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Ideology Versus Demagoguery Versus Politics…

This week, I will be back in Las Vegas for this year's rendition of socialism versus libertarianism. Billed as "The World's Largest Gathering of Free Minds", this year's meeting is expected to

This week, I will be back in Las Vegas for this year’s rendition of socialism versus libertarianism. Billed as “The World’s Largest Gathering of Free Minds”, this year’s meeting is expected to exceed full-capacity as preregistration has broken all previous records. We are excited to be a part of this meeting where strong-minded people come together to discuss politics and wealth management. It should be a lot of fun.

The backdrop to this year’s meeting is the unfolding debt-ceiling debacle ongoing in Washington, coupled with the apparent ‘verge of collapse’ of the European out-of-control debt issues that seem all but certain to include the bankruptcy of three or more European countries.

On this past Friday, we received the news that the country, as a whole, added an abysmal 18,000 new jobs to the workforce. Many people are finally beginning to realize that the failed economic policies of the current administration cannot be completely dumped on the previous administration. The old mantra that gets trotted out every time a social agenda fails, “We just need more money and more time.”, is getting stale. The country (and the world, for that matter) needs to quit relying on governmental social programs to solve our problems. We need government to get out of the way of the free market. Government needs to quit trying to keep failure from occurring. Government needs to quit being an enabling excuse for hard work and self-reliance. Hopefully, something other than another bail-out will happen in the US and the too-big-to-fail mantra will die a painful death.

A Contrarian Point of View…

So, you might think that I am a card-carrying member of the doom-and-gloom club. You would be wrong. I think there could be an incredible opportunity for all of us to make a huge profit in what might be the bull-market rally of a lifetime. Here is how I see this ‘could’ happen…

  • Companies have, over the last few years, become as lean and efficient as they have been in decades. This means that growth in top-line revenue could move disproportionately to the bottom-line, improving profits substantially. Investors love to bid up share prices for companies that improve bottom-line profitability.
  • These same companies are striving to get their employees to accomplish more by making them more productive. In many cases, this means increasing the use of and/or upgrading existing levels of technology. A technology fueled bull-market could be significant and have far-reaching positive impact on virtually every market segment.
  • Inflation could grow into a tsunami tidal wave that would force everything to move up in price… especially share prices. One of the first places to reflect inflationary growth could come from rising share prices. Inflation can be bad, of course. But, with higher inflation (something I am convinced the Fed and the US government wants to see happen in order to make paying off our mountain of debt much, much easier, as it means we can pay off old debt with inflated Dollars), there can be downsides for those companies that do not have pricing power. In a scenario of dramatically rising inflation, the more pricing power a company has, the more money will move to bottom-line profits and a commensurate increase in share price of stock in the company.
  • If the liberals (on both sides of the aisle) are thrown out of Congress and the Presidency in 2012, there could be massive repeals of over-reaching regulatory laws and rules. There might be some clear and permanent understanding of future healthcare costs. Companies would be encouraged to take on risk by hiring more employees again (which will fuel inflation) once these companies know how to gauge the level of diminished government intrusion.
  • Above is my ‘roadmap’ view of the market where I compare technical trends of more than a century of the market when viewed through the prism of the DJIA. You can see that every time the market broke out above its upper resistance level of a “Consolidation Range”, it has gone on to incredible new highs. We are nearing the point in the current Consolidation Range (which started in January of 2000) where the average duration of all previous Consolidations have ended. Could we be seeing an end to the current Consolidation Range in 2013 and witness the start of a multi-year (decade?) bull-market?

Indeed, I believe it is entirely possible, as unlikely as it may seem right now, that the Dow could crash UP, surging through the 14,000 level and on to 20,000 and higher within the next few (very few) years. I happen to believe that this can only occur if the liberal socialists (‘progressives’) of our government are thrown out of office. If you are a liberal, you may well believe it should be the other way around… regardless, I can certainly see a plausible scenario of a massive bull market in the not-too-distant future.
Now, let’s get back to reality for a minute and look at the next 90 days… I don’t trade on what the market ‘might’ do in a year or two or three. I tend to trade in much shorter time-frames where there is far less speculation. However, we are opening a new managed account portfolio as of August 1 of this year where we will have a third of the portfolio in long-term strategies and two-thirds in more short-term strategies. This will be a “Growth-and-Income” portfolio. More on this in future reports.

As you can see from the chart above, the forecast is indicating this coming week could be ugly, but it could also signal the bottom for a while. Starting next Monday (a week from tomorrow), the forecast indicates the possibility of a substantial rally. This is not the rally that I fanaticized above… but it could be a decent summer rally, nonetheless. I am doing a little buying this week but will likely be a much stronger buyer next week if this forecast holds. By the way… I do believe our fearless leaders in Washington will work out a plan to keep us (the US) from insolvency. I just hope that doesn’t mean we raise the debt ceiling without some significant cuts in spending. I would also like to see a lot of loopholes closed and a move toward a more reasonable flat tax for both individuals and corporations.

A Technical View

The Bull-to-Bear ratio (see below) is now Bullish with a 2.5-to-1 ratio in favor of the Bulls. This results in a Bull-to-Bear Rating of [ + 1 ] which is certainly not extremely Bullish, but it is quite a move up from previous weeks.

Investor Sentiment Forecast For the Upcoming Week

The Turner Investor Sentiment Forecast provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.

The Turner CrossOver Oscillator provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Index) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite Index) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite Index is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite Index from moving lower to moving higher. Market corrections become much more likely the Composite Index crosses the Short Sell Index from above the Short Sell Index to below the Short Sell Index. The market is represented by the green shaded area.The Turner CrossOver Oscillator Composite of Signals (black) line has jumped back above zero which is also a Bullish condition. The Short Sell (red) line is trending lower which is moving away from an over-sold condition, so this adds a little bearishness to the Oscillator, but not enough to move the forecast into a bearish condition.Have a great week in the market! Your off-to-Vegas-and-looking-forward-to-some-lively-debates portfolio manager.

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.