As I stated yesterday, what the markets are doing and how they are acting is more important than what you think they should be doing. I also stated that as they go down, correlations get closer together and the benefits of diversification go away. Simply put, they go down together. So just when you need "diversification" it is not there to save you. Therefore, it is more about when to be in and when to be out, than what to be in. Especially in the mid to short term. This is difficult task, even for professionals.

We have had a over a 10% correction (the definition of a correction), and yesterday showed some signs of resumed optimism. Most of the economic data is still positive, especially the earnings. Technically, we had a 90% Upside Day on both exchanges with 96% Up Volume on the NYSE, and 93% Up Volume on the NASDAQ. Also, the "breadth of the market" was strong with Advancers over Decliners of 11 to 1 on the NYSE, and 7 to 1 on the NASDAQ. The only negative was that volume was below its 30 day moving average. All of the short term indicators are "oversold" and are currently turning positive.

Remember, when it is time to buy, it won't feel right and you will be scared. But again, the short term indicators have turned positive, and yesterday Jim Cramer said he "doubted this rally" which makes me want to buy even more. Usually, he is a great contra indicator.

I have been holding a lot of cash and bonds along with US stocks. Today, I have deployed 5% of our cash into equities, namely Nasdaq stocks. What do we need for the market to resume its uptrend? An increase in volume coupled with expanding demand would be nice. This is why I am only deploying 5% of clients (and my own) money.

I want to monitor the follow through early next week, and would make changes if necessary. I have attached a graph of all 3 major indices, the DOW (Yellow), the S&P 500 (White), & the Nasdaq (Red) overlaid so you can see how correlated they are. I Also, you can see the early reversal at the current time (right end).

You will never be right all the time or even close, but if you can statistically stack the odds in your favor, you will be right far more than you are wrong. More importantly, this is the best way I know how to manage risk.

Keep studying,
Dan Stewart CFA®

Today I am looking at the broad indices. As I told listeners over 3-4 weeks ago, we were due for a pullback, but most of the economic data was still positive in the U.S. The wildcard was, and still is, Europe, with Japan a little further down the road.

In any event, we had our over 10% pullback (actually 12-14% depending upon the index), which is the definition of a "correction" or "retrenchment" as professionals like to call it. I call it going down.

However, thus far we are still in a secular bull market and I would like to see some follow through tomorrow to confirm what I think is true, before I commit more capital as I had some assets on the sidelines in cash.

It doesn't matter what I think, it is more important what the market it telling me. Moreover, the market doesn't care what I think, I wish it did. So I have to measure what is actually happening in the markets to determine risk.

Today, I will not be as long winded as yesterday, but all three major indices are showing resilience, and the Nasdaq is showing the most strength. It broke through a bottom trend line a few days ago but is almost back to it. It is currently bouncing off a support line with increasing buying volume on a wide array of stocks or sectors ("breadth of the market") which is a very positive sign. Again, I want to see some follow through tomorrow.

Keep studying,
Dan Stewart CFA®

For my blog today, I thought I would post a response to an e-mail I received from a loyal listener. Below are his questions, then my response.

Hi Dan,I have a question about the reliability of the ETF SLV. I have been wanting to add Silver plays into my portfolio and I hear you mention SLV on your show. However, the more I research it, it sounds like there is a sizeable crowd out there that warns against SLV (and GLD) because their reasoning says its not a "real" play on Silver, rather a play on a bunch of paper that does not really guarantee the ETF holds the actual commodity of silver. I'm confused and to the point to where I don't know who to believe.Also I heard you mention CEF on the show as a quick Gold + Silver play for those who own neither. That would be me. But in researching that I am seeing that it's a tax-nightmare for taxable trading accounts and best for a tax-deferred account. I want to get into both Gold and Silver soon, but I'm not sure I want to be in for a tax debacle of my own creation by buying CEF.What are your thoughts? Anything you can say would be greatly appreciated.

Both SLV and GLD are supposed to be backed by the actual commodity/metal. As more people invest, they have to go out & buy and store the physical metal. Can there be a "squeeze" and the fund not be able to buy and take delivery of the metal due to too much leverage worldwide of paper assets backed by gold/silver and a shortage of the physical metal, probably. But that is another reason to be bullish.

This doesn't mean the price of the ETFs won't go up. When you think there will be problems with delivery, that is when you might consider selling your "paper" gold & silver, and keep the physical metal you own. Another alternative is to buy the mining shares, GDX, but again, that is "paper" backed by the assets of mining companies just like any stock or ETF, and most companies use leverage or borrow.

The point I am trying to make is that with any stock or ETF ("paper" equity), you are buying part ownership of the assets of the company. The stock certificate is simply the contract and evidence of ownership of the buildings & assets of the company, just like the physical metals are the assets backing these ETFs. Could management of the companies mismanage the assets they are charged to operate, sure.

You have this risk with ANY stock or bond that you own, bonds are just more senior in pecking order in the event of bankruptcy. Only when you hold the physical asset yourself do you not have to worry about mismanagement. But then you have to worry about holding & storage cost (hiding it), insurance cost, theft, high spread when bought and sold etc..

This is why it is not about any one investment, because there is not one perfect investment. It is about overall portfolio construction and how the entire portfolio correlates and interacts with all the other assets in the portfolio. Therefore, you do not want to be too heavy in any one asset. Every person I know that is over worried about an individual stock has too much. You should never invest/purchase more that 6-8% in any one stock period, or 15-20% of an ETF.

This way you will only have "systematic" or market risk and can diversify away from "unsystematic" or company specific risk. Now the question becomes, how do you handle systematic or overall market risk.

That is why 1/2 my research is not about the fundamentals of the companies or sectors (the other 1/2 is), but what the investors are doing, the demand and supply of stocks. Even though Modern Portfolio Theory tells you it is all about your risk tolerance, I disagree. It is HOW MUCH RISK IS IN THE MARKET! When the market has a lot of risk, I want to be out or hedged. When the market is relatively safe, that is when I want to "take risk" or own equities.

Every asset can have only 2 of 3 qualities - growth, safety, & liquidity. You want all 3, but there is not a public investment that has all 3. That is why it is important to have different assets, some that have high growth potential & liquid, but has risk and doesn't have guarantees/safety (stock).

Then you can have an asset that has a high degree of safety and the potential for growth, but is not liquid and you lock your money up for a time period (structured notes & bonds). Lastly, you can have an asset with safety & liquidity, but without growth potential (money markets & short term notes).

Therefore, you want various assets so you have the enough safety, you have enough growth, and you have enough liquidity when you need it.

Sorry about the long winded response, but I though it important for you to understand. It is NOT about any individual investment, but the overall portfolio.

Now, for your Central Fund of Canada "CEF" question. Yes the accounting is slightly different and you will get the proper forms after year end by the company. My taxes are already a "nightmare," so one additional minor thing is not going to sway me away from a good investment.

The one good thing I like is that it is Canadian, therefore, outside the jurisdiction of the US regulators. It might actually provide some diversity within the Gold & Silver sector. Therefore, you could have some GLD, SLV, and CEF, as well as some mining shares and GDX Gold Miners ETF.

Good questions, and keep studying,
Dan Stewart CFA®

Today folks, I am looking at the Central Fund of Canada, ticker CEF, a closed end (commodity) fund that invest primarily in Gold & Silver. In fact, the fund has to be invested 90% of its net assets in gold & silver, and at least 85% must be in the form of gold & silver physical bullion. This is one great way to get exposure to a combination of Gold & Silver that is backed by the actual bullion without you actually having to store it.

In my opinion, Gold has established a new support level at $1165 per ounce, and is currently at $1197.5 per ounce. Silver has support at 17.67 per ounce, which is where Silver is currently. It is also bouncing off a trend line which is what I like to see. I like to see a support line in very close proximity to a bottom trend line.

I have been looking for a good entry point for Silver but it got away from me and went well into the $19s. I do not chase an investment if it gets away from me. I will get my chance again if I am patient. Silver has pulled back while Gold held up because it is an industrial metal as well as a currency, so it sold off with these fears of a global slowdown. I agree with the global slowdown, but do not agree with the corresponding percentage pullback in Silver.

Here is my thinking. First, as an industrial metal, they are using up silver as fast as they can pull it out of the ground. There are no significant stockpiles anywhere. Second, as an safe, non-fiat currency store of value, people around the world will start purchasing silver as gold becomes more expensive per ounce. This is especially true for small investors who cannot afford to buy ounces at a time and the spreads to purchase become wider the smaller increments you purchase.

In addition, the "average historical ratio" between Gold & Silver over time has been 15 to 1. Why, because they mine and pull out of the ground 15 times more silver than gold. Simple supply and demand. However, at current relative prices, that ratio is over 67 to 1.

Therefore, on a relative basis, Silver is "cheaper." In any event, I have already blogger about SLV, the Silver ETF, which is a pure silver play. It may be a better investment for you if you already own gold, but do not own silver.

CEF is a simple, broad way to get exposure to both Gold and Silver if you currently have neither. Technically, it bounced hard off a support and a bottom trend line at $14.07 and is currently at $14.74 (see graphs). Also, volume has been increasing, which is also a good sign in an uptrend. It means more buyers are coming into the security.

This is what I think, let me know what you think. Keep studying,
Dan Stewart CFA®

I am slowly, over the next few months going to convert some assets & investments currently in bonds into commodity related investments that governments cannot print or manipulate. Right now in the short term, interest rates are going down as the fear a global double dip recession is looming more and more. The main stream media is finally actually talking about it.

This will give us a golden opportunity to sell some of our bonds at a handsome profit, and gradually shift more into commodities while there is blood in the streets (in commodities). The governments around the world have given no indication yet that they are going to be fiscally responsible and will print even more money if necessary.

Therefore, we will have this debt collision Dan Cofall and I have been talking about for 2 years. It will make currency (paper money) less valuable. Therefore regular, fixed coupon bonds will be less valuable as you get paid back in paper money which will be less valuable. Again, it is all about purchasing power, NOT absolute dollars!

In the short term, we will probably have deflation, then high inflation as governments try to save their economies and re-inflate asset prices. This allocation shift will be a gradual process until I am convinced we will have inflation, not deflation. Bonds are a negotiated market, and trades are not instantaneous like the stock markets. Therefore, I want to start getting ahead of the curve and do this carefully and gradually until better information comes out and it is more obvious which way it will actually play out, deflation or inflation.

In short, you want to sell when people are bragging on the golf course how much money they made (even though they haven't sold yet), and buy when there is blood in the streets.

There is still pulling back in virtually all commodities and they are going down significantly as fear of global demand shrinking is spreading. Global deleveraging because of the debt crisis and the China slowdown will certainly have a negative effect on commodities and specifically miners. This is being priced in as we speak. Again, this will give us an opportunity even though it won't feel right when we do it.

In particular, I will be looking for a good entry point in Silver. Another related area will be the miners, both for precious metals and broader metals. An easy way to play this, again, is the SPDR Metals and Mining (XME) and the Market Vectors Gold Miners (GDX). Two individual stocks which support the miners with large, equipment in Joy Global (JOYG) and Bucyrus International (BUCY). I WOULD NOT PURCHASE YET, WATCH AND KEEP AN EYE ON!

These sectors are going through almost a near vertical downward correction. I have attached a graph of Joy Global (JOYG) for you to study. It blew through the trend line and is quickly coming to a support line. It will be worth watching if it breaks through support.

I do not know the exact timing of this fundamental shift, but you need to be preparing to make this shift in case it starts to unfold more quickly than people realize. We can always put our plans on hold if need be, but we want to have a plan in action already just in case it happens sooner. You do not want to be reacting under fire on adrenaline. You want a predetermined plan of action - actually a few different plans of action for different scenarios - so as it unfolds you are ready with a well thought out, logical plan.

Keep studying,
Dan Stewart CFA®

Yesterday, on our website www.thewallstreetshuffle.com , I told you about a graph I posted for the SPDR Metals & Mining EFT (XME). However, I actually posted a more specific, narrow Gold Miners ETF (GDX) inadvertantly as I was looking at both. GDX is now coming down just as XME already did.

So I took GDX off our website and posted XME, the Metals and Miners. It is hitting off of a bottom trend line and off of a support line at the same time. If it breaks through support, then all bets are off. But if it bounces off support, then it could be a good entry point.

The only wildcard it that Australia just imposed a 40% excise tax on the miners. Other countries could follow suit. It that happens, I believe the miners and in for a tough road and their profits will be cut.

For one of the best technical analyst in the world without a doubt, listen today on 1190 at 5:00 p.m. CST or stream live at www.thewallstreetshuffle.com for Paul Desmond of Lowrys Research. HIs company invented the 90% Upside Volume or 90% Downside Volume, Buying Strength and Selling Pressure, as well many other proprietary indicators.

I believe his firm is the oldest Technical Analysis Firm in our country. In any event, it will be a pleasure having him on and picking his brain.

Keep studying,
Dan Stewart CFA®

Currently, the gold & other metals are pulling back. Copper is especially down probably due to its industrial uses and people are concerned about this recovery for the longer term. In the short to midterm, the US recovery seems to be in place, and currently the only "reasonably" safe place to invest right now.

However, there are some "chinks in the armor" and some of these reports coming out over the next few days and weeks will give us more pertinent clues as to how real this recovery is, or whether we are going into a double dip recession. Much of the data is starting to point to the latter, especially in certain sectors.

I have included a chart of the SPDR Trust Metals & Mining ETF, which is an ETF that invest strictly in mining companies. As you can see, just a few days ago it hit the top end of its range and is pulling back fairly significantly. If this continues for a few days, we may find a good entry point. Technical analysis helps to find a good entry (or exit) point once you find a stock or sector you want to own. This is a diversified way to be in the commodity sector in addition to owning the metals directly.


I am still bullish in the mid and long term on metals, especially if the governments around the world keep printing. Now I am looking for more good entry points. I did this exact same analysis to find my entry point on GLD (Gold) a few months ago. I am looking for more commodity exposure & less exposure to bonds over the next 6 months or so, as interest rates are very likely to rise.

Keep studying,
Dan Stewart CFA®

I had a guy e-mail me last night about how to play the US dollar if I thought it was going to continue to strengthen over the next 4-5 months. He also asked me what I thought about China, emerging markets, oil, and specifically Petrobras (PBR).

As I have been so busy today tracking the market and have gotten so many e-mail similar to his regarding the US dollar versus overseas, and also commodities and inflation, I decided to post my response to him as my blog today. It tells you where I stand fundamentally, and is technical enough for the traders to follow. So, without further adieu, here is my response.

The Powershares US Dollar Bullish ETF, ticker "UUP," would be one way to profit if the dollar rises. My clients and I are actually double short the EURO, "EUO," which is another way to play it. I was fairly sure the Euro would go down, and I have been perfect on that trade. I wish every trade worked out that well for me, and I would rather be lucky than good any day.

It may be a little late in that trade now. Whenever you are between buy and sell signals, it is much more difficult and the probabilities of being wrong are higher. However, if you feel the European Union is going to break apart (possible, but not sure), then there is still time.

China is putting on the brakes and slowing down AND their economic numbers are massaged anyway. Oil demand was just revised downward two days ago. Therefore, because of this and Europe, I am avoiding all emerging markets right now, not because they may go up, but the risk is extremely elevated. My clients don't pay me to try and hit home runs, although that occasionally happens like the Euro short. They expect me to take risk when the risks are lower and I am much more confident and statistically have better odds.

Petrobras is a wonderful company, and I have owned it in the past, and I do like the commodities play and am long some commodities besides gold. Over the next months I will be looking to enter more commodities based companies. However, it is more about the overall market conditions and which direction the market is heading than how good a company is. Good companies go down in a down market, and bad companies go up in a good market. "All boats float with the tide" and momentum. Right now, technically, we are hitting resistance and volume is decelerating. Not bullish in the short term.

I want to own good companies in an up market, and be hedged, out, or net short in a bad market. Our positions right now are: we are long US stocks (less than 50%) with lots of cash, I am long gold (another easy one), short the Euro, and short the European stock market.

The long US/short Europe markets will act as a hedge if they both go down. However, I believe Europe will go down more and my clients and myself will make money. If both markets go up, we will make less than the overall market, but with significantly less risk. If they diverge, and the US goes up and Europe goes down (a perfect world), then my clients and I will make lots of money. It is all about risk management, not one individual stock or investment. It is about portfolio construction & how all the working parts interact with each other, known technically as "correlation."

The hard part is correlations change over time, and when things are good, they do diverge and you get the benefits of "diversification." However, when things are bad, correlations INCREASE across certain sectors (small, mid, large etc) and across borders (Asia, Europe, & US). Right now I believe the US is the "strongest of the weak," and am out of Asia and short Europe.

I know this is long winded, but I didn't want to give you a trite answer. You can go to www.thewallstreetshuffle.com and see the blogs I post every day. I hope this helps and keep studying,

Today, I want to speak a little bit about Japan, as they have some of the same systemic problems Europe has, only worse. Namely, way too much debt to GDP. Japan is #2 in the world, only behind Zimbabwe. Their debt to GDP is 192%, a 2009 statistic and getting worse!

Additionally, they have an aging workforce that is shrinking. They have a very homogeneous society with very little immegration. Therefore, Japan will be hard pressed to replace its aging workforce. Therefore, their tax base will be getting smaller to service this debt.

Luckily, when it is the right time to invest in Asia, you can find ETFs that are "ex-Japan." Therefore, you can get exposure to Asia but exclude Japan. This is important especially if you are a "long term" investor and do not make many changes. There are also ETFs that specifically short Japan. Japan, the 2nd largest economy in the world but soon to be 3rd, in my opinion, is in the most trouble of any industrialized nation!

Enough about Japan, now back to Europe, As I stated over the past few days, Europe has some serious, serious problems. In fact, we are having an expert today from IBISWorld today on theWallStreetShuffle at 5:20 CST on the European debt crisis. I know this seems like beating a dead horse, but it is so important to your investments.

Do you know how much S&P earnings come from Europe? As we stated on the radio a few weeks ago, McDonald's 40%, GM 25%, Ford 32%, and DuPont 28% just to name a few. When you convert these Euro sales back into US dollars, you have a translation loss that reduces your profit due to the weak Euro.

Additionally, if they do their manufacturing in the US, witht the strong dollar, it makes their products even more expensive. This is why it is so important to know where the companies revenues and expenses come from and orginate from. This is why thinking global is so important. Even if you have just US stocks (normally a mistake, although currently smart due to the risk), they are very affected by factors outside our borders.

Food for thought. Oh, one last thing, this expert has IBISWorld's new quarterly updated Gold & Silver Ore Mining Report. If you would like a complimentary copy, e-mail me at dstewart@noramassetmanagement.com and I will send you a copy. These reports are ususally quite pricey.

Good studying,
Dan Stewart CFA®

If you are under allocated in stocks, is it too late to catch the "dip". I think there is still some room for US stocks if you are watching it diligently . It is breaking through a trend line and may have some legs (see chart).

However, I would stay away from European and Japanese stocks as they have bad systemic problems. They may get a relief rally, but they have serious, serious problems the governments are trying to gloss over. Now, even the mainstream media is coming around and talking about it.

On another note, I just sold a convertible bond today, Sandisk due 2013, for a profit. We purchased a lot of convertible bonds, and other bonds, after the "big scare" and "sky is falling" 2008. The spreads between Treasuries versus corporate & munis was huge, and everyone believed Yankee doodle was dead, and we were doomed. We purchased many bonds at discounts, and are now much higher.

Interest rates came from 20% in 1981 down to historical lows, and the long term cycle on dropping interest rates is over. The long term trend is up, so I am slowly over the next 2-4 months, moving out of bonds and toward commodities. I think the risk in bonds is increasing every day, especially with the printing presses in overdrive.

Therefore, a fundamental shift away from bonds is in order. Food for thought.

Keep studying,
Dan Stewart CFA®

I would rather be lucky than good any day. Today is a good, no, a great day so far. The European markets are down, the Euro is down, US Treasuries are down, and the US equity markets are up. I am short European stocks, short the Euro, short Treasuries, and long US stocks. I am hitting on all cylinders today.

Obviously, I do not get this lucky every day. However, my logic is sound and my economic assessment good. Even though I am currently bullish on US stocks, if all the markets go down in the short term, European stocks will act as hedge against the US stocks. In fact, they will probably go down more and we will make money.

If all the markets go up, I believe the US stocks will go up more as the financial and economic data is much better in the US. Therefore, I believe the portfolio will still go up, just not as much. However, it is significantly less risky as being 100% long in stocks.

What I actually anticipate, is for Europe to be in more trouble, and the US to continue to recover in the midterm. In the short term, it is so volatile right now, it is anybody's guess. Short term traders, both day/momentum and swing traders are having a very difficult go of it. Position traders may be having better luck, but at the expense of severe ulcers.

Today, in these volatile markets, you need sound fundamental analysis, not so much of individual companies, but the countries and regional economies of the world. The way I am playing it for my clients reduces their volatility and ulcers, and give them the potential for nice returns, especially on a risk adjusted basis. If I am partially right, I believe we will make decent money. If I am mostly right, we will make lots of money. More importantly, you can sleep at night.

One last thing, the iShares Silver Trust (SLV) looks very interesting. I have included a chart for you to learn about. Tomorrow, I will include a broad based S&P chart for you to continue educating yourself. Keep studying.

Dan Stewart CFA®

A Trillion Dollar bailout for Europe! Really! The media today is finally starting to ask reasonable questions like "Where are they getting all the money?" and "You mean they are PRINTING a Trillion Dollars (worth of Euros) to buy a Trillion Dollars worth of bad bonds and loans?? Doesn't that feel like a ponzi scheme? I am ashamed to say they got is straight our of our (the Fed & Treasury) playbook.

I beleive the governments and central banks waited until the weekend to announce so the bailout would have a much bigger effect, a bigger punch. I also beleive these powers started buying to begin a frenzie and to force short covering.

They are trying to support the Euro, and it rallied this morning. However, it reversed and is now lower. Can this one day European stock rally continue on false financial data and monetizing the debt (jsut printing money).

They had no money last week, where did they come up with a Trillion. Even the mainstream media is starting to catch on. So what to do.

I would stay out of, or short, Europe. I would be short the Euro, I am. I would be in American equities right now as our economic date is coming out fairly strong even with "massaged" numbers and earnings are still accelerating. I would see if Asia is going to continue to tighten or whether they are going to be more accomodative.

I would also be looking to transition out of bonds over the next 3-6 months as interest rates are ending their 30+ yr downtrend and interest rates are going to rise. Remember, you were told that stocks always outperform bonds over any 10 yr period, right. Wrong, that is a bold face lie! Bonds have outperfomed stocks the last 20 yrs, BUT that is about to reverse and bonds are becoming much more risky. You must be very selective going forward, and be looking to prune weaker investments in your bond portfolio, or even make a fundamental shift. I am.

I hope this was some good food for thought and stimulated you into thinking about these things. Good luck, and pay attention. It is your money.

Dan Stewart CFA®

Positioning the Portfolio - Important Changes

This is my first blog, so I will bring you up to date. I will be posting a blog every work day going forward.

In addition to physical Gold I have been recommending for a long time, I purchased Gold (GLD) approximately a month ago. I shorted 20 year Treasuries (TBT) a few weeks ago, which may have been a little early in hindsight now that Europe is falling apart. There has been a flight to quality into Gold and Treasuries (if you can call Treasuries quality).

We have made a lot of money so far on Gold and have a long way to go I believe. Even though we are down on the Treasury short, I still think we will make money on it due to the fact of the US montetary policy of the non-stop printing money, and people are now starting to compare our debt levels and problems with Europe.

Early this week, I sold all overseas stock/equity investments, and am holding a lot of cash (money market) and bonds. Today, early this morning I shorted the EURO and the European stock markets. I think Europe has a long way to go and difficult problems. In fact, it is possible they break apart.

The European short will act as a hedge for the small portion of US domestic equity I own, and I think we will profit handsomely from it. In fact, it is possible that the US "decouples" from the overseas markets and recovers and goes up while the worldwide markets go down, especially Europe.

My timing doesn't have to be perfect as long as most of my macroeconomic indications are correct, and we (Dan Cofall and myself) have been extremely accurate over the past few years. In short (no pun intended), I currently own some US equity, some bonds, a lot of cash, and am short the Euro, European equity, and US Treasuries.

You can listen to our investment ideas on 1190 A.M. in DFW form 4-6 p.m. M-F on the WallStreetShuffle or you can listen to us streaming by going to our website the www.thewallstreetshuffle.com. In addition, I will be posting a daily "Chart of the Day" on our website.

Hope you find this entertaining, and better yet, I hope you learn something and can make some money from it, and more importantly, avoid losing it.

Have a good weekend, Dan Stewart CFA