DON'T LISTEN TO THE TALKING HEADS
Watch the market!
by Clif Droke
April 9, 2007

I ran across an interesting article in the Financial Times on Wednesday.  It caught my eye because of the headline:  “Fund sells ahead of severe ‘correction’”.  Here’s what the article had to say:

 “A leading UK fund manager has sold off around half the equities in the portfolios he oversees in anticipation of an imminent and severe market correction.  Ken Murray, the founder and chief executive of Blue Planet Investment Management, has revealed he has offloaded equities and cut the gearing on the firm’s portfolios to zero in the belief a U.S. economic recession is set to wipe more than 20 percent from the value of global stock markets.

“Blue Planet, a specialist investor in the financial sector with $350m of assets under management, operated three of the four best performing financial funds in the UK last year, according to figures from Bloomberg.  Its Worldwide Financial fund was the best performing investment trust in the UK and the world over the last three years. 

“Mr. Murray warned the impending market correction was likely to be considerably more severe than either of the two most recent downturns that began in February just past and in April last year.”

As it turns out the above dire forecast was delivered across many mainstream media platforms in the past 24 hours so that everyone (meaning the average retail U.S. investor) has a chance to see it. 

If only it were that simple!  We could listen to the highly publicized proclamations of Warren Buffett, Jim Rogers, George Soros, Alan Greenspan, or the smart fund managers at Blue Planet and adjust our investment decisions accordingly.  But when have these guys ever been right on one of their highly publicized predictions?  Try never!  Even the few times guys like Buffett make accurate forecasts they’re usually a good 2-3 years too early in their assessments. 

Of course I don’t believe that any of the people I’ve just named are stupid.  They made their billions by being on top of the market before the average investor even had a clue what was coming.  But I don’t believe for a minute that these guys are in the habit of handing out free, valuable financial advice to the public.  And if they ever do condescend to hand out free advice publicly, you rest assured it is for the purpose of “head faking” the average retail investor. 

The only time you see dire forecasts such as the one published this week by Blue Planet is after the market has already experienced a spill or else a prolonged decline.  You’ll never see high profile firms handing out bear market warnings at or near a major top.  They cry “bear market” only after the bear has been firmly established and usually as it’s approaching its conclusion.

One of the reasons for the Feb. 27 “phantom” sell-off and subsequent scaring of the average investor, I’m convinced, was to allow the big money firms to pick up stocks on the pullback.  You can see in the volume figures that the public was unloading stocks at a ferocious rate in the wake of the late February decline and the smart money was clearly buying it back with both hands.  We’ve already seen two “9-to-1” upside volume days since then and that nearly always points to heavy insider buying followed (eventually) by another run up to higher levels.  I think it’s safe to assume that the recent Blue Planet warning falls under the category of gamesmanship and is designed to keep the public at bay while the insiders complete the process of absorbing the remaining overhead supply of shares on the market. 

Once the absorption of supply is complete, it will become apparent for all to see and the Blue Planet warning will have been long since forgotten. 

Along the lines of the insiders vs. outsiders, it always pays to keep an eye on the NYSE Composite Index.  This is the index the smart money uses and as of today (Wednesday, April 4) the NYSE has all but recovered its losses since the late February correction.  This once again proves the old adage I conveyed to you immediately following the Feb. 27 sell-off, namely, that event-driven panics are always recovered within a relatively short time.  This already has held true for the China stock market and it now holds true for the U.S. as measured by the NYSE Composite.

Another thing worth mentioning is the iShares Emerging Markets Trust (EEM) which I also mentioned shortly after the late February decline.  We talked about the EEM showing a positive divergence (i.e., higher lows) in March while the S&P 500 (SPX) made a lower low.  This positive divergence in EEM told us two things:  1. the correction in the SPX would soon reverse since EEM has been a reliable leading indicator for the SPX; and 2. the world economy is still expanding contrary to the doomsayers. 

Another good proxy for global economic expansion are the stocks of shippers and ship building firms.  To get an idea of how well the shippers have been doing of late, check out the symbols of the following stocks.  Keep in mind these aren’t necessarily formal recommendations but just references:  TNT, ALEX, SFL, and ISH.  The bottom line is, as goes shipping, so goes the global economy.   

This means it will pay to keep a watchful eye on the shipping stocks in the months ahead for the *real* pulse of global economic strength or weakness, and take what the talking heads are saying with a 10 lb. rock of salt.

Clif Droke is editor of the 3-times weekly Momentum Strategies Report which covers U.S. equities and forecasts individual stocks, short- and intermediate-term, using unique proprietary analytical methods and moving average analysis.  He is also the author of numerous books, including "Stock Trading with Moving Averages."  For more information visit www.clifdroke.com