Following July’s IndyMac (IDMC) fiasco, the month closed out with two more banks — National Bank of Nevada and First Heritage Bank of Newport Beach, Calif., with a combined $4 billion asset value — going belly-up.
That makes eight banks so far. Yikes!
WHAT IF YOUR BANK IS THE NEXT ONE TO CLOSE?
Unlike IndyMac, where the FDIC stepped in to reimburse depositors (as the FDIC insures your deposits up to $100,000), the two most-recent banks to blow up were sold to Mutual of Omaha. As customers of the latter, their cash remains intact, while former IndyMac customers are dealing with the fact that at least a portion of their funds that were not insured by the FDIC might be lost forever.
Events like this should make us all wonder whether our money is safe. It’s a scary thought, I know. It’s a relief to know that the FDIC has you covered up to $100,000, but what if you, or someone you care about, have more than that at risk?
Even if you don’t have more than $100,000 in the bank, at least you’ll learn a few simple tricks that can save someone you know a fortune … or at least make you sound sharp at the next cocktail party. This could be a great way to make some friends (who will owe you some favors)!
IT’S TIME TO MAKE PROFITS WORTH PROTECTING
Based on the action of the CBOE Volatility Index (VIX), as well as numerous other indicators that I follow, the market is way oversold, and we will likely see an oversold rally in this market.
With the understanding that we’re talking about an intermediate-term rally within a long-term downtrend, NOW is the time to get bullish!
I recently noted that “We just might get one more fast sell-off here, but I wouldn’t be very bearish given how oversold we are.”
Well, we recently saw a big sell-off, right?
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But it was a sell-off on light volume. This indicates that instead of heavy selling, thus pressuring the prices down, the buyers just stood out of the way temporarily and let the sellers do their thing. So, the buyers didn’t exactly lose the battle. They just didn’t really show up for it.
Recently, I said this oversold market is “like a spring that’s very coiled, and the more coiled it becomes, the bigger the jump higher typically is.” Well I saw what I needed to see, and this is your confirmation.
THE MARKET MAY BE DOWN, BUT OVERALL, IT’S STILL UP
What’s really crazy is that the market is actually trading higher right under your noses! That’s right. It’s smoke-and-mirrors time! But we’re sitting backstage and we see what’s really happening.
This concept may be hard to grasp because of what you have been trained to think for ages. But the major indices that most people follow are just indicators. They don’t always accurately reflect what’s really happening in the stock market.
Since the low we just saw on July 15, 7% of stocks (net) on the NYSE have moved from sell signals to buy signals, and 6% (net) of Nasdaq (NASD) stocks have done the same. (When I say “net,” I mean if 10% of stocks moved to sell signals and 17% moved to buy signals, then 7% net moved to buy signals.)
Without getting into too much detail, I’ll make this very simple by painting a picture for you (OK, uploading a chart), and giving you the proof.
IT’S A CHALLENGING TIME TO BE BULLISH
One indicator that I follow, the Bullish Percent Index, does something that means the bulls have taken control for the time being. Don’t get mixed up here, please. It is called an “indicator,” but the reality is that it’s not an indication of what will probably happen.
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Unlike the popular major indices that people follow, like the Dow 30 (DJI), the BPI is an index that reflects what is happening, and right now it’s showing that bulls have taken control and stocks (unlike the Dow and Nasdaq) are moving higher.
Below is a three-year chart of the S&P 500 (SPX). The green arrows show times when this has happened in the past. Obviously the market rallied every time it happened; granted, some occasions more than others.
Now check out a chart from year 2000-’03 below. The green arrows also point to times when the magical indicator (BPI) signaled that the bulls had taken control.
I want you to focus on the two short-term rallies in 2000. These were only small rallies. In fact, the first one lasted two weeks and the second only a week and a half.
So, you might wonder if that would happen in the current market. It could. But you should understand the following key factor:
The market wasn’t nearly as oversold as it is today.
There is an enormous amount of cash sitting on the sidelines, and most of the institutions that are sellers have already sold. Unlike the two occasions noted above, the current signal from the BPI (showing that the bulls have taken control for the time being) came after the BPI showed extremely oversold readings.
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Again, this is a key factor. The market is considered to be oversold, and in low risk territory when less than 30% of stocks are on buy signals. We just got that reading, followed by the buy signal.
To put it in perspective, that’s what we saw at the green arrows circled in blue in September 2001, August 2002 and October 2002. So, I don’t think we’ll get a quick week-and-a-half blip like we did in the early stages of the sell-off in the year 2000. Those two small rallies occurred when 41% and 45% (respectively) of stocks on the NYSE were already flashing “buy” signals. The recent signal came after only 25% were showing buy signals.
More and more stocks are moving to buy signals. This means the latest trend is that more and more stocks are able to break through levels of recent resistance. This means that — at price points where sellers stepped in and forced prices lower in recent history — the sellers are either no longer there, or the buyers are so strong that they are pressuring stocks higher anyway.
So this is your signal if you want to play the intermediate-term rallies in what we still view as a long-term downtrend. If you have bearish positions, you should consider getting out of them or reducing bearish exposure. And if you want to make sure you maximize the profit potential without getting into the areas of the market that will likely fail, then you should sign up with my options trading service The Trend Rider!
Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, click here to read his bio.
