Thursday, July 17, 2008

Trading Tools - Part II

On July 1, 2008 this blog published The Case for Gold. There was no written text in that blog, as the case for gold was made on the basis of just two charts, the CRB Index and the Continuous Gold Contract (EOD) Index. This was an example of basing a trade on only technical analysis, which I do a lot of these days.

Ideally, Confirmatory Analysis requires that good technicals be confirmed with good fundamentals. The fundamentals can be in the form of traditional company-specific financial line items, i.e. earnings growth, revenue growth, book value, dividends, price to sales ratios, etc. But the idea of fundamentals can also be stretched to include a good stock-specific story, i.e. NNVC, or a good sector-specific story, i.e. Alternative Energy, or a host of other considerations that bode well for the stock breaking out with good technicals.

What is convenient about Confirmatory Analysis is that you don't have to accept the underlying fundamentals as the gospel, whether it be financial considerations or a good opportunistic story. The price chart of the security has already spoken, although fundamentals just may be spot on anyway. 

So why deal with fundamentals at all? My most reliable chart patterns appear on many more stocks then I can buy. So I like to look for stocks that also have good fundamental exposure as well. That filters my stocks and feeds my ego as it is much easier to talk a good story about a stock then to explain to someone at a cocktail party what a head and shoulders bottom or a channel break-out means. Plus, there is always a chance that the fundamental guys like Louis Navellier and William O'Neil may be right.

In a future blog will list some of my references for fundamental leaning stock analysis from a variety of both traditional and esoteric sources. But for now, I want to use as an example of fundamental analysis a premise that one of my better sources put forth recently, that we are about to experience run-away inflation that will result in Gold being a spectacular investment:

*The long-feared, U.S. credit crisis is now here, led by the collapse of mortgage lender giants Fannie Mae and Freddie Mac, and the bankruptcy of IndyMac Bank of California.

*Had Fannie and Freddie been allowed to go under Monday, it would have wiped out the home mortgage market in the U.S., and resulted in plummeting real estate prices, foreigners dumping the dollar, and a major economic depression.

*To avoid this happening, the U.S. Treasury Department assumed their $5 trillion debt. That means the U.S. national debt instantly increased in one-day by 50 percent, from over $9.6 trillion to nearly $15 trillion – about $750,000 for every working American.

*The only way the enormous debt of the federal government and banks is going to managed is by massive monetary inflation. Even before this crisis, the real rate of U.S. inflation was closer to 15 percent a year rather than the official 3 percent, according to Shadowstats.com. I now expect inflation to go over 20 percent in the next year or two, and perhaps much higher.

*This huge rate of inflation is going to be financially devastating to our economy and to the average person’s finances. For starters, 20 percent inflation means that value of savings is 90% wiped out in about 10 years. It also means massive business failures, particularly of any business which relies on credit to finance their operations. It means soaring commodity and energy prices, which you can expect to rise at least 20 percent in the next year. Finally it means plummeting living standards for most families, which have no way of increasing their after-tax income by anything like 20 percent.

*One immediate recommendation: Buy gold, in every form you can get it – coins, stocks, and options. Even before this crisis, gold prices were up 50 percent in the past year. I expect the gains in the next year will be much higher.

*Courtesy of Intelligent Investor Report

5 comments:

Deepak said...

I have read a large number of articles on the subject. But your articles stand out differently... they are always educative and insightful.

Anonymous said...

Hi Allan....this portrays severe doom and gloom..how would you prepare besides Gold? Gary

met61 said...

Allan,how do your trade around earnings releases?
Thanks,Ron

Allan said...

Gary: I try not to mix business with pleasure.

Ron: I ignore exogenous events in my swing trading, unless it moves my stock quickly above target areas or triggers a stop.

Speaking of earnings, I have a pretty good day-trade methodology for earnings related scalp trades, not quite ready to share it openly in this forum since I also use it in my hedge fund. But you never know, liquor me up some day and who knows what will get disclosed.

Anonymous said...

Allan:

as long as you are taking donations and using google ads, why not just go the extra step and make this a Pay Blog?

To All of the readership:

Would anyone NOT pay $100/month for the advice that saves your financial lives?

To Allan:

Consider it. I assume your hedge fund investors would get free membership

Phil in NYC