Principles 100109

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET A learning, teaching, always evolving stock market letter and advisory service Nineteenth Consecutive Year of Publication; Letter #1; September 18th, 1990 Post Office Box 1236 • New Paltz, New York 12561 - U.S. A. • (845) 255-6894 E-mail address: [email protected] Subscription • One-Year Morning E-Mail Delivery • $150.00 Thursday, October 1st, 2009: Wowy-zowey! The New York sports teams, minus the snake bit NY Mets, are really on a roll. The Yankees looking like the swaggering Bronx Bombers of old, winning their 39th pennant and heading to the playoffs and hopefully the World Series. And the ‘New York football’ Giants and their younger brethren, the New York Jets, with a new quarterback of their own, both at 3-0! Yikes! UPDATE ON THE STOCK MARKET. Wow! Markets can move incredibly rapidly, down even more so than up. We mustn’t forget that. Yesterday we got a tiny glimpse of such when the 9:45 am September Chicago Purchasing Manager’s Index came in at 46.1, shocking the large “economic recovery” crowd, and below the consensus of 52.0 and also below the 50 figure for August which represents the demarcation line between economic expansion and contraction. After opening higher the stock market quickly dropped about -130 Dow points in just a few minutes. Showing me I’m correct that if the economic recovery which everyone is planning and betting on doesn’t occur, watch out below! It then will be too late to get out gracefully. Still, most believe yesterday’s PMI drop was just a blip. So, of course, the stock market came right back after the bears had their brief moment feeling gratified. It was extremely brief as by 10:30 am, adamant bulls and reluctant bulls, more aptly, pressurized bears, who have been sweating while waiting for any type of weakness, started buying. And after steadily rising, the Dow hit positive territory at 1 pm. It was only after the bulls ran with the ball until about 3 pm that the bears gathered enough strength to stop this march up field, if only temporarily. John Crudele, in his TAKING STOCK column in The New York Post this morning says yesterday’s bounce back rally was “because it was the end of the quarter and professional money managers wanted to report every cent of their impressive gain to clients.” Whatever, the recent increased volatility subsequent to stocks hitting a peak a week ago continued indicating a market pulled and pushed by opposing forces but with the bulls still slightly in command, at least yesterday. Schwartz View: Looking around to other hemispheric markets which trade in the same time zone, meaning Brazil, Chile, Argentina, they hardly missed a beat. Either these emerging markets have totally bought into the ‘decoupling now’ theory, that they can go up even if their big brother neighbor has trouble, or they are part of the now dominant one big economic recovery trade, which has caused hand over fist buying. Again, let me emphasize once again, this is one big bubble expanding further and further as I see it. Today’s bullishness is based on the recession being over and economic recovery on the way. Unhappily for me, because I’m on the outside looking in, I just can’t see it that way. No matter how hard I look. Oh, before I forget, let me also point out, that this new bubble is being inflated even more by today’s money managers being in a competitive, dog-eat-dog world. Either you buy stocks now or you find a new job. ROBERT PRECHTER, JR. & ELLIOTT WAVE UPDATE. After turning bullish and calling the start of this rally almost perfectly, Elliott Wave guru Bob Prechter pulled back, turned bearish once more, on August 10th if I recall the date exactly. So he’s looked silly since. Still, as I suggested all my readers do, I’ve been closely tracking him closely since then and his thinking anyway because I buy into his Big Picture story. Besides reading the squiggles on the charts using Elliott wave tenets and incorporating Fibonacci numbers, Mr. Prechter keeps stressing two other points. First, that the news we read doesn’t drive the stock market, at least over a period of time. Instead, good news is prevalent at market tops and bad news is overwhelming at market bottoms. Which flies against a lot of what I’ve learned over the years. I can piece it all together by using different times frames. Second is that widespread societal mood changes are what creates bull and bear markets. For example, he believes that America has moved into a depression mentality, everyone now is saving, not wanting to spend, only buying value, etc., and this means we are in a depression which actually began back at the stock market peak in 2000, only it’s been disguised by all the money thrown at it, the incredible amount of credit creation which led to the housing and commodity bubbles. This downtrend with interposed rallies will continue for another few years. Hm. BULLISHNESS REIGNS. The Principle of Crowd Psychology. Continuing assessing the pulse of

Wall Street and larger America, I watched Jordan Kotick, technical analyst at Barclays Capital, who reads the charts late in the day on CNBC, say yesterday that October, contrary to its bad reputation, has been a good month since 1950 so he interprets that as a good sign for this October (OMG, that’s today!) But I take the opposite view, that seasonal, historic averages are built during bull markets which rule the majority of the time so this year throw those histories out. Like the seasonal ‘Sell in May & Go Away” didn’t hold, neither did September being the worst month of the year. Instead, as I wrote about a few days back, I’m worried about complacency ruling this month in October partially because September was up. Secondly, he showed a chart how Russia and Saudi Arabia, normally correlated with the price of oil, have recently diverged from that correlation and extrapolates that as bullish behavior since they are now moving with the general global stock market trend. Again I interpret this divergence differently, bearishly. I see is as a sign of Danger Danger, the recurrence of the blindered mania, that stocks only go up. (Of course I readily admit there can be as many interpretations as there are opinions on where stocks go next.) We’ll soon see who’s right. CLEAN, GREEN UPDATE. THE NEXT BIG

THING IS HERE & WORKING WELL!

Starting back in December 2006, I started writing about the next BIG THING. And have updated it for you continuously ever since. Happily I started on this theme right before the 2007 boom in solar stocks. Since I eat my own cooking, so to speak, I was able to capture some doubles and more in companies like First Solar (FSLR), Suntech Power (STP) and a couple others. Hope you were too. That solar boom is over, for the moment -- a good time to nibble, with today’s oversupply of solar but other subsectors of the greater clean green energy universe are now having their day in the sun (pun intended). “Smart grid” stocks, those that help reduce, measure and regulate power usage have recently been hot and I’ve long recommended EnerNOC (ENOC) and Comverge (COMV). Disclaimer! I own small portions of both but can and do change positions without notice. And that’s even before America really starts to modernize our national power grid. Wind and natural gas stocks have been doing well now as have battery and other storage technology after General Motors threw out that figure of over 200 miles per gallon coming with their Chevy Volt. I did publish a decently all-encompassing list back on June 6th, 2008, right in the midst of the 17-month downtrend and asked you to “print, keep handy and archive” it for future use. Last Wednesday, I listed a few additional technology companies which have one foot in clean green and before that, on September 18th, I posted a winnowed down list of my December 2006 list of about 80 clean green companies outperforming for possible near term trades. And of course a couple times recently I’ve again recommended that new clean green global mutual fund that Steve Leuthold and crew are now offering, which I recommended to you just back in July, that’s Leuthold Clean Green Tech (symbol LGCTX). I CONTINUE TO BELIEVE THIS IS SHOULD BE #1 THEME FOR LONG TERM INVESTORS and thus let me pound the table again today (even though it’s not Friday when I’ve gotten in the habit of giving you YOUR CLEAN GREEN WEEKEND UPDATE; I’m a man of routine my friends say.). Just want to point out that holding a bunch of clean green stocks is still working well. What I’m finding is that some good news item seems to pop every few days about one of the stocks in my own IRA portfolio, almost totally composed of small lots of lots of clean green companies, and/or also for many of those stocks on my larger shopping list of clean green. My IRA is up over +30% this year and I’m only 50% invested! (Note! I’d be much less invested if this was my fund management money. Like monies that are designated to only go into sector funds or that only can be moved around minimally or that has no clean green choices, again like the money management I do for others.) Anyway, whether it be wind, geothermal, energy storage, battery technology, fuel cells, etc. etc, whatever, there are lots of clean green niches, I’d buy ‘em all and cover all bases. Yesterday one US wind company got a big contract from a Chinese firm and popped +10% (in a ragged stock market), that’s happened numerous times as China pushes clean green too. Back a week ago a reader sent me an email that three of his very low priced clean greens were all up nicely that day when he checked. I hold one of them so I won’t mention that name but two others I used to hold, not right now but maybe I’ll buy them back on weakness down the road, were Medis Tech (symbol MDTL) up +24% and Hydrogenics (HYGS) up +13%. Schwartz View: Bottom line, pull out my original shopping list of clean green, which I’ve run in various and updated forms numerous times over the last couple of years, review it and then buy small amounts of lots of clean green stocks. That way when a breakthrough occurs, wherever you’ll benefit while the rising tide carries all ships (almost all) over time. That was my original game plan for all of us and remains so and continues working nicely. By the way I’d buy BEFORE the scheduled December Copenhagen global conference. The rationale again is the world is going clean green because it has to. We all know that. Going clean green creates new jobs which we desperately need, cuts down on oil money somehow finding its way into terrorists hands and respects and

protects Mother Earth. And when we forget we have to go green for a brief moment, some report about global warming comes out and reminds us.. China knows it, Europe knows it and America, our scientists, our government, our businesses (who wants rules in place so they can move forward with capital spending plans), our venture capitalists know it and our everyday Americans know it. All except for the pure unadulterated capitalists holdout contingent who won’t admit such because in their blindered view “it hurts business.” Let me say again: There is a critical mass for going Code Green and a critical mass means there’s no stopping it, maybe something, some event, can hold it back for a time, but there’s no stopping it. THIS IS THE #1 BEST INVESTMENT THEME FOR THE NEXT COUPLE OF DECADES! Come on, get on board! Have a great day!