intertwined economies.

You can see the extraordinary "correlation" between stocks and commodities in the chart below. It plots the performance of the benchmark CRB commodity index (black line) versus the performance of the benchmark S&P 500 index (blue line) over the past year.

The two indexes move in the same up and down fashion, at the same rate. And they've both plummeted since May:


"Interesting," some readers say. "So what should I do about it?"

When structuring your own portfolio, keep correlation in mind… And consider "lightening up" on stocks and commodities.

You could start by just increasing your cash position. I'm not talking about sitting in U.S. dollars for a decade. But in the short term, cash is your "dry powder." It's money you have on hand to buy bargains when they appear. I often call cash "big returns in waiting."

The next thing you can consider is upping your allocation to gold and silver. Granted, gold and silver aren't the screaming deals they were in 2003, but they still have enormous potential to rise, should the U.S. or European sovereign debt situations blow up.

Finally, consider taking a small portion of your portfolio and putting it into a few "short" positions. Short selling is a strategy that allows you to profit when stocks fall. (I read my colleague Porter Stansberry's advisory for the best short-selling ideas. You can learn why here.)

If you've got most of your money in stocks right now with a commodity "hedge," all you've really got is one giant bet on the same thing. For a safer approach, move money to some or all of the alternatives above.

I can't say exactly what your allocation should be. Everyone has different financial needs and goals. And market conditions change constantly.

But in today's age of massive government spending, borrowing, bailouts, and potential blowups, risk-limiting ideas like these have never been more important.

Regards,
Brian Hunt

This Simple Stock Market Strategy Would Have Increased Returns 926%

Sage advice worth noting! By Tom Dyson, publisher, Common Sense Investing Friday, June 24, 2011

"Dividends don't matter." I was playing golf with a stock trader last weekend. When I told him I specialize in stocks that pay dividends, he gave me a look of condescension. "I don't understand what the big deal is with dividends," he explained. "The stock falls by the amount of the dividend, so you can't benefit from it. Total return is the only thing that matters." On the surface, my golf partner is right. A dividend is simply a cash payout from the company to the shareholder. Whatever the shareholder gains, the company loses. So it seems shareholders don't actually come out ahead. But as I'll show you today, to say cash payouts like these don't matter is wrong. They improve returns by thousands of percent over the long term. My friend Meb Faber proved this to me the other day… Meb is a professional stock market number cruncher, or as he calls himself, a "quant." He's used his skills to create some incredible investing strategies. (You can read more about them here and here.) He alsolaunched an ETF (the symbol is GTAA) so you can follow his system with just one click. Meb recently crunched the numbers on dividends and other cash payouts and found something amazing. He started with the Russell 3000, an index of 3000 small-cap stocks. Since 1972, the market-cap weighted Russell 3000 index gained 9.98% a year on average. But when Meb took the highest dividend payers in the index, (the top 10% of dividend payers), he found they returned 13.29% per year… an improvement of more than 3% over the common index. Meb didn't end his study there… When most people think of companies returning cash to investors, they think of dividends. But there are two other ways a company returns cash to shareholders. Stock buybacks are the first way. A company might decide to pay shareholders by buying back its own stock in the open market. To an accountant, it's an identical transaction as a dividend. Cash leaves the company. Cash goes to the shareholders. The difference is, instead of sending each shareholder a check for, say, $100, the company causes the investors' stock to rise in value by $100. The shareholder has a capital gain instead of a cash income, but the result to the shareholder is the same. The second way a company returns cash to shareholders without paying dividends is by paying down debt. Cash flows from the company and accrues to shareholders, just like a dividend. In this case, the cash pays off a bondholder who has a senior claim to the stockholder. Once the bondholder is out of the way, the shareholder is that much closer to the future profits. When you include these two additional ways companies return cash to shareholders, you get the true "cash" yield to shareholders. Meb calls this the "shareholder yield." Meb repeated his study on the Russell 3000, taking total shareholder yield into account. This is what he found… Group Average Annual Return Russell 3000 9.98% Dividend Yield (top 10%) 13.29% Shareholder Yield (top 10%) 16.93% Earning 9.98% over 38 years turns $1,000 into $37,147. Earning 16.93% a year over 38 years turns $1,000 into $381,229. In other words, over 38 years, that annual difference of nearly 7% would have increased your total returns by 926%. The conclusion is, my golf buddy is totally wrong. Stocks that pay out cash generate far higher returns than stocks that don't. If you're investing for high returns and are ignoring stocks that pay cash out to shareholders, you're missing the point. You should almost always favor companies that pay out cash to investors over those that don't. Good investing, Tom

A BULLISH SIGN FROM THE TRANSPORTS

If you're looking for confirmation of a "bullish on stocks" stance right now, make sure to check out the Dow Jones Transportation Average…

More than 100 years ago, Wall Street Journal founder Charles Dow set the foundation of modern technical analysis – the "art" of watching stock price trends.

One of Dow's major tenets holds that the stock market is healthy when both the manufacturers of goods and the transporters of goods are doing brisk business and enjoying rising stock prices. Dow called it a "confirmation" when his Industrial Average and Transportation Average reached new highs together.

Below is a chart of the price action in the Dow Jones Transportation Average over the past year. This index measures the stock price performance of America's most important railroad, trucking, and shipping firms. As you can see, this index is enjoying a bullish series of "higher highs and higher lows" and is sitting near its yearly high.

Sure, there are many things out there to worry about (government debt and government debt being the two biggest), but until major indexes like the Dow Transports start breaking down, we have to say, "Things can't be all that bad." 

While most of the world rallies, two of the most important markets are quietly diverging

From Pragmatic Capitalism:

While the markets have continued to melt higher on the hopes of perpetual Fed easing and "better than expected" earnings, some interesting divergences are occurring.
In particular, copper prices and the Shanghai Composite are in retreat. The Shanghai Index has proven to be a particularly good leading index in recent years. While the recent divergence is...
Read full article...
More Cruxallaneous:
Porter Stansberry: My worst predictions are now coming true
Financial "D-Day" is coming in two months... Here's what to do

Listen to Jim Rogers... The big fortunes of the next 20 years will be made here
View the original article here

Fifteen mining stocks set for a big rebound

From The TSI Trader:
Gold topped a couple weeks ago, on March 7 to be specific, and closed this past week just 2.1% below the all-time high reached on that day.
Silver also topped on March 7th and closed this week just 4.8% below the historic intraday high reached at 36.75 on March 7.
That gold and silver have consolidated within literally a few percentage points of their all-time highs, given the news events of the past two weeks, speaks volumes as to their relative strength and ability to withstand tremendous selling pressure.
When the selling pressures of forced liquidations, margin calls, and downright emotional panic lift in the very near future, I have no doubt that gold and silver will break out and quickly make new all-time highs.
But what about the gold and silver miners? Are they, too, within just a few percentage points of their March 7 high?
The answer is that a few are... very few, in fact. And within this fact, lies a wonderful opportunity for an investor to get positioned ahead of the crowd before gold and silver break to new highs.
The purpose of this post is simple...
Read full article...
More on mining stocks:
Doug Casey: Get ready for the junior gold mania
This silver miner could be starting a monumental rally
An incredible development is taking place in gold mining stocks
View the original article here

Why the majority of investors miss big market moves

From ValueWalk:

The conventional wisdom is that the market is forward-looking. What investors are trying to figure out is, where are stocks headed? They form an assessment of what they think is going to happen to the economy and that determines what prices they are willing to pay for stocks. As their assessments of future economic developments change, stock prices change with them. The stock price that applies on any particular day reflects the collective assessment of millions of investors placing their bets on where the economy is headed.
This is a plausible explanation of why stock prices change. But there is no hard evidence supporting it. It certainly has never been proven. It is a theory, that's all.
My view is that the evidence all points in a different direction...
Read full article...
More on investing:
On a day like today, don't forget your stop losses
Market guru Montier: The seven immutable laws of investing
Top trader Gartman: The investing mistake you must never, ever make
View the original article here

Six world-class stocks that could pay larger and larger dividends for decades

From Dividend Monk:

When building a dividend-growth portfolio, finding high-quality companies that will continue paying larger and larger dividends for decades rather than just the next few years is important. The longer you can hold onto shares of a company, the lower your trading costs and taxes will be compared to what they would be if you trade often.
But this is only a good strategy if the companies you hold onto continue growing shareholder value.
So the key is to look for companies that, among other things:
a) Have a large and sustainable competitive advantage.
b) Are in an industry that is timeless, or nearly so.
c) Are in a solid financial position.
Here are six sample companies... JNJ, LOW, MCD, WMT, MDT, CVX
Read full article...
More on dividend stocks:
These stocks are an income investor's dream
This list of top stocks for 2011 has something for everyone

Four criteria the world's greatest dividend stocks have in common
View the original article here

How to find tomorrow's great dividend stocks

From Dividends Value:
... [A] dividend stock analysis is a snapshot in time, but the real question for the savvy dividend investor is ‘where is the stock headed?’
Here are four important directional metrics that I look for when updating my stock database...
1. Declining Shares
Many companies sell stock to raise cash. The important question is what is the company going to do with the cash? Is it for an acquisition or “general corporate purposes?” The latter is code for...
Read full article...

More on dividend stocks:
How to get started in dividend investing
This could be the best dividend opportunity of your lifetime
These dividend stocks could be "the best kept secret on Wall Street"
View the original article here

Six big signs the market could plunge soon

From Gold Scents:
Warning signs are starting to build. To start we have a Dow Theory non-confirmation. Usually this is a sign of distribution.

Breadth is diverging. This often happens at intermediate tops.

Emerging markets have failed to make new highs.

China, the driver of global growth appears to be in a bear market.
 
Read full article (with charts)...

More on stocks:
This rare divergence could mean big trouble for stocks
Why this is a great time to buy "insurance" on your stocks
Top market-timer DeMark: A BIG stock market decline is about to begin
View the original article here

When this alarm goes off, it's time to get out of stocks

From Jeff Clark in Growth Stock Wire:

Periods of low volatility in the stock market are always followed by periods of high volatility. Always.
It's as certain as spring following winter.
Of course, when you're suffering through temperatures that would make an Eskimo shiver, it's hard to remember spring is on its way. And when stocks are a one-way bet, when the market moves higher day after day in unending bullishness, it's hard to imagine it moving in the other direction.
But it always does. You can bet on it.
By the look of the Volatility Index (VIX), the market may be about to change temperature...
Read full article ...
More on stocks:
You're taking a big risk buying stocks today
This chart says the bear market will return in 2011

If you're thinking of buying stocks today, read this first
View the original article here

Three ideas for safely buying stocks today

From The Reformed Broker:
Lots of people feel as though they're under-invested after this week. The anxiety is palpable. They've digested the latest economic data and have come around to the fact that they should probably be in some stocks. The cascading bond market certainly offers a bit of reinforcement in that regard with yields on the the 10-year Treasury ripping back above 3%. And rising.
The sideline dwellers must now confront their fears of top ticking the stock market. We've had an incredible run in equities for 20 months now and valuations are beginning to price in a recovery that is more robust than what many economists are forecasting. The under-invested are caught between the rock of misallocation and the hard place of not wanting to chase.
But never fear - I'm in the solutions business and I'm going to let you in on a few tricks you can use when you find yourself not quite long enough...
Read full article...
More on stocks:
Top research firm: Don't get too bearish now
Warren Buffett is dumping these long-held stocks
BREAKOUT: These stocks are about to make new yearly highs
View the original article here