Many people focus on GDP and the absolute level and then they try to buy or sell stocks based on that.  It’s not about if GDP is positive or negative, it’s about the rate of change.  Today’s GDP (QoQ annualized) was reported at a -1.0%.  The estimates were for -1.5%.  The average investor will look at these numbers and say how horrible, our economy is still contracting. 

But, let’s look at this further.  Below is a picture going back 10 years with GDP QoQ annualized (red) and the S&P 500 (blue).  You can see that instead of asking if the economy is growing or not, the question should be is the rate of change of GDP improving or not.  That’s what making money in the stock market is all about.

The fact that unemployment is still rising, foreclosures are still rising, consumers still aren’t spending, and banks still aren’t lending doesn’t correlate with the price of stocks.  There are so many other factors.  One of those is how fast the economy is improving or contracting.  In the fall of 2008, the economy was contracting at a rapid rate.  GDP was contracting at a rate of over 6% (annualized).  Today’s report of -1% shows that while still a bad economy, it’s improving.  You can see from the chart above, that’s what the stock market has been discounting.

The next question is whether or not that red line continues to rise.  I think GDP will actually continue higher and we’ll get a positive reading over the next few months (perhaps over 2%).  That leaves the S&P will plenty more room on the upside.  Obviously it won’t be a straight line.  But, I think we’ll work our way higher the remainder of the year.

As for today, this number could be a buy the rumor, sell the news event.  In addition, there were some disappointing pieces of economic data.  Personal consumption was much lower than anticipated.  Mixed data may give the bulls some pause today, but ultimately all of these numbers will continue to improve over the next few months.

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I’ll be filling in for Daniel Frishberg today on the Biz Radio Network from 4-5 p.m. CST.  www.bizradio.com

I’ve had a few phone calls on my radio show the last couple of days asking if UNG is still the best way to play natural gas.  And some have said there have been articles written about the fact that natural gas doesn’t correlate to UNG (the ETF for the commodity).  Below, I’ve shown a picture of the natural gas and UNG year to date.  You can see they are off a couple of percent but overall they are extremely correlated.

Then there’s the question on whether or not you should buy it.  I still own it but I’m using it as a pairs trade with oil (short oil, long natural gas).  At the present time, I’ve covered my oil short and locked in profits and I just remain long natural gas.  But, I believe I’ll be re-entering the oil short at some point.

If you can’t watch natural gas on a daily basis, then this fund isn’t for you.  We know the CFTC is discussing many options with various contract limitations, etc.  That will add volatility but overall if nat gas goes up, I still prefer to own UNG.

Another option for those that like natural gas but are worried about the mechanics of UNG, you can buy FSNGX, which is a Fidelity fund that is a basked of natural gas companies.  It’s a managed fund and will get you long that sector.

[youtube=http://www.youtube.com/watch?v=ZGRIDfzG2po]

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It’s amazing how the market continues to battle back from a low opening and finish higher.  Given that, we’re in a range for the last few days between 970 & 980 on the S&P 500.  The bears would say we’re having trouble getting through 980.  The bulls would say it just won’t go down and it’s only a matter of time before we go to new highs.  I have to lean on the side of the bulls in the sense that the longer the sell off that should happen doesn’t, we’ll probably move higher.

The way to play this market right now is to continue averaging into various positions and don’t buy the full amount that you want to ultimately have.  Using time stops is the strategy that I’m going with.  Here’s the way it works.  You have cash on the sidelines you’d like to get invested.  You can either wait for a pullback which is still very likely and invest a lot at that time or average in as time moves along.  I would recommend both.  Continue to average in positions the look like they will move higher over time.  In addition, I will become a more aggressive buyer on pullbacks in securities that appear to just be falling because of profit taking.

The areas I’m focusing on right now are still technology, emerging markets, & commodities.  I think this is a fundamental story and technically they aren’t bad either.  Now, with all of this said, we’re still overbought.  That hasn’t changed.  All of the various indicators I watch are at the top end which leads me to believe a pullback is coming.  But, just like the selling was persistent in the fall, the opposite is true right now.  Any fall in share prices is being met with new money.

I know a lot of pros that are simply waiting for a pullback.  So, you’re not seeing aggressive selling.  You’re just seeing a pause in the buying.  But, if we continue to move higher, the pressure to get invested will spread and the volume will pick up.

Sorry for the short report but I’m off to the airport.  Look for me on Fox Business tomorrow morning at 8:10 & 8:30 a.m. CST.

As the rally from March 9th progressed, it became more selective, the volume declined, and more doubt about the economy came in.  We saw a flattening out of the indices in early May that lasted until just recently.  In June, I took a lot of profits on positions and prepared for a sell off.  We got the sell off.  Most of the indices went down about 10% and many stocks much more.  The risks of owning stocks rose dramatically.  I didn’t want to give back the gains I had for 2009.  Principal protection was key.

I coined a phrase called the gap trade whereby the fundamentals would continue to get better and the prices of stocks would fall creating a gap that we could profit from.  What I didn’t know was how wide that gap would get.  Well, the gap trade happened sooner than I thought and the past two weeks have made many of my indicators change.  Folks have realized the economy is improving and are now buying stocks and becoming more and more reluctant to sell.

Not only have we gone back to the top of the range since May, but we’ve broken through it.  In addition, the most important part of the rally has been the fact that now there is more and more participation (breadth).  In other words, more stocks and more sectors are participating.  In addition, sellers are nowhere in sight.  This is a change in character from what we saw just two weeks ago.  It’s quite an amazing change.  It’s true the volume has been extremely weak but it’s been that way for most of the rally.  Now, don’t get me wrong, the internal conditions are far from ideal and in fact there have been very few rallies the last several years with internals this weak.  However, the key to this is that the internals are improving (not ideal) and the risks of owning stocks is now falling.  As fast as the market was deteriorating it has changed course and is improving.

Given the above improvement and change in character of the market, that doesn’t mean we run out and buy a ton of stocks, ETFs, & mutual funds.  In the very short-term, we’re now very extended any way you measure it.  So, I’m expecting a very short-term pullback but it’s quite impressive on a day like today when big bellweather stocks like Microsoft, Amazon, & American Express disappoint and get beaten up that the Dow comes back from down 70 to finish up 24 on the day.  When a market doesn’t sell off when it’s supposed to, you have to pay attention.

I always write that in this environment, you have to stay flexible.  This is one of those times.  If you’re a perma bear or a perma bull, your results are poor this year.  If you’ve been flexible and willing to trade as I’ve suggested, you’ve made good money (including bonds).  Many people were caught off guard for this rally in the last two weeks.  I wrote that I expected a rally a couple of weeks ago.  “Many of the indicators I watch are getting to the point where we should (key word should) have a rally over the next few days.  We’ve now had almost a 10% correction and the bulls will come in and start buying some “bargains””. What I didn’t anticipate was the strength and the improvement in the technicals.

I also wrote, “Many people keep asking me to give them levels on the indices.  How far can we fall from here?  As I mentioned on my radio show yesterday, I simply lighten up on stocks when the risks rise and I increase my allocation to stocks when the risks fall.  Right now, the demand for stocks has fallen while supply has picked up and the risks are rising to hold stocks.  That certainly doesn’t mean we can’t rally from here.  It simply means I won’t participate until the risks go down.  It’s that simple.” Well folks, the risks rose considerably in early July.  But, looking out over the next several weeks and months, I think the risks are now falling.  As I’ve said, the short-term may be dicey, but I believe we’re in the buy the dip mode.  Use some skill to trade these markets but widen out your stops.  In other words, instead of using a 10 or 20-day moving average for example, use a 50-day moving average if that’s one of the ways you use stop losses.  Begin to focus on the economy more and the day to day volatility less.  It’s turned into that kind of market.

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[youtube=http://www.youtube.com/watch?v=7GxkZBwrV-Q]

[youtube=http://www.youtube.com/watch?v=c7SMqwan15o]

I’ll be on Fox Business this morning at 8:10 & 8:30 a.m. CST

http://www.cnbc.com/id/15840232?video=1190683259&play=1

http://www.cnbc.com/id/15840232?video=1190687625&play=1

Since March 9th, markets have rallied substantially and many people have been left behind.  There’s been everything wrong with this rally, except oh yeah, it’s made us a good chunk of money.  There are plenty of investors that are still down on the year because they owned too many stocks in the first two months of the year and never participated in the rally.  Since March 9th, I’ve heard so many people say they will buy the dip or buy when it gets to Dow XXXX.  That attitude is what’s fueling the rally.  I’ve said it on television several times in the past few weeks.  Good stock markets don’t let you in.  That appears to be what’s happening right now.  The more people doubt a rally and complain about it, the more people there are there are yet to be converted.  If those people are complaining about it, then they aren’t in. 

We’ve talked about the “Gap Trade” for several weeks.  That was the name I gave the opportunity that was ahead of us.  It was fundamentals improving and the technicals languishing behind creating a gap that we could eventually profit from.  The one thing we didn’t know was how wide the gap was going to get.  Perhaps we got our answer.  We had a 10% correction coming into earnings season and earnings haven’t disappointed.  Therefore, stocks have rebounded.  Now, the rally hasn’t been perfect.  The internals have stunk for most of the time.  But, not all of them.  And, to be honest, it hasn’t mattered.  This may be a situation where there is an adjustment going on where investors are realizing some of the risks from months past are gone and stocks deserve a higher price.  That adjustment sometimes doesn’t show up in ideal technicals all the time.  So, how do we play it?

As you know, we’ve made good money this year and when the market was rolling over, we didn’t want to take anything for granted.  Therefore, we protected profits, built some short positions, and built a lot of cash, in addition to keeping some long positions.  The risks rose and we took cover.  Now, the rally may be resuming.  But, because the internals of the market aren’t the greatest, we have to proceed with caution and gradually get more long at strategic times.  In addition, this is where pairs trades comes in handy.  You can short weak areas and go long strong areas to give yourself more exposure without over committing.  It’s possible the stock market could continue to drift up another 10%.  But, given that the Nasdaq is up 9 straight days, I would expect a pullback soon.  If it’s a weak pullback, that will be the time to get more allocated.

I would say the market isn’t climbing the wall of worry so much as it is the wall of doubt.  Any way you slice it, the market is being very persistant.

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