So Far, So Good, So What?

Edited a bit and some charts were added with perhaps helpful explanations...
POT will probably do close to $25 in earnings next year and grow 40% a year for the next 5 even in the face of a global slowdown. As of right now... who cares? There's a strike coming... read about this and some thoughts on the overall market below...
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I've been quite busy this week.... not for lack of ideas but for lack of time... however I want to mention a few points:

The overall market:
This is a very deep bear market in my opinion. The cheap credit way of living that has been the American lifestyle for decades is at serious risk here. The last period in which the US really produced a shining new product for the world to buy was around 2000 in the tech days. Since then the country has been living on illusion money... home equity and credit that didn't exist in reality. We could have had a longer recession after the dot com collapse that would have cleansed the system and forced us to be productive rather than living on fake money. Instead Greenspan lowered rates to 1%... it was like putting the drinks on a credit card tab... pay later... but when you do pay you can't believe how high the bill is... We're talking about years if not decades that have built up to this recession in the making... it will not go away overnight... but should take at least a few years and perhaps longer to resolve the fluff in the system. The massive job losses and effects on the broader economy which follow the consumer slow down and financial tightening are just beginning to be felt. Soros said it best when he said that even if the financial crisis is coming close to an end the effects of the crisis on the economy are just beginning. And I believe that it is a feedback loop- the slower economy will further hurt the banks and investment institutions which will further hurt the economy etc.

The global economy is now slowing as well. My cousins and family in the Netherlands (near Eindhoven) told me several months ago that they saw their robust economy slowing... and now even orders for basic materials in China and other nations has started to show signs of weakness. This is a real 'hang on to your seat' type thing.

So what does that mean for the stock market? First of all it means that we should lose at least all of the gains in the broader index that have occurred since the end of the dot com bubble. That means we should see the Dow go to 10,000 (where we started the rally of the past yrs)... however as this bubble collapse made things worse and bubbles tend towards overextending on both sides I believe we may go below and see 9,000 or perhaps lower... The famous economist Roubini has claimed that the drop in the stock market now is somewhere around half over from the peaks... that would make 9,000 at the bottom quite realistic.

I would like to discuss sectors and the market overall at another time. For now I recommend the posts: In a picture and a word: why this market is so dangerous... and It PAYS to be Trendy (both can be found under top posts at the top of the page). This describes fundamentals of this market and the concept of the technical trending element that must be used in conjunction with fundamentals.

Regarding some stocks I've mentioned:

• FSLR- despite the earnings and fundamentals the island reversal type pattern I mentioned a few days ago has been a turning point back down for the stock. Right now only health care has been performing well as a sector... though as the charts to technology stocks may look to make a move up. Diagnostics such as IVGN, MYGN, and CMED seem to be getting money flow right now. It is a very exciting business and potentially very profitable
  
• MOS and POT and Ags in general: A look at the two year charts show how far up these have come. When the charts with those kind of trends break down (as they have... the trend according to higher highs and lower lows and maintaining the 50SMA are broken for both... though they may resume) it is time to be very very careful. In spite of the incredible fundamentals, which will occur even as the global economy slows because developing countries will not eat like they use to ever again and the supplies of potash are too low to meet demand and will be for years, despite this in the face of these kind of charts one has to be vigilant. Especially if the charts break the 200 day moving averages. I have been going short at 180 a share for POT and 114 for MOS as insurance along with my longs. I have about a 2:1 long to short bias... but will go more short and perhaps net short Friday if the charts break down... because
• Potash... the talks have broken down and there will be a strike. This is just the catalyst the bears are looking for to perhaps bust through the 200 day moving averages. Be ready to go short with buy to cover stops or just decide to ride out the storm. Stocks follow fundies... not necessarily in the short to medium term though...

Now let's look at some charts. These charts are why I am so concerned. I have never seen companies as fundamentally solid as MOS and even more so POT get sold off like this even as earnings are expected to accelerate in a slowing economy. With oil stocks... they were short term overvalued as oil prices ran to much. Natural gas stocks... similar. Coal stocks... they will likely enjoy nice gains next year due to coal shortages but that won't be until then and a slowdown may affect their earnings, especially the non metallurgical coal stocks... either way they had run too much too quickly based on current earnings... the exception here really, the one group of companies that should do very well even in a slowdown are the potash companies because while factories can demand less steel or less coal or less fuel or less gas people will not demand less food. The move of people in developing countries to the cities, to the kind of lifestyle that requires more meat, that demands more and better food... that entails a whole new lifestyle... is a one way phenomenon... at worst I believe demand might (though probably won't) curb a tiny bit but there is such a huge imbalance of global potash demand and supply that effects should be negligible. So maybe POT and MOS grow at 30-35% a year instead of 40% a year for the next 5 ... does this justify selling stocks with a future PE of 10... and a FY PE of 15 in the case of POT?

I am very careful before investing in stocks, especially in a slowing global economy. I pick my battles in a very discerning manner. The charts for MOS and POT were trending down before earnings along with oil. I saw this... however I also knew that these companies were different fundamentally. I was right about earnings and believe I will continue to be right about earnings... but when even quadrupling and tripling earnings and guiding higher with no demand destruction even on the horizon for potash is not enough to shake the charts from a clear downward trend it is time to question the fundamental principle that earnings correlate with stock price... at least in the short to intermediate term. Its just like those people who were short financials in the Spring. They were right... but the charts didn't care... and it does not look like they will now either. If there is one thing that should be clear to everyone it is that in this market the fundamentals may dominate the long term trend (whether it be fertilizers (up) or financials (down)) but in the weeks to months time frame the charts rule...

One other thing... If you have gains on the long side in anything... whether FSLR a while ago, CMED, TSCO, or many others be very careful not to let them turn into losers. I highly recommend stops... they allow profits to run but keep gains in place when the stock turns...

In this market you are lost without charts regardless of what you buy on the short or the long side so please take the time to try to learn them... I can't emphasize this enough...

Commodities.., many of these stocks have shown very similar patterns.. the huge move up in the Spring and early Summer followed by a trend reversal and move down along with the price of oil.

The 200 day moving average is a critical point for markets as a whole, for grouping of stocks within sectors, and for individual stocks. When the 200 day moving average is breached for the overall market it is often an indicator that we are in a bear market. This is why, in addition to the fundamentals, that the SP, Dow, Naz, etc, chart bounces down from the 200 day MA in the beginning of the Summer were a very bearish sign for the overall market. For months commodities have traded well above the 200... now we are seeing breakdowns... in most cases there is a bounce off of the 200, some sideways movement, and then we have seen moves through... in which case watch out below...


BTU offers a perfect example of this. Coal did go up too fast... BTU beat estimates handily but it didn't matter... this is a trouble chart on the long side and is worth a look on the short side unless/until it moves back over the 200... it may be a great short if it moves to the 200 and fails. Notice also the significance of the middle Bollinger Band. Stocks in a downtrend often will bounce off down from the middle Bollinger Band (dotted line) while stocks in an uptrend often bounce up from the middle Bollinger Band. When you see charts where the stock is trending down and bouncing between the middle and lower Bollinger Band (dark line) this is a very bearish sign... If you've seen Top Gun you know what it means when a pilot says he has his enemy 'locked in'. There are many many computers out there involved in trading these days and a chart like this that bounces perfectly off of the lower Bollinger and middle Bollinger and trends down looks very much 'locked in'.


It's scary how similar ACI looks to BTU. They also looked very similar on the way up.


CHK is one of the premier natural gas names. Natural gas prices had a huge run and then fell like crazy... the stocks have followed. Notice again how similar this pattern is to BTU and ACI. Also notice the island reversal in the beginning of July. Island reversals after long trends are one of the most reliable indicators of trend reversals. Had I seen this at the time I would have strongly considered going short. Also, again, a possible test of the 200 going forward here and a fail is a good shorting opportunity with a buy to cover stop on the other side of the 200... as always you would want to give it a margin of error... never set the stop right at a key support or resistance area but a bit above the 200 in this case. Before taking advantage of such an opportunity, should it exist, it is always also it is important to look at RSI (close to 30... if the stock turns up it may bounce a bit... see "It Pays to be Trendy') a longer time frame version of the chart to examine longer term support and resistance areas, and a number of other factors for confirmation. Trading is about putting the odds as much in your favor as possible.


This chart shows a breakdown through the 200 and for now a rebound. This is not a commodity name but they did not blow away earnings last time as they have been wont to do. If MA, one of my favorite stocks overall, breaks down back through the 200 it could also be a good short potentially. I would love to see it move up... proof that stocks on a downtrend can break the 200 and move back up if the companies are of good enough quality.


Here is MOS. Fundamentally one of the very best stocks in this market. Technically it is on a severe downtrend. This is exactly the kind of chart I would want to short... yet the fundamentals are so good...the stock is so undervalued, the earnings growing so quickly, that it is very hard for me to toss away fundamentals here. The approach has been to hedge... I added to the short at 105 with a buy to cover stop around above the 200 Simple and 200 Exponential moving averages. This chart has respected the simple more than the exponential but for extra caution I am forcing an upswing to break both. I am now almost 1:1 short to long on MOS... and as we are now under the 200 if we continue down I will add more shorts and go net short. It hurts to say that but this is a market driven by charts and technicals more than fundamentals... A some point the charts will become uptrending again because of the fundamentals... this is your opportunity, if not invested... or if you have extra cash ready for further investment (I do have some reserves and am looking to add more), to watch this and the POT chart closely because they are starting to sell gold for $5 bucks an ounce... when the charts turn this is a huge opportunity.

By hedging I at least minimize the downside and have cash for the turn back up when it happens... it would be better not to have been in since the 130 area but that is only if you could have known that a company that fundamentally should be at 150 to 160 at least right now would go down even in the face of unbelievable earnings and prospects. What do you do when there is an epic battle between fundamentals and the charts and the charts are winning? You go with the flow and hedge, simply go short with buy to cover stops, or you just let the stock sit for years and don't worry about it. This one will almost certainly be significantly higher in the long run.

POT is like MOS but an even better company. Both are great but POT has more access to large potash mines and is the absolute king of potash. Phosphate prices will keep going up (MOS is king of phosphate... though they also have a nice amount of potash) and phosphate, unlike potash, is expected to bring on enough supply to meet demand in let's say 5 years from now because of projects in the Middle East. Potash will likely have an imbalance for decades to come and POT is the only company that can really fix this imbalance... they are probably one of the best companies out there, period, for the next decade in terms of earnings growth...


On the flip side here is an interesting article




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