A Shallow But Turbulent, Squeezing Week For The Markets

Upward pressures from market bulls managed to send the major financial indexes higher in the early part of this past week. However, the majority of the rally was unsustainable, and the momentum diminished in the latter part of the week. Mixed economic data and technical market conditions caused traders to question the strength of the recent market rebound of the last several months.

Observing the S&P 500 chart, represented by the S&P 500 SPDRS (NYSE:SPY) ETF, the 111.30 level acted as a strong resistance level. This resistance coupled with other technical conditions of the S&P, suggest a larger correction is imminent. Currently, the S&P is trading within a well established uptrend and there will be short term upward pressures until the S&P ETF closes below the support of the ascending trendline near the 106 level, or the S&P index closes below 1,065.

The iShares Russell 2000 Index (NYSE:IWM) ETF continues to show negative signs. IWM recently established a short term downtrend, and has not had enough strength to break above its October higher like its larger-cap counterparts. Many traders will watch for the index to find support at its mid to long-term moving averages. There is not any good support levels between the current level and the significant moving averages, which are currently near $50-55. This chart suggests a larger pullback, and a test of major support levels.

The Powershares QQQ ETF (Nasdaq:QQQQ) was hit hard in the second half of the week. The lackluster earnings report from Dell Inc. (NYSE:DELL) didn't help the case for a move higher. However, the diverging moving averages shown on the chart are a clear indication that the long-term uptrend in technology stocks is still intact.

The Dow Jones Industrial Average(^DJI) has not had any real direction this past week and has been in the choppy, range-bound motion that we had suggested would occur this week due to low volume, economic data, and significant technical chart levels. The chart below shows the DOW has recently touched it's upper trendline resistance (blue line) suggesting now a test of it's lower support level. Also, the pattern that is shown on the chart below is technically called an "inclining wedge" and is generally bearish.

Short-term support for the DOW comes in at 10,050 (UPPER CIRCLE) which is the lower trendline of the wedge (blue) and is also where the 20-day moving average (upper red, wavy line) lies. A break below this 10,050 level should lead the markets to a larger, medium-term correction, near the 9,000 level (LOWER CIRCLE). This 9,000 level is  the current area for the 200-day moving average, 38% fibonacci retracement, and June resistance now turned support.

The action this past week clearly shows that the strength of the market rally continue to be in question and seems to be diminishing, paving the way for a downward breakout. The late-week pullback has caused many to wonder if the rally is running out of steam and if a larger correction is nearby, or if this is a brief period of consolidation before another leg higher.

We suggest that you be very cautious with your investments at these current market levels, either take some profits and allocate more of your assets into fixed income, or hedge some of your investments. We still maintain our short-medium term bearishness and outlook for a medium term 10-15% drop in the DOW, and very similar in the other major indices.

Housing Roars, While Financials Sleep

New home sales rose last month to the highest level in more than a year, largely due to strong activity in the South and the new home buyer tax credit possibly coming to an end last month (was extended to April 30,2010).

The Commerce Department said Wednesday that sales rose 6.2 percent to a seasonally adjusted annual rate of 430,000 from an upwardly revised 405,000 in September. Economists surveyed by Thomson Reuters had expected a pace of 410,000. The report tracks signed contracts to buy homes, rather than completed sales.

The surge in new home sales was driven entirely by a 23 percent increase in the South. Sales fell about 5 percent in the West and Northeast, and fell 20 percent in the Midwest. Despite the lack of certainty about the tax credit that buyers faced in October, sales were up 5.1 percent from a year ago, the first yearly increase since November 2005. The median sales price of $212,200 was almost even with $213,200 a year earlier, but up almost 1 percent from September's level of $210,700.

By scaling back on construction, the building industry has brought the oversupply of homes on the market under control. Currently, there is 6.7 months of supply of new homes for sale, which is a drop from last month and down from last winter's peak of more than a year.

Used home sales were reported to have rose 10 percent from September to October, the biggest monthly increase in a decade. Along with the tax credit, buyers are being attracted by low prices, low mortgage rates, and slightly higher personal income.

Financial Stocks Have Not Seen Much Action

Stocks in the financial sector have been settled down for several months after seeing high volatility during the market downfall of 2008. Financials recovered in early 2009 and a experienced a rally that lasted well into the Fall of 2009. Interest in financial has died down and they have been trading generally in a choppy sideways manner since the late August, early September period.

After analyzing financials there are some that show critical areas, and deserve your attention. The chart for the Financial Select Sector SPDR ETF (NYSE:XLF) is a general picture of what many of the bank stocks and financials look like. It has been trading in a very tight range recently, and the 20- and 50-day moving averages have practically turned sideways. This narrow range should be watched closely, because a break in either direction would lead to a continuation move and be the mid-term direction for financials.

Bank of America Corporation (NYSE:BAC) looks very similar to XLF but there is one apparent difference. While XLF respected the lower bounds of its trading range, BAC actually broke under the range in late October. However, there was no follow-through, and BAC was able to climb back into the base. This often ends up turning into a bear trap, but BAC would have to first clear the narrow trading range highlighted in red before the bears get nervous. A move below the narrow range could lead to a full-fledged breakdown and a test of the 200-day moving average in the $12-$13 range.

JPMorgan Chase and Co. (NYSE:JPM) is another financial stock that may be in a critical area. JPM has been gradually rolling over, and has begun to set lower highs. However, it is important to note that JPM hasn't broken support either, and remains entrenched in its current base. While the pattern is beginning to resemble a head-and-shoulders topping pattern, the pattern will not be valid until JPM closes beneath the neckline (highlighted in blue). The whole area between $40.50 and $42 is the level that needs to hold for JPM on a pullback.

Capital One Financial (NYSE:COF) is another financial stock with an interesting chart. COF has been showing some weakness, but it is still in it's main uptrend and is being held by several support levels. It attempted an upward breakout in October, but the rally failed. COF is now building a base and is riding the 50-day moving average. A move below the 50-day moving average would show greater weakness, and could provide the catalyst needed for a larger correction downward.

Putting It All Together

Although volume and trading in financials has been declining for a few months, it might be time for them to start seeing some action. While they are showing some near-term weakness, the fact that the markets continue to be in an intermediate uptrend must be taken into account when considering a financial stock investment. Volatility has diminished singnificantly in the financials, and it is likely the next move in the group will be large. As investor confidence in financials is determined this should provide an idea of where the major indices may be headed as financials can sometimes lead the markets.

An Unfamous, Precious Commodity - Water

Water is something many people take for granted, seeming almost free and almost infinitely abundant. However, the fact is that water is one of the worlds most precious commodities, and does not receive the respect it deserves. A recent report has just revealed that water demand will increase nearly 50%in developed countries, and more than 50% in developing coutries, within the next 20 years.

So why is this commodity so precious & why should you be invested in it?

• Only 3% of all the water on earth is drinkable,
• Of the 97% that is not drinkable, in order to make it drinkable will dramatically increase the costs of water, and in turn increase the values of water utility stocks,
• At the current rate, world water supplies will be depleted in only a few thousand years,
• Nearly 1/4 of the world population still does not have access to clean, drinkable water, and another 1/4 has very high water scarcity stress,
• Our water needs will aways be there and growing, unlike natural resources for energy where we can change from one source to another, we will always need to drink water and use it in our food.

How can you take advantage of the ever growing long-term demand for water?

Buying water utilities is the best route to take for directly investing in water.Water utility stocks have on average outperformed the major market indices annualy, and cumulatively for the past several decades. Also, on an annualized basis, water utility stocks have been among the top performing domestic stocks for the past decade.

What water utilities to invest in now?

We have done some analysis and have decided upon the 2 water utility stocks we believe deserve your investment the most. They are: Consolidated Water Co. Ltd. (Nasdaq: CWCO) & Mueller Water Products Inc. (NYSE: MWA)

Both of these water utilities are very good long-term value buys at their current prices. CWCO has a very good net income growth trend, and is very efficient with much better than industry profit margins. CWCO also has extremely good liquidity, has recently been upgraded by analysts, and also is a small cap. stock which gives it tremendous room for future growth.

MWA has larger market capitalization and therefore, generally less risk, than CWCO so it may be an investment for a more conservative investor. However, MWA is in great position financially, particularly with their liquidity and debt management. Also, MWA is a great bargain at it's current price, and has technically broken above strong resistance levels which should give it an extra boost in the short to medium-term.

Does Your Portfolio Have Transportation?

Transportation is the back-bone of the world economy. Without transportation, raw materials cannot be shipped, and the end result is disasterous for the economy. With the world's major economies coming out of a recession transportation is sure to benefit. The transportation sector is comprised of airlines, railways, package carriers(trucking, postage), even oil and gas pipelines.

Why should you be invested in the transportation sector?

In reality, transportation is the most important sector of them all, and also is a great indicator/leader of the equities markets. This nature is due to the fact that growth or contraction in the transportation sector is an early signal for economic growth or contraction. Companies will begin producing more before hiring; therefore,  transportation is an early indicator of mid to long-term economic growth because it benefits before companies increase their overhead labor costs.

It make sense that if more raw materials and finished product are being shipped, it means companies are producing more goods to satisfy business and consumer demand. This growth in the transportation sector is a good indication that the U.S. economy, or the rest of the globe is in good health and ready for a rebound.

It would make sense that when investing in a sector which has a great degree of costs, many sub-sectors, and is generally highly cyclical, you would to invest in the most EFFICIENT transportation system.

So what is the worlds most efficient transportation system?

It is U.S. intermodal, or integrated transportation. Here's why:

•Close to 40 million tons of goods are hauled around the United States every day.

•The total price of all the goods being shipped every day is $25-30 billion.

•Ground transportation is done on near 4,000,000 miles of highways and roads, 95,000 miles of railroads and 26,000 miles of waterways.

•U.S. shipping also includes thousands of miles of air routes and over 1.7 million miles of oil and gas pipelines.

•Accounts for close to $500 billion, or 4% of total GDP.

Intermodal shipping is highly efficient and more strategic. During the record high oil, diesel, and gasoline prices of 2008 the companies that survived and thrived the best were those that shifted their focus to intermodal shipping.

So what exactly is intermodal shipping?

Intermodal freight – a shipping method that combines rail, ship, and freight with very minimal handling of the freight during the switching of transportation modes, which reduces costs.

Intermodal freight shipping is down close to 20% in the past year. This drop is significantly due to the U.S. and world economic recessions.

So why should you consider investing in intermodal shipping companies now?

•Intermodal freight volumes have either been flat, or on the increase since June.

•Domestic container volumes have been rising slightly (up 1.3% during the third quarter).

A few other reasons why intermodal shipping will continue to do well includes the fact that the method is more cost-effective and environmentally friendly. For example, it uses 33% less fuel than shipping by truck alone. And most rail trains can move a ton of freight about 400 miles on a gallon of diesel, much more efficient than a truck.

So what companies stock is worth your attention to take advantage of intermodal shipping?

J.B. Hunt Transportation Services’(Nasdaq: JBHT) is a company that is in great position, taking advantage of the increased savings and higher margins intermodal shipping offers. CEO, Kirk Thompson, recently completed a new intermodal deal with Norfolk Southern Corp. (NYSE: NSC).

The multi-year contract will provide both companies a platform to accelerate the conversion of traditional truck traffic to intermodal transportation with service that is competitive with truckload moves. “The conversion of highway freight to the more efficient, cost-effective, safer and more environmentally friendly services that we jointly provide, will not only benefit shippers and the general public, but our shareholders alike,” said Hunt's CEO Kirk Thompson. The overall goal of the deal is to accelerate the switch from truck traffic to truck-rail intermodal transportation for freight shippers.

Both J.B. Hunt and Norfolk Southern are strong financially as well. J.B. Hunt's sales returns, ROA, ROE, net income, and liquidity are all much better than the transportation industry average. Norfolk Southern has recently had great management efficiency, and a solid trend for the last decade of rising profit margins, rising ROE, rising ROA, and decreasing debt.

The Hub Group  (Nasdaq: HUBG), is another shipping company that deserves your attention, and it is a freight company specializing in intermodal services and logistics. Dave Yeager, CEO of The Hub Group agrees with the intermodal mode, recently mentioning “We believe that business conditions are better and have become more stable. The future remains bright for intermodal due to the excellent service, a cost advantage over trucks, and the environmental benefits.”

Ultimately, if you want to harness the power of the transporation sector benefiting from economic recovery and long term growth, consider investing in J.B. Hunt, Norfolk Southern, or The Hub Group. They all surely stand to benefit as the economy continues to rebound.

Interesting Point For The Dollar & The Dow

How Will The Dollar Perform From Here?

The US dollar index closed below 75.75 on Friday, which is where there is a falling trendline resistance drawn from the July 2009 high. This implies that the long-term down trend line is holding strong and the currency’s downtrend remains in place, suggesting further weakness.

Not much action is expected for the dollar in this following week, US markets will be closed on Thursday for Thanksgiving and will be closed early on Friday. As a result, there will be lower than normal volumes, which may contribute to either flat price movements, choppy-rangebound trade, and no real direction.  Since, event risk will be very high all week the rangebound, choppy trade is the most likely outcome of this next week.

Both technically and fundamentally, our outlook for the Dollar is continued weakness. Ultimately, we suggest you increase your exposure to inflation protected assets, and assets which benefit from a declining Dollar value.

What's In The Cards Now, For The Dow?

We are moderately bearish and still believe there is a soon to be 8-10% move lower, minimum. However, there has been no confirmation of a top in US stocks yet even though a small pull back was seen last week after touching another high for 2009. We know that there is strong resistance for the DOW at the current levels.

Fundamentally, economic news is expected to be mixed. Technically, the DOW is overbought,and experience moving average divergence; both of which are indicators of potential poor-negative performance. Also,  the DOW is very near the 50% retracement level of it's Record high in late 2007 to it's low of earlier this year, 50% retracement from14198 to 6469 at 10334. 50% is a VERY significant number in technical analysis, specifically Fibonacci, because there is normally overwhelming tendency for markets to continue in a certain direction once it completes a 50% retracement. That certain direction the DOW has been in before this 50% retracement began, or March of 2009, is down. Hence, a downward move should very soon be seen to 9880, a short-term support level.

Analysis Reveals Some Great Opportunitues In the Oil Sector

One of the most reliable of inter-market relationships is that of the dollar and assets priced in dollars such as commodities. Normally this is an inverse relation, and rising asset prices result from a falling dollar, or vice-versa. The logic behind this reasoning is that if the dollar falls, it takes more of those dollars to purchase the same physical commodity. Consequently, the price for that commodity rises. While at times market relationships can decouple, eventually this inverse relationship holds true.

Although much of the recent focus on assets benefiting from a declining dollar have centered on precious metals, another asset that has been benefiting is oil. Oil, as measured by the United States Oil Fund (NYSE:USO) ETF, is quietly trading at prices unseen since last December. While this is still a long way from USO's 2008 summer highs in the low $100s, it is starting to get a boost, with long-term interest rates at historically low levels. 

For many there is fear as to what will happen when the Fed eventually raises rates, and this possibility is probably starting to find its way into assets like this USO ETF. The chart for USO shows that it was able to clear a base it formed from May through October, and it has been consolidating from this breakout in a bullish fashion while forming a flag pattern. It will be interesting to see if it can follow through with a move above the $41-42 level.
 

One way to take advantage of rising oil is with a basket of oil service stocks. The Pro Shares Ultra Oil and Gas Index ETF (NYSE:DIG) measures the performance of the energy sector and components which include oil drilling equipment and services, coal, oil companies, pipelines, and gas producers and service companies. This ETF had been trading in a base for several months before finally clearing its resistance in October. It quickly retested its base support into early November, and appears to have held the area as support. The levels to watch in the near term are the recent highs near $39 and the recent low near $32.
 


One individual stock that may be worth an investment if the sector continues performing well is Precision Drilling Trust (NYSE:PDS). PDS had been forming a large cup-and-handle type base over the past several months and it finally made a push above resistance in September. It has been consolidating above the prior resistance area since the breakout and could be close to a breakout above this resistance. The $7.60 area deserves attention, as it has contained the past two rally attempts.
 

Another individual stock that could benefit from continued strength in the oil sector group is Core Labs NV (NYSE:CLB). CLB has been in a steady rising trend since bottoming in December 2008. It did experience a one-month correction after rallying to a high in early June, but it was able to break the June high a few months later in September. It is currently consolidating in a triangle base, a very good signal for you to consider investing in this stock because this is often a continuation pattern.
 

What All This Means For You
With oil at fresh several month highs, it is possible that momentum can carry the price farther than most think. If the dollar continues to weaken, which we believe it will, or the economy shows any signs of strengthening, which it already is, this could trigger a sharp rise in oil prices. While these ETF's and stocks are still in a longer term bear market, they have good prospects for a corrective move higher in the short to medium term, and even long term trend change around the corner. Rallies in down markets can often produce sharp gains quickly, so as an investor you should be open to all opportunities as long as they adhere to your risk tolerance, and time-frame.

Economic Calendar - Week of 11/16/09 to 11/20/09

We would like to provide a concise overview of the economic releases which are on the agenda for this week. It is important for investors of all types to be aware of the fundamental conditions of the economy, especially if you are deciding to make any investments close to the time of a major economic news release.

This awareness you must have about the economic news release calendar becomes greater the more active you are in investing, because when economic health conditions are released there is often a large spike, or movement in the markets. Due to this spike, which is often market noise, it is important for you to be aware of the dates of major releases. When you are aware of these releases you can avoid large price shocks that can occur in asset classes around the release time of important economic figures.

Here is a summary of the United States, moderate to major ranking, economic releases for this coming week:

November, 17 Tuesday:

1. US Producer Prices (Expected to DROP by -1.7% for the month of October YoY) - Measures changes in the selling prices producers charge for goods and services, and well as tracks how prices feed through the production process  
2. US Net Long-Term TIC Flows (Expected to be $30Billion for the month of September) - Measures Capital Flow into U.S. Denominated Assets and summarizes the flow of stocks, bonds, and money market funds to and from the United States . The headline figure is the difference in value between American purchases of foreign securities and foreign purchases of American securities, expressed in millions of dollars.
3. US Industrial Production (Expected to RISE .4% for the month of October) - Measures changes in the volume of output produced by the manufacturing, mining, and utility sectors.

November 18, Wednesday:

1. US Consumer Prices (Expected to drop -0.3% for the month of October) - CPI assesses changes in the cost of living by measuring changes consumer pay for a set of items. CPI serves as the headline figure for inflation. 
2. US Housing Starts - (Expected to be 600,000 for the month of October) -Gauges the number of new houses built in the United States. Housing Starts are one of the earliest indicators of the housing market, only trailing Building Permits in timeliness.

November 19, Thursday:

*Only minor ranking releases, which have very little or no effect at all on the markets.

November 20, Friday: 

*No US economic releases for this day, and very minor Japan and European Union releases.

Technical Analysis Indicates These ETF's Are Aligning For You To Profit:

 
A moving average is one of the most popular indicators used on chart analysis. Some investors and traders utilize moving averages because they do a great job of smoothing out irrelevant moves in price and presenting a visual representation of an assets trend. A moving average is the average price over a specified number of trading days. While there are many values and settings that traders can use, some of the most common values used are the 20 period (short-term trend), 50 period (medium-term trend), and 200 period (long-term trend) moving averages. 

Investors should pay particular attention to a moving average's slope and its position relative to other moving averages. When a faster moving average crosses above (or below) a slower moving average, it reveals that an assets trend has been higher (or lower) in the near term than over the longer term average. While it may seem that a simple technique like this would offer limited value, trading or investing with the trend ONLY has been proven to produce spectacular investing/trading results (400%, 500%, 600% annual returns have been produced using moving averages only).

Below we have some analysis using the 20-period and 50-period moving averages. These Exchange Traded Funds below are at some defining periods in their trends, suggesting possible trend following buy points for you or time to take some profits if you have gotten in these specific ETF's  at lower profits. Most of these ETF's have their 20-period moving average touching, or just above, their 50-period moving average, which suggests great buying points as financial instruments, such as stocks, often bounce and turn around in direction when these two moving averages touch or approach each other.

The Financial Select Sector SPDR (NYSE:XLF) ETF is an example of a sector ETF that has started to show some weakness and has its 20-day moving average crossing below the 50-day moving average. XLF broke under its 50-day moving average nearly one month ago, and has been consolidating underneath the average since, with very little progress. Often, a stock will resume the breakdown when the moving averages catch up to the trading price. One thing to keep in mind is that the crossover is not a magic signal to short a stock; in fact, the last crossover in XLF back in July signaled a decent buying opportunity. However, it does show objectively that a stock is experiencing weakness, and as such should be monitored.



Semiconductors HOLDRs (NYSE:SMH) is another ETF that recently broke under its 50-day moving average and under a recent base. It is about to cross the 20- and 50-day moving averages as well, just as SMH bounces back into this resistance area. The semiconductors were leading the markets for much of the summer. They have now set a lower low, and are in danger of failing on this bounce higher. One key level to watch is to see if SMH can close back above its 50-day moving average and begin to consolidate above this level. This would eventually negate the negative crossover, and possibly set up a bear trap.



Utilities Select Sector SPDR (NYSE:XLU) is another ETF that has the 20-day moving average crossing below the 50. It is also in the process of bouncing back into this moving average cluster after testing a major support level near $28. The key level to watch here is how XLU deals with the moving averages as resistance, as a move back above the cluster could be a sign of strength. However, if XLU rolls over in this area, it could be a prelude to a much larger breakdown.



The iShares Dow Jones Transportation Average (NYSE:IYT) is another example of an ETF bouncing back into resistance formed by the 20-day moving average crossing below the 50-day moving average. IYT also set a lower low in the recent pullback in early November, which hints at weakness. IYT is currently at a critical juncture, and needs to hold up in this area in order to avoid a failure and possibly setting a lower high.



What Does This Technical Analysis Mean For You?
 
While a moving average crossover is not a definite signal to enter a trade, it provides an objective view into the trending nature of a particular asset. It is worth paying attention to the direction, slope and order of the moving averages, as it not only measures the average price of a stock, but the behavior of traders. When a cluster of moving averages is headed lower, it often signals that traders are selling into rallies, and thus the moving averages can act as resistance. With several sector ETFs in this situation, it bears watching to see how they react at these critical levels. The result could not only offer a good trading opportunity, but also a clue into the next move for the markets.

Medium to Long Term Gold Outlook

Gold has been really on the move recently within the last couple of months. A few months ago my analysis revealed that once gold broke $980/ounce, it would be in for a great rally. At that time I suggested to others a $980/ounce break would be a great buy signal and time for them to increase their gold exposure. It did break the $980 level a few weeks after I said that and it is now a large 14% higher, $1,119/ounce, only months later with barely any signs of slowing.

Many of the worlds greatest investors and fund managers have been increasing their exposure to gold, mainly earlier this year is when they were adding to their gold positions. These guys are the best, Billionaires, whom I am referring to, and I applaud them for getting into gold earlier this year before its big rally.

So with these hedge fund managers and I calling this big rally of recent in gold earlier this year, where do we stand now?

Gold may have a little further to rise in the short to medium term, but in our view not much further. It is time for you to start taking some profits on any of your exposure to Gold, or begin scaling out of your Gold holdings, EVEN if you are a long term investor. It would be wise for you to at least take some profits soon and buy Gold back at a better price you will certainly see as soon as next year.

I know that many of these fund managers I was referring to have their targets on Gold not much higher from here, very near $1200/ounce or only several percent higher from here. From our proprietary research, we know why these fund managers have their targets close to the current gold prices.

With both a combination of technical analysis and fundamental analysis we have set our medium to long term outlook on gold as BEARISH, meaning that we believe gold will be lower by Mid-2010 and head even lower from there, and its drop should start within a couple of months. In the end, if you are a medium term, or even a long-term buy and hold investor we advise you to take the majority of your gains on any gold holdings, or gold related (stocks, etf's, etc...)holdings by the end of 2009. ONLY if you are a short term investor/trader, less than a couple of months time frame, should you be buying gold at these levels of $1119/ounce.

MEDIUM - LONG TERM GOLD OUTLOOK: We are bearish, gold should head DOWN. Our analysis is that gold should drop at least 20% lower, or to $900/ounce, in the medium-long term.

We view the recent price action in the chart below as a clear BUBBLE, be prepared early for its inevitable pop:

(click on picture to enlarge)

Retirement Plans For the Self-Employed

SEP IRA:

With a SEP IRA in 2009 there is a $49,000 maximum contribution. This IRA is easy to set up and requires minimal administrative responsibilities. Disadvantages of this option begin with the fact that contribution limits are smaller than the limits of an Individual 401k at the same income level. This IRA does not have a catch-up plan provision like the Individual 401k, and loans are not permitted.

Main advantages of SEP IRA are that annual contribution is based on a percentage of W-2 wages if your business is incorporated and a percentage of personal income if your business is a sole proprietorship. If your business is an S or C corporation, or a LLC taxed as a corporation, up to 25% of W-2 wages can be contributed into a SEP IRA.

If your business is a Sole proprietorship, partnership or a LLC taxed as a sole proprietorship you are allowed annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) which can be contributed into a SEP IRA.

The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income. A SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain.

INDIVIDUAL IRA:

Main features of an individual IRA is that in 2009 there is a $49,000 maximum contribution ($54,500 if age 50+ due to a "catch-up" provision), tax free loans are permitted, and loans are permitted up to 1/2 of the total value of the Individual 401k up to a maximum of $50,000. Another feature of an individual IRA is that there is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into an Individual Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

One disadvantage of an individual IRA is potentially greater administrative responsibilities and administrative fees compared to other self employed retirement plans.

Advantages of this option are high contribution limits and completely discretionary annual funding requirements. An Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated. Another important distinction between this self employed retirement plan and others is a loan provision.

DEFINED BENEFITS PLANS:

Features of this plan are that, depending on the age and income of the business owner, annual contributions can exceed $100,000 or more. Also, loans may be permitted, however this may increase annual funding requirements.

Main disadvantages of defined benefits plans are that they can be more expensive to set up and to maintain, along with having rigid annual funding requirements.

Main advantages of this plan option are that you can contribute more than the contribution limits allowed by the SEP IRA or Individual 401k. Defined Benefit Plans also offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000. Lastly, defined benefits plan may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.

SIMPLE IRA:

A Simple IRA is easy to set up and has low administrative responsibilities. With a simple IRA self employed individuals can elect to defer up to 100% of their income up to a maximum of $11,500 for the 2009 year or $14,000 if age 50+. In addition there is a maximum 3% employer contribution.

A disadvantage of this plan is relatively low maximum annual contribution limits, and loans are not permitted.

In conclusion if you are self-employed and looking for a retirement plan take into consideration the amount you believe you will contribute, and leave room for a potential increase in your contribution that you may decide to make. Also, review the tax implications of each plan, and keep in mind the set up and administrative aspect.

Oil Hedging, It Is Not Only For Energy "Hedge Funds"

Hedging strategies can often be complex, which usually scares a lot of investors away from utilizing the strategy. Most average investors have not even heard of a "hedge" for investing. You may believe hedging is more for active investors, or those who make their living from investing, or those who are trader, or other reasons. In reality, hedging is a great tool when done properly for investors of all types.

So what is a hedge?

A hedge as an investment strategy is when you open separate positions in different markets in a way so that the two positions offset the risk of each other. Usually, they involve the use of different financial instruments such as derivatives and futures.


How can you employ a hedging strategy to the oil markets?

There are a variety of ways, here are some which we have tried to explain in simple terms:

Hedging Strategy #1- If you believe oil prices rise:

• Buy a put option on oil, do this through an account which permits and has options trading such as CBOE, OptionsXpress, or NYMEX
  

• Second, you will want to buy a little smaller oil future contract. 

Now, if oil rises in value you will money on your oil future and just let your oil option contract expire, losing no money on the options contract (except for the small fee). If oil drops in value you will lose money on your oil future, but then you will close your future and exercise your option and make the amount you lost on the future back, plus a little more (since you opened a slightly larger option contract)

Hedging Strategy #2 - If you believe oil will decrease in value:

• Buy a call option on oil,

• Sell short an oil future,

Now if oil drops you will make money on your oil future, and let your option expire. If oil rises in value you will lose money on your future, but then close your future and exercise your option.

Hedging Strategy #3 - If you believe oil prices will rise:

• Buy an oil swap (you pay a fixed rate, while you receive the floating rate)

• Buy an oil put option

Here if oil rises in value you will make money on your swap, but not lose any money on the put because you will not exercise it, but instead let the put expire. If oil prices drop in value you will lose money on the swap, but exercise the put option and make money on the option.

Hedging Strategy #4 - If you believe oil will decrease in value:

• Sell short an oil future,
  

• Buy a swaption at the same price

Here if oil decrease in value you will make money on your short oil future, but not lose any money on the swaption because you will not exercise it, but instead let the swaption expire. If oil prices rise you will lose money on the oil future, but exercise your swaption so you will then make money on your swaption.
 
These are the basic outlines of several hedging strategies you can implement to decrease risk and become exposed to the oil market. Any of these strategies when implemented properly will work excellent, but it is important you understand what you are doing fully.

If you would like to open a hedged position on oil, or would like to know more about other oil hedging strategies then please give us a call at 262-939-8885. Thank you for reading and have a great weekend!

Say NO To Letting Rising Oil Prices Choose Your Wallet, And Choose A Good Oil Stock, Here's How:

Now that we have covered how to choose oil index and mutual funds in our other post, we will move on to oil stock picking and hedging strategies. Both of these investment methods require their own due diligence and different analysis techniques.

When choosing oil stocks understand that their are 3 major categories: refineries/production, shipping/transportation, and maintenance/rig servicing companies. Therefore, you must consider all the fundamental factors that will affect each category and decide which has the best prospects moving forward, and for your time frame.

Choose the category that will have their margins affected the least by current market conditions. If you are a very conservative investor you may want to consider choosing a stock from each category to be truly diversified among oil, but otherwise we suggest sticking with one category. Your investment allocation in oil as part of your total portfolio is already being diversified, so there is no need to be diversified among several oil categories, also in general there is a high correlation among all oil stocks so being diversified will not reduce the systemic risk.

Once you have narrowed down a category of oil stocks, now you must choose what size of company to invest in: small cap, mid cap, or large cap. Remember, that volatility (risk) will decrease in general as the company is larger along with returns; so small caps generally are the highest returning and most risky, while large caps are usually the lowest returning and the least risky. So if you are a conservative - moderately conservative investor you should choose large cap stocks among the category you choose, mid-cap stocks if you are a moderate investor, and small cap stocks if you are moderately aggressive - aggressive investor.

Lastly, we will move on to exactly which stock to choose among your specific oil business category and size.
You have to decide whether you are a fundamental or technical investor, or maybe a little of each. Fundamentalist's observe micro-economic conditions affecting the company, its financial statements, news, management, and competitors. Technical investors look at charts only, price action, and chart indicators  such as trend-lines, support/resistance, pivot points, and hundreds of other chart/price only elements.

If you decide to choose fundamentally, look for a few stocks with good ratios compared to the industry; industry comparisons and stats. can be viewed on websites such as TheStreet.com, MoneyCentral.com and others. Analyze the management and make sure their have been no recent legal issues and discrepancies with the company. Also, areas that most fundamentalist's miss when choosing oil stocks  that can give you an advantage is the companies market price as share of oil reserve value, oil reserve replacement cost per barrel.

If you choose the technical route look for oil stocks with well defined trends, and easily drawable trend lines. (we are considering most of our readers our medium-long term investors so stocks in a range would not be a good choice for anyone other than short-term "traders") Also look for a stock that has pullback to a upward sloping trend-line or support level and become familiar with indicators such as the RSI, MACD, and Stochastics; divergence in these 3 indicators are good early warning signals of large reversals.

We have now gone over beginner to intermediate techniques of how you can go about choosing an oil stock to profit from our view on oil prices rising in the near- medium term. Both of these areas can be highly advanced. Stick with a simple and proven strategy that you can implement in an understandable manner. For example, following trend-lines ONLY is a technical strategy that has been proven to work very successfully, but mathematical algorithms that literally are 5 pages long and have to be designed by PhD. mathematicians and input into computers by advanced programmers (complex) is also another technical strategy that has been proven to work consistently.

Due to the this post long already, we will cover hedging strategies in our next post. If you need any help at all with choosing an oil stock, deciding which strategy to use, please call us at (262) 939-8885. Thank you for reading, and we hope that this post has helped you some with your oil investment endeavors.

Oil Mutual and Index Fund Galore, What to Do?

Following up on our post below, we would like to give you an idea on how exactly to choose mutual and index funds so you can benefit from rising oil prices. With literally hundreds of oil exposed funds, you have a great array of unique fund characteristics to choose from and that need to be taken in to consideration.

Before making your final decision to invest in a specific fund, you should become familiar with, and observe the following unique fund characteristics:

1. Holdings & Diversification - To really benefit from rising oil prices you should choose a fund with the majority of it's stock holdings in direct oil/petrolium refinery and gasoline companies (Exxon, Shell, etc..), preferably greater than 75%. A fund's holdings can be viewed by examining its prospectus, website, or through almost any other financial website such as Yahoo Finance, Bloomberg, MoneyCentral, and others. We suggest choosing a fund with less than 10 seperate oil stocks, because above 10 the benefits and risk-reward ratio from diversification greatly decreases, and therefore the systematic risk increases.

2. Turnover - This is another area were you need to be aware of your risk tolerance. A funds turnover is simply the amount of times its holdings change throughout the year. A higher turnover in general means the fund is more active, seeking higher gains, and is thus more risky. A lower turnover ratio (index funds) means the fund is more passive, and less risky.

So what is high and low turnover?

For index funds anything above 10% can be considered high and 5% should be considered low. Mutual funds are different than index funds because their turnover ratios can vary greatly, depending on how active they are and the fund's size.

For a small cap mutual fund, anything greater than a 200% turnover ratio should be considered high and 50% low. For mid and large cap mutual funds, 150% should be considere a high turnover ratio and 20-30% a low ratio. Also, if you would like to go by the average, the average turnver ratio for a mutual fund is 90% and the average for an index fund is near 5%.

3. Expense Ratio - Fees are among the most important of these 4 fund aspects. For a mutual fund you should be willing to accept higher fees than an index fund, because mutual funds on average are more active and outperform index funds. For a mutual fund an acceptable fee rate would be 1% or lower, and it should be .5% or lower for an index fund.

4. Minimum Investment - Mutual and Index Funds can have many different minimum investments. Therefore, be sure to find a fund with a minimum investment you are comfortable with and this minimum investment conforms to your overall investment strategy and portfolio diversification. For example, say your total portfolio of all your investments is $50,000, you are a conservative investor and may want to have 5% exposure to oil, so therefore you would find a fund with a minimum investment not greater than $2,500.

You should first start with finding a group of funds that would accept your investment size, weed out the funds which have too large of a minimum investment. No need to waist your time analyzing a fund which will not accept your investment size. Second, check the expense ratio, then holdings and turnover ratio.

Be sure you are always aware of your investor profile and to choose a fund only if its characteristics match your investor profile. In brief, when choosing an oil index or mutual fund you should look for a low expense ratio in general, a relatively low turnover ratio if you are a conservative investor and a little higher turnover ratio if you are moderate to aggressive. Also, look for a fund which has the majority of its holdings exposed to direct oil refining and gasoline companies.

Harvesting Profits From Black Gold

In our other post we stated that oil should head upwards in nearly all time frames, especially in the medium term and longer. Due to our bullish outlook, and blossoming prospects for better and sooner than expected worldwide growth, it is time for you to reconsider your energy investment allocation.

Volatility is another aspect of oil that will sure come into play, and there are no reasons that volatility in oil should subdue any time soon. Volatility in oil is surely likely to increase with the price due to OPEC meeting uncertainty, higher trading volume, profit taking, shifts in federal reserve policy, and for other reasons.

So how can one take advantage of the many oil market dynamics?

1. Buy An Oil Index Fund -An oil index fund attempts to mirror or replicate the returns of the overall oil market, so if oil prices rise by 20% an oil index fund should be very close to a 20% gain for the same period.
Oil index funds attempt to provide a better risk-return payoff than mutual funds, so in turn they are more risky (volatile) than mutual funds, but less risky than individual oil stocks. A good choice for the moderately conservative to moderately aggressive investor.

2. Buy An Oil/Energy Mutual Fund- In general a minimal risk oil investment can be made through mutual funds which invest in oil and energy on an international scope. Mutual funds provide a nice, simple opportunity for you to take advantage of rising oil prices on a diversified basis, in general they are more suitable for conservative to moderate investors.

3. Buy Oil Stocks- The most widely used strategy of investing in oil, but however it may be the most widely misused, as there are numerous factors to be considered when investing in oil stocks. When choosing stocks in an individual sector such as oil, the "stay diversified" strategy does not provide good returns since there is a large, positive correlation, between all of the stocks in the sector.

4.  Oil Hedge - A more complex strategy, which when done right, greatly decreases you risk for a loss and should give you one of the best risk-return ratios. Hedging strategies involve the use of different financial instruments at concurrent times, usually derivatives (swaps, options, futures, and others). Some hedging strategies attempt to take a position in such a way that when the value of one derivative declines, the value of the other increases. Other hedging strategies can be used as a volatility play, as they profit when there is significant movement in a security regardless of the direction.

All of these strategies are meant for you to be able to profit from rising oil prices, and all deserve special attention and research in their own rights. When choosing one of these strategies to invest in oil it is important for you to know your investor profile like you know if the sun is out or not. You should consider re-evaluating your investor profile and tolerance for risk as that will give you a nice idea for which of these strategies to use.

In our next post's we will elaborate on each of these strategies. We will start by giving you an idea of how to choose some oil index and mutual funds; then we will give you some insight on specific names of what we believe are appealing funds. Oil sector stock picking and hedging strategies will also be discussed in further post's. In the end we hope to help you have a better understanding of how to put the oil market in your favor.