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For every piece of data that comes out offering a glimmer of hope for the expansion, such as the recent ISM non-manufacturing index, investors are being bombarded with a slew of data of late that points to the recovery being quite weak. The latest piece to fit this bill was the employment report out last week, which not only was worse than expected, the numbers were worse than the previous month’s figures. While unemployment is often viewed as a lagging indicator (which is perhaps why the stock market shrugged off the latest reading), in the case of credit driven contractions such as we’ve experienced) it’s much more of a leading indicator. And the numbers behind the headline 9.8 percent jobless rate suggest we’re in for more pain in the months ahead.

As of last count, 5.4 million people have officially been out of work for more than half a year now. I say officially because if you include those who have simply given up looking for work, the unemployment rate would stand at 10.3 percent. The official rate is also skewed by the Bureau of Labor Statistics birth/death adjustment, which is essentially just a wild guess (not actual survey data) of the number of people who have joined newly formed businesses. Excluding this guess the unemployment rate jumps to 10.5 percent. And the numbers would be worse if many people hadn’t just given up and stopped looking for work. Those people who are still employed are working fewer hours. The average number of hours worked has fallen to just 33, the lowest reading in the 45 years this statistic has been tracked. Had hours worked remained constant throughout the recession, millions more jobs would have been lost. It follows then that companies are going to be slow to add new hires going forward as they will simply be able to use their existing staff more.

Perhaps the best measure of the employment situation is the measure which, in addition to the total unemployed, adds in marginally attached workers working part-time because they can’t get full-time work. This figure reached 17 percent last month. And if you factor in the other adjustments mention above this metric would top 20 percent. The labor market hasn’t been this weak since the Great Depression, and everything points to it only getting worse in the coming months. With millions laid off and millions more concerned they’ll either lose their job or see their pay cut in the next 12 months, it’s hard to envision a meaningful pick up in consumer spending this coming holiday season.

Corporations seem no more likely to ride to the economy’s rescue, judging by surveys of corporate spending plans and the trend in bank lending, which has contracted at an alarming rate in recent months. We should get a better feel on this score in the coming weeks: The third-quarter earnings season kicks off this week. Expectations are for another quarter of losses, but the consensus sees a resumption of growth in the fourth quarter, thanks in large part to soft year-over-year comparisons.

Forward guidance may set the tone for the stock market in the next several weeks every bit as much as actual results. More important than fundamentals, however, are the technicals, which have driven this rally from day one. After reaching a recovery high around 1080 on the S&P 500, stocks pulled back in the last two weeks only to bounce off of their 50-day moving average. I won’t rule out this kind of action continuing for a while longer, with stocks climbing even higher without a meaningful correction, but I can’t help but conclude that at some point market fundamentals will re-exert themselves. When they do, stocks will contract in a hurry.

Gold, meanwhile, just keeps looking better and better. Past rallies above $1,000 an ounce were promptly followed by sharp reversals. This time around we had only a very modest pullback before buyers came back into the market. And while a correction could still occur, the metal has moved to a record high, opening the way for much greater gains in the coming months.

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One investing strategy that is often ignored is momentum investing. It is a strategy that can make huge percentage point gains and has been proven to work in the past.

So, what is it? Unlike conventional investing where the goal is to buy low and sell high momentum investing is the process of buying high and selling higher. Instead of trying to find undervalued stocks in the stock market it attempts to find stocks that are continuously making new highs and get into them assuming that the trend is likely to continue.

I have personally seen how powerful this can be. A stock that is trending up and making higher highs will likely keep trending up and keep making new highs for a long time. It is not unheard of for a stock which has just doubled in price last year to double again the next year.

Of course this does have two sides to it. If a stock has moved up so much there is a lot of room for it to fall. A $300 stock can fall a lot further then a $5 stock after all.

Because of this it can be a good idea to actively manage every trade. Instead of waiting in a stock for the highs and lows, selling at the first sign of weakness and attempting to hold onto it only as it continues to go up can have impressive results.

While momentum investing is not for everyone here are some free stock tips to help you make the most of it.

1. Develop a System

If you are trading the market you can no longer just buy a random stock and hope that everything turns out all right in the end. Instead creating a system which has exact entry and exit point is the only way to get any consistency in your trading results.

2. Cut Losses

If a stock you buy goes down, that means that you where wrong. There is no need to let the stock fall down 50% or more before you decide it was a bad trade. Instead getting out at the first sign of weakness allows you to save your money and keep any profits you do have.

3. Control Your Emotions

Emotions will sometimes get the better of you when trading. in the stock market. There were many times when I was up 20% on a position and I just want to get out of the trade, at least I know I have made money after all.

But more often than not going with your “gut” will lead you to large losses. That is another reason why it is important to develop your own trading rules. If you have specific guideline to follow when entering or exiting a trade it will help save you from making a bad, spur of the moment decision that you would later regret.

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The forex market can be a scary place for new traders. This is because many new traders find themselves getting in too deep before they even know it. What I mean by this is that they begin to think that they are beginning to understand how the market works after only a month. Due to this, they begin to trade on a live account with real money, and they may make some money, but will ultimately end up losing a lot of it.

If you’re just getting into the forex market than you should know that there is a good way to avoid this. The way to avoid this is to give yourself the mindset that you’re going to be in forex for the long run. Tell yourself that in two years time, you will trading forex full time for a full time income. With this type of attitude, you spend more time learning the market on a demo account, and even more importantly, you spend more time studying different trading strategies.

It is not fun to be the 95% of traders who quit the forex market after less than a year. They do this because they go into the market expecting to learn it all in only a matter of months, but it just does not happen that way. Instead they go through a process that looks something like this. They begin trading with a demo account and love the fascination of trading. After about a month they open up a real account and deposit some money and begin trading trading that. They Then lose all of the money in the account (usually not very much) and begin to try to better understand the fore market. Then they put more money into a forex account and lose that, which leads them to tell themself that they are going to trade a demo account until they are 100% sure they are good enough to profit. Then about month later they deposit some more money in their account, lose half of that, and then get discouraged and never trade again. This whole process usually takes about 4-6 months to go through.

This process is now beginning to change though with the introduction of forex robots. These new software programs are designed to allow traders to profit from the forex market without them even having to trade. A forex robot actually enters and exits trades in the forex market automatically for you. This has allowed many new traders the opportunity to profit from forex every day without having to do much of anything. There are a good bit of articles over on ezinearticles that give a more in depth view of some of these programs, such as the article, the best forex trader software. There are also some other good ones like the best forex robot in the world and the best forex robot ever.

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Wild Times in Markets

But the gain over that time , which began when markets reached their nadir in March, was not enough to neutralize the losses recorded in the recent six months. Not since 1932 had the market suffered a half-year time as bad as that one.

Investors clearly found it difficult to determine whether the Great Recession would turn into Great Depression II.

Amazingly, nevertheless , the American stock market was one of the least inconstant markets in the world in the last year. It was among the best stocks when it was plunging, and among the worst when it was increasing . Over all, it ranked near the bottom among international markets.

Whatever else you might want to say about the virtues of international diversification, in this cycle it has done little to balance the risks of investing in any one market. When the markets broke , they nearly all went down. When the markets increased , they soared together.

If history is a guide , the strong upturn may be an indication that better prices are still ahead. Since World War II, there have been eight periods before the current market when the S.& P. 500 managed to soar at least 30 percent over a half-year period — in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them.

The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock costs .

Before that, the record was less impressive. Increasing costs in 1929 presaged the Great Depression, and a sharp rebound in 1930 proved to be a suckers’ rally. But big gains in 1932-33 and 1935 were followed by additional gains . Prices were little changed a year after large gains in 1938 and 1943.

The accompanying graphic demonstrates the truth of an old proverb : If you lose 50 percent of your money, and then profit 50 percent, you have not come close to going down even.

Italy offers one of the best examples of that. Over the six-month period finishing on Wednesday, the FTSE/MIB index of Italian stocks rose 81 percent in euros. With the euro also strong against the dollar during that time , the Italian index more than doubled, rising 109 percent from the perspective of a dollar-based investor .

But an sponsor who put money in the Italian stock market exactly one year before, on Sept. 9, 2008, suffered a decrease of 55 percent in euros, or 60 percent in dollars, during the next six months. The Italian market, like the American market, hit break on March 9 of this year.

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James Grant penned a commentary in the weekend edition of the Wall Street Journal (September 19, 2009). James is always worth reading (Grant’s Interest Rate Observer). He has been a moderately bearish commentator for as long as I have been reading his work (10 years), most often in Barron’s articles. He has bemoaned the high consumer and national debt and the very low (even negative) personal savings rate in America. For this, he has called for a weak dollar and higher interest rates for the past decade.

That he flys in the face of his brethren bears is of no small consequence to me. Normally James Grant’s perspective is closely aligned with so-called other “bond vigilantes” like Bill Gross at PIMCO and perma-bears like Bill Fleckenstein or Peter Schiff. Those other dollar sellers / interest rate watchers are still looking for a flat to declining economy and dollar and moribund economy. Grant really is making a departure from his club here, which is good because it is contrary.

He was early to call the stock market decline, as far back as 2005. But this is news: now he sees it is time to become Bullish, if for the all the wrong reasons in his view. James Grant is leaving the Bear camp (maybe six months late). Here is an excerpt from his article.

Though we can’t see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter.
The Great Recession destroyed confidence as much as it did jobs and wealth. Here was a slump out of central casting. From the peak, inflation-adjusted gross domestic product has fallen by 3.9%. The meek and mild downturns of 1990-91 and 2001 (each, coincidentally, just eight months long, hardly worth the bother), brought losses to the real GDP of just 1.4% and 0.3%, respectively. The recession that sunk its hooks into the U.S. economy in the fourth quarter of 2007 has set unwanted records in such vital statistical categories as manufacturing and trade inventories (the steepest decline since 1949), capacity utilization (lowest since at least 1967) and industrial production (sharpest fall since 1946)……

…..By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. “Reflexivity” is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today’s bull markets are helping to revive it.

I promised to be bullish , and I am (for once)—bullish on the prospects for unscripted strength in business activity. So, too, is the Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute’s long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 —after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion. Which is not to say, he cautions, that growth this time will match that pace, only that growth is likely to surprise by its strength, not weakness.

And that is my case, too. The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects. Pigou had humanity’s number. The “error of pessimism” is born the size of a full-grown man—the size of the average adult economist, for example.

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Doug Kass recently predicted the S&P500 stock index will finish the year at 920. It is currently right at 1000 (on September 2, 2009). I agree with the prediction of 920 sometime in the next couple of months. I think 900 may be possible and even lower to 875 based on the bottom set in July. But unlike Kass, I think the market will rebound by year end. I will wait for signs of a possible rebound once this current drop (begun last week) is further along. The signs of the bottom to this dip will be a stall in the decline just as the recent market top was shown by a stall or resistance around 1040. The rebound will happen when the market goes up on bad news. I think that may happen during the Q3 earnings season the middle of October into early November. I am still thinking that 1200 is a possibility by year end. This would completely retrace the panic selloff starting from the Lehman collapse on September 15, 2008. So, if we wait until 900 to redeploy our cash raised the past few weeks, that could provide a nice 33% finish to the year.

Where Kass is probably wrong, along with many others on Wall Street, is that there are just too many people with a bearish market view. There is virtually no one on the financial networks (CNBC, Fox Biz, etc) today saying that the selling should be ignored and the market will go much higher. There are just no Bulls as far as I can tell. The market always confounds the consensus position. It has to in order to work. If there are a majority of bears, then by definition, there is hardly anyone left to sell. Once all of us who had our finger on the trigger, pull the trigger, there isn’t anyone left to sell. So, I think the decline will be shallow and the market will rebound in 6-8 weeks. This can’t be like the panic last year because all the retail investors that bailed out in the fall and winter are still on the sidelines. People who sold everything in January and February never got back in.

There are a lot of factors to a panic that are missing right now (as they usually are, fortunately). To get a true financial panic, first everyone must be euphoric and unaware of or discounting trouble. Then when the decline starts because the market just can’t go any higher (everyone who is going to buy has bought), investment holders must be forced to sell at any price by margin calls or other financial misfortune. Last year, there was a cascading of events that are no longer in play. Most importantly, the leveraged, collateralized securitization market, the core of the trouble, is almost completely unwound (except CMBS, which is where there is still concern). The leverage in 2007-08 was in the carry trade, which is what caused the dollar to soar and interest rates to drop when foreign currencies were sold and dollars bought to cover margin calls. The securitized loans are mostly back inside the big banks now with backing by government guarantees or in private hands where they have been de-levered which allows them to be held to maturity, if needed. So, there are no large institutions needing to dump stock or other financial instruments into an illiquid market to raise money to stay afloat. That is a big and significant change.

On the way down, I am using portfolio hedges to protect my positions. I like the SP500 Double Inverse fund by Proshares, with ticker SDS.

I like this ETF because it is a double short of the SP500, which is a pretty basic / broad index of the market and includes all the big financials, techs and energy companies. I also hold another hedge, hte Proshares product called DUG. DUG is basically the double inverse of the energy market, something like IYE but with a little Materials exposure too.

I use it to hedge all my Materials and Energy exposure, although I also use covered calls for this on stocks like Suncor that have good premiums. I also have used covered call options on the Canroys, but the premiums are not very good because of the large dividends. It is just an alternative to outright selling them.

Even though it has become popular, I don’t do those Direxion 3X ETFs. They are just too wild for my taste. Even the doubles are a little scary and I am careful to keep my exposure balanced with opposite long positions. I don’t bet naked short, even now when I am pretty convinced the market is going lower. The market always goes up in the long run, so being short should be very tactical and short term. I don’t want to get caught on the wrong side of that trade.

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