Since the 7% correction last month, stocks have shot higher coming close to highs for the year.  Consumer discretionary stocks have helped lead the charge higher with big gains recently in stocks like Macy’s (M), Brunswick Corp (BC) and Williams-Sonoma (WSM).

I’m a firm believer that the U.S. consumer will not, I repeat NOT, get back to previous levels.  It’s simply impossible.  Therefore, I’m very negative on these stocks like the ones mentioned above.  Nevertheless, these stocks have been on fire in recent days and weeks.

Maybe people are still buying crap because it seems nobody is paying their mortgage these days and banks are overwhelmed with the volume that millions of people are essentially living for free?  This allows these broke Americans to continue living the dream!  Even so, the numbers are not anywhere near where they used to be in terms of consumer spending.

I believe this rally will not be sustainable and eventually the reality will be evident that the consumer is not coming back.  Savings is in.  Paying off debt is in.  Spending and borrowing is no longer the path that all Americans are taking (although some still are).

Remember, stocks don’t reflect economic reality.  They reflect people’s perception of economic reality.  This perception may or may not be correct.  Invest with caution.

Disclosure: Short some of the stocks mentioned above.

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1838Comments (0)http://20smoney.com/2010/03/09/consumer-discretionary-stocks-skyrocketing/Consumer+Discretionary+Stocks+Skyrocketing2010-03-09+18%3A55%3A48Kevin

As of writing, we’re down over 150 points on the Dow today.  We’re getting some more exciting moves in the market.  This will make several days in a row of near 100 point moves or over 100 point moves.  While nothing can really be infered at this point, it is definitely more exciting for those of us who watch the market on a daily basis and definitely those of us who play the market on both the long and short side.

I tend to believe that the market has topped for the near term with the Dow topping out in the 10700 area earlier this year, but that could easily change.  There is a reckoning coming, but you can’t underestimate the ability to hold off that day by the powers that be.

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1778Comments (0)http://20smoney.com/2010/02/25/market-volatility-this-week/Market+Volatility+This+Week2010-02-25+16%3A06%3A09Kevin

A down 3% day in the S&P 500 Index serves as a painful reminder that we still have huge, huge challenges as an economy.  We’ve had several large moves lower in the past couple weeks which have had the impact of reminding people that this so-called recovery might be anything but.

If you haven’t heard, the government underreported job losses by close to a million units over the past year.  Basically, something like an additional 800,000 jobs were lost that we not reported.  For anyone who has been skeptical over government economic figures, this doesn’t surprise us.  For the others, it typically goes unnoticed.  Similarly, we report a great GDP number then revise it lower a month later when nobody cares anymore.  My point here is that you need to remain skeptical about the economy, the markets, everything.

As I’ve been saying for a long time, you should be taking defensive positions with regards to your finances.  Do not trust the recovery.  Do not trust the unemployment number that will come out tomorrow morning (Friday) – the number doesn’t factor in the people who are so demoralized that they don’t even look for work anymore!  The real unemployment is much higher.

I’m not here to make you sad, but I’d be doing you a disservice if I told you everything was great and you put your money into speculative recovery stocks and then got cleaned out.  I don’t know what the market is going to do tomorrow, next week or next month, but I do know that I won’t be surprised if it goes lower, much lower.

Gold

Gold got hammered today.  If you read my blog, you know I like gold.  I’ve also repeatedly said that any correction will impact commodities and gold.  It’s going to be very volatile and a bumpy ride, but I think its worth buying on dips (perhaps now).  I wouldn’t mind personally if it went back down to the $1000 level.

If you’re investing in gold, it needs to be for long term security, which means you should probably own physical gold.  The paper trading assets make me nervous.  Gold shouldn’t be traded.  It should be viewed more as insurance.

Tomorrow

Tomorrow morning we get the unemployment report which usually moves the market.  Most traders view the market in a down trend now, so I wouldn’t be surprised if the market opened higher than moved lower.  There have been many examples of “sell the news” in recent days.

Disclosure: I covered part of my short position in BC into the close today but am still holding significant short positions.

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1650Comments (0)http://20smoney.com/2010/02/04/back-to-reality/Back+To+Reality...2010-02-04+21%3A30%3A27Kevin

GDP results came in at 5.7% (this will be revised lower when nobody is paying attention just like last quarter), yet the market still couldn’t hang on to its 100+ gain (Dow).

The Dow closed down 53 points and ended the week at 10,067.  The S&P closed down 10 points to 1073.  The Nasdaq closed down 32 points to 2147.

Today saw a huge drop in one of the market leaders of 2009, Apple Inc. (AAPL).  This is a perfect example of how a stock can drop even when the company is clicking and hitting on all cylinders.  Remember, stocks are emotional vehicles.  Earlier this week, Apple reported a blow out quarter with massive growth in their earnings.  The company continues to dominate in many of its product divisions.  Then, we saw Apple debut its iPad (terrible name).  While many are quick to criticize the iPad, it is definitely an awesome product.  The $499 starting price was also a huge winner.  No matter, the stock has had its run it looks like.

Apple (AAPL) closed the day at $192.

I heard Jim Cramer tell his viewers on Mad Money last night “I don’t like this market” – his view is that people are looking for a reason to sell.  I actually agree with him, but I do like this market.  For me, it’s starting to make more sense, and I love being able to trade the short side and actually make money.

Shorts I’m holding over the weekend: SPG, BC, M, COF and a few others that I’ve been holding for months

I’m also eyeing Philip Morris Int’l (PM) as it drops.  Hoping it drops more so I can pick up some shares in the low 40’s.  Patience is key though.  We’ve had a giant move up, and just started correcting.

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1622Comments (0)http://20smoney.com/2010/01/29/telling-day-in-the-market/Telling+Day+In+The+Market2010-01-29+21%3A25%3A08Kevin

Finally some tailwinds to my shorting plays versus the headwinds of just about all of 2009.  After breaking north of 10,700 last week, the Dow Jones is now very close to the 10k mark.  Insignificant, but definitely a psychological level.

Good article over at Seeking Alpha about “shorting the double dip” says the following:

What to do? Short the obvious – a continuing fall in national income – start looking at logical shorts based on fundamentals and then check out technicals for the “when.” An important part of those fundamentals are balance sheets. As sales stay stagnant or continue to decline, debt service will increase – if debt can be re-financed – as rates rise. Who needs a boat? Short Brunswick (BC), decent balance sheet, not great. Who needs a high end motorcycle? Short Harley (HOG), totally wrecked balance sheet. Who needs more stuff? Short Macys (M), woeful balance sheet.

The author’s point on using technicals for the “when” is what I failed to do in 2009.  The technicals were bullish and are only now starting to become negative for many stocks.

I have attempted to short Brunswick and Macy’s both last year and this year.  I’m now finally adding to these shorts.

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1602Comments (0)http://20smoney.com/2010/01/28/market-going-lower-getting-easier-to-short/Market+Going+Lower%2C+Getting+Easier+To+Short2010-01-28+17%3A03%3A24Kevin

I like to think about the stock market and how it relates to investor psychology.  Specifically with market tops and market bottoms.  As we look back over the last 10 years, there is a debate over where the bear market, that we may or may not still be in, actually started.

When Did The Bear Market Begin?

There are two common answers to this question:

1. The bear market began in 2000 with the bust of the dot-com bubble
2. The bear market began in late 2007 / early 2008

Depending on which chart you look at, you can make a case for either.  The Nasdaq 10 year chart pictured below supports the idea that it began in 2000.  The S&P chart supports the latter argument since it reached its all time high in late 2007.

NASDAQ Chart

S&P Chart

If you price the market in gold, it tends to support the argument that the bear market began in 2000 since the market priced in gold peaked in 2000.  Since then, the market has been flat or down and gold is up significantly.

The problem with the gold argument is that when it comes to investor psychology, the market priced in gold does not tend to have an impact since the masses follow the nominal value of the market, not the market priced in gold.

Even still, I tend to believe that the bear market started in 2000 and still has years to go.  I will explain why.

Focusing On Psychology

First, let’s examine what market sentiment or market psychology is at the market top.  For the market top, let’s use the peak of the Nasdaq bubble in 2000.  Everybody wanted to get into stocks.  Taxi drivers were buying tech company IPOs.  For a similar scenario, think about the real estate bubble where EVERYONE wanted in.

Now, at least in theory, a bottom should be the opposite psychology, right?  The opposite would be the scenario where stocks are untouchable.  Nobody wants anything to do with them.  While, we got close to this mentality in March of 2009, it’s pretty clear that many people are still into stocks even if it’s significantly less than the top in 2000.

I believe that it takes multiple crashes, at least three, in order to achieve this “bottom” in market sentiment or psychology.  If we started in 2000, we’ve had two crashes, meaning we still need one more.

Why We Need Three Crashes (or more)

For decades, Americans were conditioned that we should all have a stake in the stock market.  Yes, our allocation to risky assets like stocks should diminish as we get older, but stocks are the way to go for the most part through life.  We were led to believe that stocks are a guaranteed return.  A good return.  Many believe 10% annually.  Only when we’re talking long-term, of course.  With such a consensus opinion among the American public, it takes repeated disappointment to shatter this view.

Let’s go back to the real estate example quickly.  If you take this concept about a market bottom and apply it to the real estate bust, it is obvious we still have several crashes to go to where the public views real estate as a terrible investment, dead money, an investment of last resort.  Even after the disastrous bust in the real estate market, you still have some people who believe now is a good time to buy.  Now is a good time to flip a property.  Clearly, the boom is still too recent in memory to where there are still buyers out there.  Again, not a real market bottom.

If this theory is correct, we should have at least one more significant crash in stocks in the next year or couple of years.  This crash coupled with the memory of the other previous stock market crashes will create such a sell-off where stocks would hit a real bottom.  A few marks of a potential real bottom might be:

• A Dow / Gold ratio at 1:1 or at least near 1:1 – Currently, we’re at approximately 9.35:1
• Very high dividend yields – Yields are much to low right now to signal a bottom
• Very low P/E ratios – a real market bottom will have depressed P/E ratios below historic norms

Potential Reasons Why It Might Not Play Out Like This

While my theory described in this article is a definite possibility, let’s talk about why this subsequent crash might not materialize.

The number one reason why this might not materialize is the U.S government.  You cannot underestimate the U.S. government and its ability and determination to prop up the economy including the stock market.  Their response since the crisis began in 2008 was to drop interest rates to zero creating a huge inflow of liquidity that has helped stock markets skyrocket from March 2009 lows.  The increase in stocks has allowed many companies to raise capital and avoid bankruptcy.

Be assured… the government will do whatever is necessary to prevent another crash especially in the near term.  Eventually, market forces will over power even the government, however, and a crash will be unavoidable.

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1437Comments (1)http://20smoney.com/2010/01/18/is-the-stock-market-bottom-still-to-come/Is+The+Stock+Market+Bottom+Still+To+Come%3F2010-01-18+09%3A02%3A27Kevin

This image is from David Rosenberg of Glusken+Sheff:

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1413Comments (0)http://20smoney.com/2010/01/07/amazing-image-why-this-is-not-a-new-bull-market/Amazing+Image%3A+Why+This+Is+Not+A+New+Bull+Market2010-01-07+16%3A05%3A28Kevin

The stock market was a wild ride in 2009.  We started the year with the continued “crisis” from 2008 and reached the ultimate lows in March.  Since then, however, it has been a skyrocketing missile upward.  The Nasdaq is up 80% from the lows and other major indices over 60%.  As we cross into 2010, it looks as if the trend will continue.

For me personally, I have 2 accounts with 2 different strategies and as a result, 2 very different outcomes this year.  My long term account is a long only account and therefore did very well this year.  My trading account, on the other hand, took a hit due to some incorrect bets on the short side; namely in commercial REITS such as Simon Property Group (SPG) and Vornado Realty (VNO).

The two biggest factors in 2009 were government intervention, namely zero interest rates, and the technical momentum of coming off a major low.  Both contributed to the fierce rally this year.  The biggest lesson I learned this year was that the stock market is not economic reality but instead is a perception of economic reality.  In my opinion, the economy has gotten weaker this year despite what you hear on TV, but that doesn’t necessarily matter, because others’ perceptions were different and were able to drive the market higher.

The question then becomes whether or not the economic reality as I see it will catch up with the market or will the market correct?  Will this happen in 2010 or can the government push this day of reckoning further into the future?  I’m no longer underestimating their ability to do this although there are some significant hurdles that Ben Bernanke and others will have to overcome.

A huge hurdle in 2010 will be the massive increase in debt that the U.S. will issue.  With quantitative easing supposedly ending in the spring, there will have to be an eleven-fold increase in buyers of U.S. debt.  Since that is an insanely large increase, there will most likely have to be a major raise in interest rates or another round of quantitative easing.  Both have major effects.  The former choking off economic recovery (especially in housing) and the latter causing gold to potentially spike on more dollar weakness.  Pick your poison.  I’m looking to position myself for both outcomes.

For the long only crowd, I wouldn’t be surprised to see a shift out of the sectors that had a huge run, like technology, and into more defensive, blue chip names with dividend yields.  For example, sell Amazon (AMZN) and buy Philip Morris Int’l (PM).  As investors may doubt the ability of the markets to continue reaching new highs, but not wanting to get out of the game completely, this might be a possible scenario.  I also like Verizon Communications (VZ).

Another potential obstacle for the market in 2010 is the continued issuance of equity by large banks. Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) recently combined to issue $70 billion in new equity.  That essentially takes $70 billion out of the current stock market.  That is a large number.  If losses continue, and they need to raise additional capital, new issuances will continue to be market headwinds.  With that said, I’m happy that the banks are able to raise private capital versus tapping the tax payer, but the dilution is real.

With the market making new highs, it is absolutely critical to limit the downside on deploying new money at current levels.  With the added risk of a mean correction, you need to identify stop loss targets on new money.  For a clear example of this, check out the recent trend I’ve identified in Exxon Mobile (XOM) and as a result, I have started a new position.

Moving forward,  I’m working on positioning myself in a more market neutral manner.  Long quality names with good yields, maybe even looking to increase the possible cash flow through the use of a covered call strategy.  If certain names that I got burned on shorting in 2009 change directions, I might be quick to jump back on the short side.

I’m continuing to look to add to positions with regards to the major trends that I’m following, specifically in high yield oil & gas plays and also gold & gold miners.  These are multi-year strategies; therefore, patience is important in order to wait for quality buying opportunities.

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1361Comments (3)http://20smoney.com/2010/01/06/what-i-learned-in-2009-outlook-for-2010/What+I+Learned+In+2009+%26+Outlook+For+20102010-01-06+08%3A10%3A16Kevin