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Trading Lessons

BP, Stock Market Trends and Quantitive Easing

Stock-Markets / Investing 2009 Mar 27, 2009 - 05:02 PM GMT

By: Christopher_Quigley

Stock-Markets Best Financial Markets Analysis ArticleFor those wondering why the stock market has exploded they might be interested in studying the chart below. This sets out clearly the proposition that the market has a long term correlation to currency in circulation (CinC). With the "Quantative Easing" policy now firmly in place it is quite possible that the "old heads" about the market know of this relationship. Thus regardless of fundamental issues they may sense the groundwork being laid for a technical recovery based on finance alone. Time will tell.


Chart of DJIA and Currency In Circulation 

The rally that began recently was long overdue as Stochastic, MACD and McClennan indices were all screaming "oversold". It is far too early to ascertain whether this rally has legs. With the earnings season now upon us it will be telling to see whether this positive trend can be successfully tested. If such is the case it would indicate that Mister Market is trying to earnestly find a bear base to sustain a change in trend. However, classic Dow theory tells us that "a trend is in place until otherwise proven." Thus this "rally" is a bear-counter-trend-move and investors should treat it as such. Therefore my advice for the last quarter prevails; this is a traders market not one for investors.

THEREFORE: Stocks should be chosen for their technical positions; hard sell stops should be used; once in a profitable position remain in it by raising your stop, therefore protecting gains; once you are stopped out do not re-enter until there is a significant pull-back that is supported.

I would champion this attitude to the market because the main indices have shown particular technical weakness. For example, this quarter, while the Dow 20 Transports successfully tested and held above the 2001, 2002 and 2003 lows, the Dow 30 Industrials shot below the 2003 support level, reaching an intra-day low of 6469. In my opinion, once this rally starts being tested, there could be a great deal of "whipsaw carnage" until a solid technical platform is secured. This has not occurred yet.

However there is one "fly in the ointment". My favorite QQQQ bellwether, Amazon, has recently shown fabulous strength. It has nearly doubled since late 2008. This could be the "canary in the mine shaft" indicating more investor confidence than otherwise reported. It remains to be seen if this sentiment can translate into broader market performance. Until this transpires keep your powder dry.

Should a market base develop, one area I would suggest looking at is the large real estate management arena. This area will explode, in a moment's notice, once a shred of evidence filters through that "Quantative Easing" and the "Toxic Bank" initiatives are working. It has been a long wait. Do not let the pain of the last year dull your pocket-book to the reality that all bear markets eventually die. The end to this bear will start with a significant rally that will be tested and supported and held. We might just experience such an event over the coming earnings season. Be aware, be alert, be prepared.

Stock Pick: BP

BP has put its house in order. Malfunctioning refineries in the United States have been repaired and are now running normally. Fourth-quarter volume rose nearly 8% sequentially, pointing to good momentum for 2009. The assumption is that profits will perk up again in 2010 on increased petroleum usage and a stronger economy.

Spending remains accelerated. Capital expenditures are currently slated to be 90% - 100% of 2008 high water mark.

This issue offers high income at current prices. The company is very strong financially, providing a level of assurance that the strong dividend will be maintained. This top quality equity also offers attractive total return potential going out to 1012-1014.

Return On Capital: 17.5 %
PE Ratio: 8.9
Financial Strength: A++
Dividend Yield: 9.8%

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley is 46 years of age and holds a Batchelor Degree in Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in San Francisco, California where he lived for 6 years. Now based in Dublin, Mr. Quigley actively trades utilising the principles set out in the modules above. This Wealthbuilder course has been developed over the last 9 years as a result of research, study, experience and successful application.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Chuck LeBeau
28 Mar 09, 12:49
Temporary buy signal

I enjoy your comments and analysis.

Regarding the market direction - the weekly charts of the Dow Industrials just gave a rare but noteworthy buy signal this week. I use a combination of the ADX and the Parabolic. Rules for this signal are: ADX must be above both DI lines and also above 35. The buy is triggered when the downward sloping Parabolic is penetrated to the up side. A discussion of this pattern can be found on my web site at www.traderclub.com. This is the same pattern that gave a nice buy signal in November 2002.

Your advice about using hard sell stop orders is very appropriate these days. I would refer you to for appropriate stop levels on US stocks. For example the current stop on BP should be at $39.16.

Chuck LeBeau


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