Understanding the Basics of Bonds

There are certain things you must understand about bonds before you start investing in them. Not understanding these things may cause you to purchase the wrong bonds, at the wrong maturity date.

The three most important things that must be considered when purchasing a bond include the par value, the maturity date, and the coupon rate.

The par value of a bond refers to the amount of money you will receive when the bond reaches its maturity date. In other words, you will receive your initial investment back when the bond reaches maturity.

The maturity date is of course the date that the bond will reach its full value. On this date, you will receive your initial investment, plus the interest that your money has earned.

Corporate and State and Local Government bonds can be ‘called’ before they reach their maturity, at which time the corporation or issuing Government will return your initial investment, along with the interest that it has earned thus far. Federal bonds cannot be ‘called.’

The coupon rate is the interest that you will receive when the bond reaches maturity. This number is written as a percentage, and you must use other information to find out what the interest will be. A bond that has a par value of $2000, with a coupon rate of 5% would earn $100 per year until it reaches maturity.

Because bonds are not issued by banks, many people don’t understand how to go about buying one. There are two ways this can be done.

You can use a broker or brokerage firm to make the purchase for you or you can go directly to the Government. If you use a brokerage, you will more than likely be charged a commission fee. If you want to use a broker, shop around for the lowest commissions!

Purchasing directly through the Government isn’t nearly as hard as it once was. There is a program called Treasury Direct which will allow you to purchase bonds and all of your bonds will be held in one account, that you will have easy access to. This will allow you to avoid using a broker or brokerage firm.

Wild Markets, Looking for A Safe Haven? Better Think Twice About That Haven

Normally, when markets get really wild, as they have been lately, investors pour into to safe haven assets. These assets are generally highly liquid, and relatively provide extremely low returns. When market uncertainty increases, and investors become risk averse, the crowd will flood into investments like bonds, money market funds, treasuries, and the dollar.

Many investors get to the point of taking their money out of the markets when volatility and uncertainty picks up. When this happens it creates a huge demand for the US Dollar, and consequentially the US Dollar benefits and begins to strengthen.

Although there is nothing wrong with getting out of the equity markets and into safe haven assets, such as the dollar, there is a key factor at the moment that may make that play a bit more risky.

This factor is the recent market sentiment for the US Dollar. I spoke of sentiment on the dollar last December, and recommend a GBP/USD short and EUR/CHF short, which performed very well with each pair dropping substantially. However, that same sentiment may be changing to be a negative thing for the US Dollar in the medium term.

If you are in need of a safe haven in these turbulent times (volatility surged several days ago) then you may want to consider rushing into a different currency than the US Dollar. Why? because sentiment is changing....

Current dollar *sentiment against the British Pound and Swiss Franc:

GBPUSD - The ratio of long to short positions in the GBPUSD stands at -1.17 as nearly 54% of traders are short. Yesterday, the ratio was at 1.27 as 56% of open positions were long. In detail, long positions are 6.6% lower than yesterday and 32.1% weaker since last week. Short positions are 38.8% higher than yesterday and 1.9% stronger since last week. Open interest is 13.3% stronger than yesterday and 12.8% below its monthly average. The SSI is a contrarian indicator and signals more GBPUSD gains.

USDCHF - The ratio of long to short positions in the USDCHF stands at -1.06 as nearly 51% of traders are short. Yesterday, the ratio was at -1.24 as 55% of open positions were short. In detail, long positions are 7.0% higher than yesterday and 7.9% stronger since last week. Short positions are 9.0% lower than yesterday and 53.1% weaker since last week. Open interest is 1.9% weaker than yesterday and 26.8% below its monthly average. The SSI is a contrarian indicator and signals more USDCHF gains.

What does this suggest?

It suggests that the dollar strength sentiment I spoke of several months ago in December is now running out of steam, and sentiment is now turning in favor of dollar weakness against these pairs for the short to medium term. Therefore, as a safe haven investment US Dollar cash investments are not looking so good based on currency market sentiment. If anything, you may want to consider rushing into the GBP or Swiss Franc to ride out these rough and indecisive times.

*FXCM sentiment data

Sound Investing for Retirement

Retirement may be a long way off for you – or it might be right around the corner. No matter how near or far it is, you’ve absolutely got to start saving for it now. However, saving for retirement isn’t what it used to be with the increase in cost of living and the instability of social security. You have to invest for your retirement, as opposed to saving for it!

Let’s start by taking a look at the retirement plan offered by your company. Once upon a time, these plans were quite sound. However, after the Enron upset and all that followed, people aren’t as secure in their company retirement plans anymore. If you choose not to invest in your company’s retirement plan, you do have other options.

First, you can invest in stocks, bonds, mutual funds, certificates of deposit, and money market accounts. You do not have to state to anybody that the returns on these investments are to be used for retirement. Just simply let your money grow overtime, and when certain investments reach their maturity, reinvest them and continue to let your money grow.

You can also open an Individual Retirement Account (IRA). IRA’s are quite popular because the money is not taxed until you withdraw the funds. You may also be able to deduct your IRA contributions from the taxes that you owe. An IRA can be opened at most banks. A ROTH IRA is a newer type of retirement account. With a Roth, you pay taxes on the money that you are investing in your account, but when you cash out, no federal taxes are owed. Roth IRA’s can also be opened at a financial institution.

Another popular type of retirement account is the 401(k). 401(k’s) are typically offered through employers, but you may be able to open a 401(k) on your own. You should speak with a financial planner or accountant to help you with this. The Keogh plan is another type of IRA that is suitable for self employed people. Self-employed small business owners may also be interested in Simplified Employee Pension Plans (SEP). This is another type of Keogh plan that people typically find easier to administer than a regular Keogh plan.

Whichever retirement investment you choose, just make sure you choose one! Again, do not depend on social security, company retirement plans, or even an inheritance that may or may not come through! Take care of your financial future by investing in it today.

Choosing A Broker

Depending on the type of investing that you plan to do, you may need to hire a broker to handle your investments for you. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. The answer is yes. If you intend to buy or sell stocks on the stock exchange, you must have a broker.

Stockbrokers are required to pass two different tests in order to obtain their license. These tests are very difficult, and most brokers have a background in business or finance, with a Bachelors or Masters Degree.

It is very important to understand the difference between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock… not to analyze stocks.

However, some brokers may try to push stocks to you and give you there analysis and try to get you to buy or sell. Do not listen to any broker, because there is conflicts of interest and will not offer the best advice to you due to their desire to get a commission. Stick to listening to the professional investment advisors, traders, investors, and analysts whom actually invest, not just take orders. There is a common fallacy of thinking that brokers are traders or investors, that is wrong, they are the order takers for the investors and traders.

Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat ‘per transaction’ fee.

There are two types of brokers: Full service brokers and discount brokers. Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions.

Discount brokers typically do not offer any advice and do no research – they just do as you ask them to do, without all of the bells and whistles.

So, the biggest decision you must make when it come to brokers is whether you want a full service broker or a discount broker.

If you are new to investing, you may need to go with a full service broker to ensure that you are making wise investments. They can offer you the skill that you lack at this point. However, if you are already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you.

A Brief Overview Of Common 401k Mistakes

Believe it or not there are many mistakes that can be made along the way when it comes to financial retirement savings and investing. Unfortunately a good many of these mistakes center around the 401(k), which can be a tremendous boost to your retirement plans when used properly in order to build your portfolio. The problem is that the mistakes are often the only things we hear when it comes to retirement plans and investing. I suggest begin with the mistakes so that we can move along to better information and advice in the near future.

The first and perhaps largest mistakes that people make when it comes to 401 (k) plans is not signing up. Yes you heard that right. What people do not understand is that this is something your employer offers so that you can have some security for your future. It is a manner of saving money for your future that shouldn't be overlooked or taken for granted. Even a bad 401 (k) plan is better than no 401 (k) and with strict regulations those are few and far between. More importantly, if your company offers to match the funds in your 401 (k) plan not taking them up on that offer is literally tossing money in the garbage can.

The next big mistake when it comes to your 401 (k) is risking too little. Rewards come with risk. If you aren't taking any risks with your investment then you are by and large throwing money down the drain. In addition to that, it is nearly impossible to meet your retirement goals without taking some risks, and some hits along the way. This doesn't mean you should be reckless but along the way you are going to need to take some calculated risks in order to receive the bigger payouts that most of us hope for when investing in their retirement funds.

Risking too much. There are many risks involved when investing in the stock market. There are a few that deserve a little more mention than others. First of all, stocks present a fairly large risk, particularly to the uninitiated. While it is true that great rewards are most often the product of great risks you do not want to risk the bulk of your retirement by investing it all in stocks. Another thing you want to avoid doing if at all possible is investing in your company stock. We've seen too many lives destroyed when companies go under taking the financial stability of their employees along with them. Many companies offer incentives to employees for investing in their stock, which may be tempting but I recommend investing as little as possible in your company stock whenever possible as this could lead to problems down the road.

Finally, the worst thing you can do for the health of your 401 (k) is borrow against it. There are so many ways in which this could go wrong and the penalties for this are more than a little prohibitive. They are designed to be that way so that you will use the funds for their intended purpose. If you absolutely have no other option is the only way I would recommend borrowing against your 401 (k) and I would seriously consider selling a kidney before doing that.

When it comes to your financial retirement, 401 (k) mistakes can be far more costly than you may realize. Work to avoid these common mistakes and you should be well on your way to a successful retirement.

Your Risk Tolerance

This is where most financial advisors or investors go wrong, not properly accounting for risk tolerance. During the recent poor and volatile performance of stocks in 2008 and early 2009 there was not an investor whom did not have their risk tolerance tested. However, some investors were still happy and comfortable during those dismal times for the markets. Why? Because their risk tolerance was properly accounted for. Simple truth is, any individual whom was frustrated, angry, or complaining about the market conditions of 2008 and 2009 has improperly assessed, or was not properly advised on, their risk tolerance.

Assessing your risk tolerance will determine how comfortable you can be with your investments. If your risk tolerance is properly accounted for, no matter how much the markets fall you should still be comfortable and relatively happy with your investments.

Each individual has a risk tolerance that should not be ignored and rigorously understood before any of their capital is invested. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Do not settle for any financial advisor to just give you a short survey or quiz of 10 questions and small talk for only 15 minutes to determine your risk tolerance. It goes deeper than this; after all, this is among the most important steps in your investing why should it not deserve as much time as anything else?

Determining one’s risk tolerance involves several different things. Mainly for your risk tolerance you need to be aware of your time frame, what you plan to achieve in that time-frame (goals), the amount of cash you have available to invest, and your age.

For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you will be placed towards higher risk tolerance – because you will need to do some more aggressive – risky – investing in order to reach your financial goal.

On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement at the age of 55, your risk tolerance will be low. You can afford to watch your money grow slowly over decades. In contrary, if you are in your early twenties you may be willing to take more risk because you have many years to recoup a loss or you may have the idea of retiring earlier at age 40 for example and live off of your investments

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there are multiple factors in determining your tolerance.

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, how would you feel? How about asking the question, "If I buy $X worth of this stock what percentage would it have to drop in one month that would cause me to be uncomfortable?" If a drop of over 5% is the threshold that would cause you to be uncomfortable then you would be conservative to moderate on risk tolerance. If you would not be comfortable with anything more than a couple percent drop in one month then you would be highly conservative. In contrary, if it would take a drop of 20% or more within one in order for you to become uncomfortable then you would be aggressive.

Remember, risk and returns go hand in hand. In general, you can expect higher return investments to have higher risk. This is because risk is not only about losing money. Risk involves the amount of deviation or fluctuation from the mean both up and down. As an example if you have the goal of 100% returns in one year, you may place yourself as high risk tolerant, but at the same time if would only be comfortable with a 2% drop in one month then you would have to choose which is more important and meet in the middle, accept lower returns for more comfort. In this example, you would have to have moderate risk tolerance.

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

In the end it is goals, goals, goals and a complete understanding of what it takes to achieve those goals that will determine your risk tolerance.

Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.

A Pharmaceutical Stock Poised to Rise

This is a stock that we had recommended in early September, actually it was mentioned as a superb buy on our investment DVD that was made in early September. We recommended this stock last September for a variety of reasons, both technical and fundamental.

Teva Pharmaceutical (TEVA) - This worldwide pharmaceutical company known for its bio-generics and active pharmaceutical ingredients, has been in an uptrend since the late '90's.

Since our September recommendation, TEVA is up close to 16% in only 4 months. However, TEVA is still showing some positive signs and potential for another burst higher.

What is the potential for TEVA?

Another 10-15% higher within several months. Why? Technically TEVA has recently been in a very bullish pattern on the daily chart, this pattern is called a bullish flag. Also, TEVA has just broke upwards out of the bullish flag pattern which is a confirmation. With the nature of bullish flag patterns, TEVA should head another 10% higher minimum within a relatively short period of time, 3-6 months.

(Click to Enlarge)

Recently, TEVA's strong upward trend has made it an institutional favorite. The 50-day moving average has been where buyers have been trampling this stock and supporting it on the way up, so you may want to consider buying at the 50-day simple moving-average. This moving average is a simple indicator available on many free chart packages including Yahoo Finance and MoneyCentral.

The recent pullback to the 50-day moving average resulted in the normal buying, but shoved it from a small flag that tells us that the advance will more than likely continue with a minimum short to medium term target in the high $60 area.

Recently, S&P just rated TEVA a "five-star strong buy" with a price objective of $70. Lastly, fundamentals are still very healthy for this "drug" stock as well. Therefore, TEVA is a great buy and would be a great addition to the large-cap portion of your portfolio. Also, one thing to remember is that historically the health care sector has been among the top performers when coming out of recession.

Markets Still In Correction Mode, Stay On Defense

Major indices have been in a large correction this past week. This should not be new to our readers, because we have warned of this correction a few times in the past couple of months. As an update though, we are still moderately bearish on the markets and our analysis shows further fall can be expected from here in there short-medium term.

Due to the fact we are still bearish on the markets we still recommend that you remain overexposed to defensive investments, such as long-term government bonds, corporate bonds, TIPS, and others.

One common adage that you should be aware if and avoid is buying commodities when stocks drop. There is a lag between the two markets, and lately gold has been a leading indicator, advancing before the markets, and falling before the markets. We expect this trend to continue throughout the most part of this year. Therefore, you should not buy commodities as a safe haven investment for the short-medium term. If you want to take your cue from gold to get into stocks due to its leading nature, then a good move would be to wait for gold to confirm a new medium term uptrend. This new uptrend in gold would be confirmed if it broke above $1,135/ounce. Also, we recommend that you avoid short term t-bills, they are in a bubble and there are much safer, higher returning alternatives.

As a more moderate to agressive investment for you to make some descent returns during this correction you may want to consider buying the dollar. Sounds funny huh, buy a dollar? you already have dollars why buy some? Well, buying the dollar actually means going long on, or expecting it to appreciate in value. When the market corrects the dollar in general strengthens against the Euro, British Pound, and other major currencies. You can buy the dollar in a variety of ways.

Some conservative methods of buying the dollar are the PowerShares DB US Dollar Bullish Fund (Symbol:UUP), and the Morgan Stanley Double-Short Euro ETN (Symbol:DRR); just look at how well these two long dollar funds perform when the major indices drop. Both of these two funds are up today, while the DOW is down about 200 points.

More agressive ways to go long the dollar are to short other currencies through a forex otc broker. You must be very careful when doing this. Even though all you would essentialy be doing is one investment for the short-medium term, which would require only one click of the mouse, you still need to understand terms like leverage, margin, and how the trading platform works. If you want to buy the dollar against other currencies as we suggested above, which is the same as shorting other currencies against the dollar, then on your trading platform you will want to place a bid (means sell) position on the pair where the dollar is the quote/counter currency, and in contrast if the dollar is thebase currency you will then want to place an ask (means buy) position. Both of these mean you would be making an investment in future dollar strength.

All of the above investment recommendations are for the short-medium term only, except for the the long-term government bonds, which should outperform well in both the short and long term. With this post we just wanted to inform you of our current stance on the markets and some defensive investment opportunities that will do well if our view continues to unfold. That is why this blog is called "Seedlings To Your Healthiest Money Tree", take these seedlings above and use them wisely.

Lag Of the Curve, May Strike An Investment Nerve

Have a look at this chart:



What does this show? It shows something very interesting, and that you should be aware of as an investor. Above is a comparison of the 3-month, 5-year, 10-year, and 30-year treasury yields beginning in 1994.

What is its significance? The majority of the time short and long-term yield either rise or fall with high correlation, in tandem. However, there are rare periods when they do not, and currently we are experiencing one of those periods.

A good indicator of a recession, or large stock market correction has been when short-term yields rise above long-term rates. This is technically called an "inverted yield curve". Before every one of the last six recessions there has been an inverted yield curve, occuring on average about 3-6 months before the beginning of the recession.

What is shown in the charts above is that there has been strong flattening of short term yields, while the increase rate of longer term yields has slowed. Now have a look at the chart below:



If you look at at the end, where we currently are, it shows the difference of the 10 and 3-month at the top of the chart (between the 2 dashed horizontal lines).
Now look at what happened after the last time yield differences where at that point. There was a sharp drop down to the circle, the circle is the yield curve inversion.

From history, and the chart above, we can say that the next phase is dropping of long term yields and inversion of the yield curve. At the current rate, and historical trends, we can expect another yield curve inversion to occur within 1-3 years, and another recession in about 4-5 years based on current yield curve analysis.

Currently, this is what we believe will be a large catalyst to the short-term bond bubble (we are currently still in) burst we are expecting. Therefore, as short term yields rise and the yield curve begins to invert, inflation following or floating rate investments (floating bonds, floating bond funds, etc..), should do very well in the years to come. Also, other analysis of ours suggests long-term bond funds in general should do very well in the coming years.

Analysis Of Several Major Markets

Major stock price indexes have been declining for the recent trading sessions.

S&P 500 (SPX) Cash Index tested Potential Support: 1089.99 is the Gann 12.5% retracement of the 2009-2010 range, and 1089.86 is the actual low of Tuesday, 1/26/2010. ISEE Call/Put Ratio fell to 0.67 on 1/26/10, down from 1.68 on 1/11/10, indicating a shift to pessimism from optimism. The ratio’s 6-year mean is 1.41, its median is 1.36, and its range is 0.51 to 3.16. Recently, some market indicators got oversold enough to support a bounce to the upside.

9 major U.S. stock sectors ranked in order of long-term relative strength:

Consumer Discretionary (XLY) Bullish, Overweight. The Relative Strength Ratio (XLY/SPY) rose above 16-day highs on 1/26/10. XLY/SPY remains above its rising 50- and 200-day simple moving averages. Absolute price of XLY fell below 6-week lows on 1/25/10 and remains below its 50-day simple moving average. Support 28.73 and 28.29. Resistance 30.38, 30.54, 31.95 and 33.76.

Health Care (XLV) Bullish, Overweight. The Relative Strength Ratio (XLV/SPY) rose above 6-month highs on 1/22/10. XLV/SPY remains above its rising 50- and 200-day simple moving averages. Absolute price of XLV traded above its highs of the previous 15 months on 1/20/10. Support 31.07 and 30.88. Resistance 33.16, 33.37 and 33.74.

Technology (XLK) Neutral, Market Weight. The Relative Strength Ratio (XLK/SPY) fell below the lows of the previous 7 weeks on 1/22/10, signaling a downside correction. XLK /SPY fell below its 50- day simple moving average but remains above its rising 200-day simple moving average. Absolute price of XLK fell below 8-week lows and broke down below its 50-day simple moving average but remains above its rising 200-day simple moving average. Support 21.46 and 20.46. Resistance 22.59, 22.87, and 23.05.

Industrial (XLI) Neutral, Market Weight. The Relative Strength Ratio (XLI/SPY) and the absolute price both fell below the lows of the previous 8 days on 1/21/10. XLI/SPY remains above rising 50-day and 200-day simple moving averages. Support 27.67 and 27.46. Resistance 29.61, 30.56 and 32.00.

Consumer Staples (XLP) Neutral, Market Weight. The Relative Strength Ratio (XLP/SPY) rose above the highs of the previous 5 weeks and above its 50-day simple moving average on 1/22/10. XLP/SPY remains below its falling 200-day simple moving average. Absolute price of XLP fell below the lows of the previous 5 weeks on 1/26/10. Support 25.96 and 25.77. Resistance 27.04, 27.18 and 29.29.

Materials (XLB) Neutral, Market Weight. The Relative Strength Ratio (XLB/SPY) ) plunged below the lows of the previous 11 weeks on 1/26/10, confirming a price correction. XLB/SPY fell below both 50- and 200-day simple moving averages on 1/21/10 and have continued to decline. Absolute price of XLB also fell below the lows of the previous 11 weeks on 1/26/10. Support 31.00 and 28.95. Resistance 33.73 and 34.52.

Energy (XLE) Neutral, Market Weight. The Relative Strength Ratio (XLE/SPY) fell below the lows of the previous 3 weeks on 1/26/10. XLE/SPY fell below its 50-day and 200-day simple moving averages. Absolute price of XLE fell below the lows of the previous 5 weeks on 1/26/10. Support 55.88 and 54.17. Resistance 58.52 and 59.90.

Utilities (XLU) Neutral, Market Weight. The Relative Strength Ratio (XLU/SPY) may be attempting to stabilize since probing 2-year lows on 11/18/09. XLU/SPY moved above its 50-day simple moving average on 1/26/10 but remains below its falling 200-day simple moving average. Absolute price of XLU fell below the lows of the previous 8 weeks on 1/25/10. Support 29.37 and 28.10. Resistance 31.30, 31.64 and 32.08.

Financial (XLF) Bearish, Underweight. The Relative Strength Ratio (XLF/SPY) has been in a downward correction since 10/14/09 and fell below the lows of the previous 3 weeks on 1/26/10. XLF/SPY is in a weak position, below both 50- and 200-day simple moving averages. Absolute price of XLF has been in a correction/consolidation phase since 10/14/09 and fell below the lows of the previous 5 weeks on 1/22/10. Support 13.78 and 13.62. Resistance 14.68, 15.40 and 15.76.

Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) fell below the lows of the previous 4 months on 1/26/10. EEM/SPY fell below its 50-day simple moving average on 1/21/10 but remains above its rising 200-day simple moving average. Absolute price of EEM fell below the lows of the previous 12 weeks on 1/26/10. EEM has underperformed the SPY since 10/14/09.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) fell below the lows of the previous 4 weeks on 1/21/10. EFA /SPY fell below its 50-day simple moving average on 1/21/10 but remains above its rising 200-day simple moving average. Absolute price of EFA fell below the lows of the previous 11 weeks on 1/22/10. EFA has underperformed the SPY since 9/9/09.

NASDAQ Composite/S&P 500 Relative Strength Ratio rose above its highs of the previous 8-years on 1/4/10 and remains above its rising 50- and 200-day simple moving averages. Absolute price fell below its 50-day simple moving average on 1/22/10 but remains above its rising 200-day simple moving average.

Growth Stock/Value Stock Relative Strength Ratio (IWF/IWD) has been performing sideways/neutral for most of the past 10 months, since March 2009. Longer term, IWF/IWD has been bullish since 8/8/06.

Russell 1000 Value ETF Relative Strength Ratio (IWD/SPY) has been performing sideways/neutral for most of the past 8 months, since May 2009. Longer term, IWD/SPY has been bearish since 3/22/07, and we assume that major trends continue--until proved otherwise.

The S&P 500 Equally Weighted ETF Relative Strength Ratio (RSP/SPY) rose further above previous 6-year highs on 1/8/10. RSP/SPY remains above its rising 50- and 200-day simple moving averages. Absolute price of RSP rose to a new 15-month closing price high on 1/8/10, then broke down below 5-week lows on 1/26/10.

The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEX/SPX) fell further below the lows of the previous 3 months on 12/22/09. OEX/SPX remains below its falling 50- and 200-day simple moving averages.

The Small Cap/Large Cap Relative Strength Ratio (IWM/SPY) rose to a new 3-month high on 1/22/10 and remains above both its 50- and 200-day simple moving averages. Absolute price of IWM fell below 5-week lows on 1/26/10 after rising above 15-month highs on 1/8/10, indicating a short-term correction within a long-term uptrend.

The Mid Cap/Large Cap Relative Strength Ratio (MDY/SPY) rose above the highs of the previous 4 months on 1/22/10. MDY/SPY remains above its 50- and 200-day simple moving averages. Absolute price of MDY rose above 15-month highs on 1/11/10, then broke down below 5-week lows on 1/25/10.

CRB Index of commodity prices fell below 5-week lows on 1/26/10.

Crude Oil nearest futures contract price fell below 5-week lows on 1/26/10, confirming a minor correction. Oil is below its 50-day simple moving average but well above its rising 200-day simple moving average. Support 73.52, 72.72, 72.45, 68.59, and 65.05. Resistance 77.06, 79.47, 80.36, 83.95, 85.82 and 98.65.

Gold nearest futures contract price broke down below 4-week lows on 1/22/10, confirming a minor correction. Gold is below its 50-day simple moving average but well above its rising 200-day simple moving average. Support 1075.2 and 1028.0. Resistance 1163.0, 1170.2, 1196.8 and 1226.4.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) fell to a 6-month low on 1/23/10 after falling below both 50- and 200-day simple moving averages on 1/15/10. The gold mining stocks have underperformed gold bullion since 9/17/09.

Silver/Gold Ratio fell sharply since 1/19/10, breaking below both 50- and 200-day simple moving averages, suggesting new doubts about prospects for the world economy.

Copper nearest futures contract price broke down below 4-week on 1/22/10 and consolidated since. Falling copper prices suggest doubts about global economic prospects. Support 3.2475, 3.06 and 2.966. Resistance 3.47, 3.544, 3.5625, 3.5625, and 3.79.

U.S. Treasury Bond nearest futures contract price rose above 5-week highs on 1/26/10, confirming the short-term trend as bullish. The Bond is above its 50-day simple moving average but is still below its 200-day simple moving average. Support 118.02, 116.22, 115.24, 114.16, 113.04 and 112.15. Resistance 119.08 and 120.08.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) fell below the lows of the previous 6 weeks on 1/22/10, signaling a downside correction. JNK/LQD has been testing its 50- day simple moving average and remains above its rising 200-day simple moving average. Absolute price of JNK fell below 6-week lows and broke down below its 50-day simple moving average on 1/22/10 but remains above its rising 200-day simple moving average.

U.S. Treasury Inflation Protected / U.S. Treasury 7-10 Year Relative Strength Ratio (TIP/IEF) rose to another new 15-month high on 1/7/10, again confirming a bullish long-term trend. TIP/IEF remains above rising 50- and 200-day simple moving averages. Bond investors may be growing increasingly concerned about the inflation outlook, despite assurances of tame inflation by economists.

The U.S. dollar nearest futures contract price rose above 3-month highs on 1/21/10 and has consolidated gains since. USD has been holding above its rising 50-day simple moving average and is challenging its falling 200-day simple moving average. Support 78.20, 76.74 and 75.90. Resistance 79.00 and 79.695.

The Art of Contrary Thinking: The various surveys of investor sentiment are best considered as background factors. The majority of investors can be right for a long time before a major trend finally changes course. The Art of Contrary Thinking is best used together with more precise market timing tools.

Advisory Service Sentiment: There were 52.2% Bulls versus 18.9% Bears as of 1/20/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio fell to 2.76, down from 3.36 on 1/13/10, which was the highest ratio of bullish sentiment in 6 years. The 20-year range of the ratio is 0.41 to 3.74, the median is 1.50, and the mean is 1.57.

VIX Fear Index jumped to 27.31 on 1/22/10, up from 17.55 on 1/11/10, which was its lowest level in 26 months. VIX is down from a closing high of 80.86 set on 11/20/08. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

VXN Fear Index jumped to 28.37 on 1/22/10, up from 17.73 on 1/14/10, which was its lowest level in 26 months. VXN is down from a closing high of 80.64 set on 11/20/08. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

ISEE Call/Put Ratio fell to 0.67, down from 1.68 on 1/11/10, indicating a shift to pessimism from optimism. The ratio’s 6-year mean is 1.41, its median is 1.36, and its range is 0.51 to 3.16.

CBOE Put/Call Ratio rose to 0.65, up from 0.49 on 1/8/10, a reversion to the mean. The ratio’s 6-year mean is 0.66, its median is 0.64, and its range is 0.35 to 1.35.

The Dow Theory last confirmed a Bullish Major Trend on 1/11/10, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 14 months. The Dow Theory signaled the current Primary Tide Bull Market on 7/23/09, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 6 months. That 7/23/09 signal reversed the previous signal: the two Averages signaled a Primary Tide Bear Market on 11/21/07, when both Averages closed below their closing price lows of August 2007.

Quick Way To Boost Your Investment Expertise

You do not trade or invest in the markets, no one does. Now that might sound surprising to many of you. But what you really trade or invest in are your or someone else s beliefs about the market. Furthermore, your ability to do so is tempered by your beliefs about yourself or the other person such as an advisor, or money manager.

Spend some time and jot down your beliefs about yourself. These beliefs will typically start with words like

• I am...
• I feel...
• I experience myself as...

Now if this sort of exercise is new to you, when you first do it, you'll probably write down a bunch of your positive attributes. Furthermore, you'll probably have trouble writing down more than twenty or thirty such beliefs. But you probably have hundreds.

However start your list. Let's say you think for about five minutes and you come up with the following items:

• I am a fairly good trader/investor.
• I feel positive about my potential.
• I like myself.
• I am fairly astute in thinking about the markets.
• I am intelligent.
• I am creative.

You know there are a lot more, but after 15-20 minutes of thought that's all you can come up with then that is fine. Now you need to continue this exercise each time you make a trade or investment, both at opening the position or closing it.

For example, let's say it's Monday morning and you open positions in the market. After doing so you continue to assess yourself and you notice two things:

• I'm feeling really excited.
• I like fast moving stocks.

Okay you've gained some insight about yourself.

By mid afternoon the market is in a steep decline and three of your stocks are down $500 on the day. Now you start thinking to yourself:

• I feel angry about that position. I just got in and it's going against me.
• I'm not going to let them take advantage of me this time. I'll hang on until it comes back.

Notice that you've just gathered some more insights about yourself. Keep this up until you've written down 100 or more statements that reflect you and your feelings. When you do, you'll have a lot more insight about how you invest or trade. This is a great way to start enhancing your investor/trader psychology and you will be starting down the path towards becoming a much better investor or trader.

Concept of Intermarket Analysis

Intuitively, investors and traders know that many markets are interrelated. They realize that a development that affects one market is likely to have repercussions in other markets. No market is isolated in today's global financial system. However, technical analysis has traditionally emphasized single-market analysis, focusing on one chart at a time and failing to keep up with structural changes that have occurred in financial markets as the global economy has emerged with advances in telecommunications and increasing internationalization of business and commerce.

Many individual traders or investors still rely upon the same types of mass-marketed, single-market analysis tools and information sources that have been around since the early 1970s. There is a large percentage of traders/investors who continue to end up losing their capital. If you are still doing what the masses are doing with their analysis, isn’t it likely that you will have the average-below average returns the mass experiences, or possibly even end up losing all your hard-earned money?

In the currency, stock, and bond markets especially, you cannot ignore the broader intermarket context affecting the market that you are investing in, or trading. You need to technically analyze the behavior of each individual market to see the double tops or broken trendlines or indicator crossovers that so many other traders are following, because that is part of the mass psychology that drives price action. However, it is increasingly important that you factor into your analysis the external intermarket forces that influence each market being traded.

What Is More Important Than Being Right In Investing?

Here is a list of the major methods of trading or investing:

• Trend following – If you buy what’s going up, it will probably continue.

• Value Investing – Buy what’s undervalued because it will eventually become overvalued.

• Seasonality – The market tends to show seasonal patterns that you can capitalize upon.

• Band Trading – It’s possible to draw bands to describe the nature of an investment. Those bands will allow you to sell when the price gets too high and buy when it gets too low.

• Elliot Wave – The market moves in a sequence of five waves up and three waves down, and if you can understand the various levels to this, you can predict tops and bottoms.

There is a multitude of other strategies, but can you notice the relation between all of the above? Every investment method or strategy has its main focus on predicting. Predicting and speculation is what most people believe investing is about, and that is where they place most of there focus. For example, if you are a trend follower, you are predicting that the trend will continue in a certain direction. If you are a value investor/trader you are predicting that what’s undervalued will go up eventually.

However, observing the track record of some of the worlds greatest investors and richest men who use these methods, you will find that investing is not about predicting. These major players often have a winning trade or investment percentage of less than 50%. This means less than half of all investments or trades they make turn into a profit.

So how do they generate consistent double-digit returns year after year, sometimes even several hundred percent returns is they are loosing more trades/investments than they are winning?

It is because they cut their losses short, let profits run, and implement rigorous risk management. It is ultimately the risk management that separates the great investors from the bad. Their has literally been fortunes made on using astronomy (star alignments) for taking investments/trades, but what made the fortune was that they implemented sound risk management.

I have yet to hear anyone say, “I don’t make money picking stocks – I make money by cutting my losses short and letting my profits run. And more importantly, I meet my investment objectives through the judicious use of position sizing.”

Ultimately, it really does not matter what criteria/strategy you use for picking your trades or investments. That is only a small part towards the start of real investment success. What’s really critical is that you understand that you make money by cutting losses short, letting profits run, and employing risk management.

Understand the concepts of position sizing, margin requirements, the max loss you would accept in a given amount of time, the concept of stop losses, and other risk management methodology such as the Kelly Criterion, Variance, Standard Deviation,, and volatility. You do not have to learn all risk management, but just a few. Remember, that the criteria you use for getting in to an investment is not the only thing you should consider when finally entering.

Is Steel The Real Deal?

Are you positioned for a global economic recovery? One way to do this is to have some exposure to the steel sector. As the economy grows, this will spur demand for all things composed of steel. Economic growth will help demand for real-estate, cars, and machinery. Also, in the steel sector is considered a leading indicator of capital spending and economic growth, so you will want to take advantage of this sector early.

One way you can invest in the steel sector is through the NYSE Arca Steel Index, or through the Dow Jones Steel Index. The Dow Jones Steel Index was strongly higher this week, closing above a 38.2% fibonacci resistance level. The next major resistance, 50% resistance level stands at 338, which is nearly 16% above current levels. More importantly, the relative strength completed a bottom formation this past week (point 1) as it moved above resistance at line a. The strength in this industry should have positive implications for the economy as a whole.

Figure 2 - Click to Enlarge

A nice steel stock is Steel Dynamics (STLD) which has also broken out upwards on the weekly charts, closing well above the September highs at $18.56. Strong resistance at the 38.2% retracement fibonacci level been overcome the next major resistance is at $23, nearly 15% above current levels. If the rally from point c is equal to that from points a to b, the target is at $26, with the 61.8% resistance at $28.50. First good support is at $16.50, with major support at $13.50. The OBV has overcome its major resistance (line 1) at point d, and is not far below the highs made in 2008. This suggests the breakout is valid. Other steel stocks you should consider are: AKS, WOR, and NUE.

Things To Be Aware Of Before Utilizing A Roth IRA

Basically, Roth IRA's are accounts that investors set up to save for retirement. They come in various forms, including the two that I'm going to talk about here - traditional IRAs and Roth IRAs.

On the surface, a Roth IRA seems like the best bet, as it allows for tax-free accumulation of profits on your contributions. A great idea, for sure. But there's a catch: It's always been restricted to people who earned less than a certain amount. If you earned more, you were forced to use a traditional IRA, where the gains are taxed. Until now.

A recent change in the tax laws regarding qualifications for Roth IRAs, versus traditional IRAs, should have many folks jumping for joy. Until this year, you couldn't qualify for a Roth IRA unless you fell below specific income requirements. But the government has now decreed that anyone can have a Roth IRA, regardless of their income level. Furthermore, if you have a traditional IRA, you can switch it over to a Roth - with all future gains and distributions being tax-free. This all sounds excellent for you, right? Well that is because you are unaware of...

The Roth Trap

While spending your hard-earned money tax-free when you retire sounds like a great idea, there are catches. Several catches. And you need to be well-informed before you even think about making the switch to a Roth IRA.

Here are just a couple of issues:

~ Government: The government is angling for a lot of cash with this move. Think about the trillions of dollars sitting in retirement accounts. The lure of collecting taxes early on those trillions makes even the sleepiest bureaucrat wake up.

~ Tax Implications: Any money you switch from your regular IRA to a Roth will be taxable. This means you'll pay tax on these funds at the marginal rate over a couple of years.

However, if you're at the 25% tax rate and you decide to make the switch, the amount you transfer will increase your marginal rate and possibly push you into the 35% bracket or higher.

Ask yourself, What will your estimated tax rate be at retirement? If it's going to be lower and you're within a few years of retiring, the Roth switch may not be for you. Also, the taxes due must come from somewhere.

Switch Now... Or Pay Later? An example...

Let's take a traditional IRA with $500,000 in it.

If you switched to a Roth, you'd owe at least $175,000 in taxes at the 35% tax rate. That would leave your investible capital at $325,000. But the pros tell me that you need to pay that $175,000 out of other funds so your IRA is intact and can earn money tax-free without having to spend years getting your principal back to square one. Hmm, now where can I find an extra $175,000 lying around?

The thinking behind making the Roth tax switch now is simple: Taxes are going up (maybe way up, thanks to our lavish spending habits), so better to cough it up now before you really have to hand over some big bucks later.

In fact, it's not out of the realm of possibility that marginal tax rates will top 50% for the highest earners within a couple of years - something that would make the Roth switch really expensive.

The upside, however, is that tax history doesn't usually change because of fiscal responsibility, but because of political will. Over the past 40 years, we've seen marginal rates decline from over 70% to the low 30% level.

And while we're on the upward slope today, who knows where we'll be in 20 years? Taxes might have declined by the time you take a distribution. So scare tactics aside, let's look at a couple of solutions...

Thinking About Switching to a Roth IRA? Consider...

~ Status Quo: The easiest thing to do is let your traditional, tax-exempt IRA continue to grow and just pay the taxes at the marginal rate upon distribution. The money you'd have to find to pay the taxes today (compounded at a reasonable rate going forward) would likely make up for a good chunk of what you'd pay in taxes later anyway. And if your rate is lower in the future, you may actually come out ahead if you're looking at a period of 10 or 20 years.

~ Switch in Stages: If you're going to switch to a Roth IRA, don't let the government fool you into thinking that you can pay the taxes over the next two or three years. From what I can tell, it's a gimmick - it wants the money now.

Instead, consider switching over a longer period of time, transferring just enough each year, so that your tax bite doesn't vault you into some ungodly high tax bracket. For example, if you have $500,000 to switch, transfer $50,000 a year over 10 years and pay the tax on that amount - it's a lot more manageable. Check with your accountant that there are no future restrictions on switching your IRA in this way. If not, then there is no reason to do it all at once.

Do Not Forget About the Small Side Of Your Portfolio

Small cap stocks are more volatile in general than the overall markets. Due to this reason they experience greater booms and greater busts. Another important fact you should know is small caps outperform when coming out of recessions, so how much of your investment allocation was in small caps since mid last year? If none at all and you are a mid-long term investor then you really should start gaining exposure to small caps near these levels; and yes, even if you are a conservative investor. Adding more volatile asset classes to a portfolio does not necessarily increase the overall portfolio volatility(or risk), to an extent it can actually decrease the volatility because small caps are generally ahead of the curve.

Small caps have underperformed throughout November and early December, and since mid December began to outperform the broader markets. A good representation of this is the US small cap ETF (Symbol:IJT), which completed its continuation pattern on December 22. Current targets on the upside for IJT are $60, and then $63. On the downside a break below 57.15 should bring rise to $55, and below $55 there should be a test of $50 (a good buying point.

Looking at the global small cap ETF (SCZ) we can see that it is in a range. Upper boundary for this range is $37.85 and the lower boundary is $34.50. A breakout is imminent in this ETF and be prepared when it occurs. An upside breakout of this range should lead to a test of $40, and a downside breakout would have its first target at $33. However, with this ETF there is still a strong uptrend, and the momentum indicators are still slightly bullish suggestion at least another retest of the upper end of the range at $37.

Both if these ETFs suggest further gains for small cap stocks in general. Purchasing one of these ETFs is one way to gain exposure to small caps; however, there is a multitude of other ways. You could also purchase a small basket (about 5) of small cap stocks. Remember, just because these two ETFs suggest broad small cap market gains you still must perform, or have a financial advisor perform analysis and research on the selection of the individual stocks. Do not just randomly choose and think you are properly invested because you are diversified. Diversification is not the only factor to be considered, you must have an investment strategy and research applied to every investment decision.

Be Aware Of the Dangers In Holding Exchange Traded Funds Long-Term

Many believe that ETFs are great investments to own long-term. However, most investors do not know the fact that some ETFs do not literally own what they are represented in their names or prospectus to own. This aspect of ETFs is a danger for investors in them and also dangerous to the economic climate. Some ETFs are actually more like derivatives, which sometimes the party that created the derivative or is on the opposite of your position/investment cannot honor its end of the bargain.

Using the Gold ETF, GLD, as an example if you own GLD you probably know that it is somewhat like owning gold, and there is a lot of people who think it is exactly the same as owning gold bullion. However, these two beliefs are false and there is a big difference. Only theoretically the GLD ETF Trust owns about 850 tons of gold, but in reality it does not own that much real gold. In fact, it does not own much real gold at all.

In the GLD Trust Prospectus of late 2004 we found it has no method of guaranteeing how much real gold it does own. Also, GLD ETF has no knowledge and no way of finding out that the gold that is held in trust for it, is actually there or not.

One possibility could be that the bank that should be holding their gold already has it leased out. Stated another way, banks could be playing the same game with the GLD trust gold that they do with your money. They hold your money on deposit, theoretically, but most of it they do not have for long and it is given out in loans.

Recently, there has been worries about the government confiscating gold. So what would happen if the 850 tons of gold GLD only theoretically owns (about $25 billion worth) suddenly disappears? It would certainly hurt investors in the GLD trust ETF, and probably have other economical effects.

GLD, has no way to legally confirm if the gold being kept by the custodian (which is the European bank HSBC) is actually in the their vault. Also, HSBC has the right to use other banks as "subcustodians" to hold some of the gold making it even harder for GLD to actually know what is being physically held. Taking it to extremes, these subcustodians actually can use other subcustodians of their own, meaning GLD has sub-subcustodians.

With the way GLD is set up, there are multitudes of legal barriers that prevent anyone from verifying if the gold is in the vault or leased out. Thus, GLD could very literally have actually no Gold at all on hand to actually back up the 850 tons of gold it claims to have.

The ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreements the Trustee may, only up to twice a year, visit the premises of the Custodian for the purpose of examining the Trust's gold and certain related records maintained by the Custodian (p. 37).

Following information is from the GLD prospectus:

The Trustee and auditor are not allowed to visit the Custodian “when no gold of the Trust is held in the Custodian's vault.” (p. 48). And this could occur when it is being held by subcustodians. Thus, the Trustee of GLD has a limited ability to determine what the Custodian is doing and no ability to determine what the subcustodians (at any level) are doing. “The Custodian is not responsible for the actions or inactions of subcustodians.” (p. 44) And the Trustee has no right to audit the gold or even any financial records about the gold of the subcustodians.

“In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust's gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian." (p.37). Furthermore, the Prospectus states that “because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may hold the Trust's gold, failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust.” (p. 12).

Current subcustodians appear to be one US bank: JP Morgan (which has $US93 trillion in derivative exposure), one Canadian Bank: The Bank of Nova Scotia, and four European banks: the custodian, The Bank of England, Deutsche Bank AG, and UBSAG.
All of these banks actively lease gold.

Another noteworthy factor to consider is that the GLD trust does not insure its gold. Stated in the Prospectus, only the Custodian is responsible for insurance and “shareholders can not be assured that the Custodian will maintain adequate insurance” (p. 11). Furthermore, “Custodian and the Trustee will not require any direct or indirect subcustodians to be insured or bonded” with respect to gold held by the subcustodians on behalf of the Trust (p. 11).

“Consequently, a loss may be suffered with respect to the Trust's gold which is not covered by insurance and for which no person is liable in damages” (p. 11). If subcustodians are used outside of the U.S., it may be difficult or impossible to seek legal remedy against the subcustodians (p. 12). This is significant because the Custodian's primary vault is in London. The subcustodians' vaults can be anywhere in the world. If the subcustodians fail to return any gold that they have to the HSBC, the major custodian, there is no contractual obligations that can be enforced.

According to many analysts the European banking system is going to experience problems for quite some time. It is this banking system that holds the gold in the GLD Trust. The Daily Telegraph reported several months ago that European banks may have to write off nearly ten times more than the U.S. banks. This is because they have lent aggressively to Emerging Europe, which has imploded and been even more aggressively involved in the subprime debacle than their U.S. counterparts. Furthermore, they have no printing press like the Federal Reserve to print trillions of Euros to exchange for the junk debt like the U.S.

GLD and in my opinion most ETFs are fine for short term trading. However, for holding long term positions, they could face a disaster with solvency and liquidity issues. And if one of the most well known ETFs, GLD, is organized in this manner described above, then as a long-term investor you should really look at the prospectus of any other ETF that you plan to hold for any substantial length of time.