Signup for our free newsletter:

Stock Market Pullback

Written By Brian Hicks

Posted September 27, 2011

“Dude, where’s my market?”

Blackouts and missing days have been a pretty common Hollywood theme as of late. Movies like The Hangover and Pineapple Express are very popular with the populous.

But it’s not just a movie plot…

Wall Street is right back to where it was at the start of 2010. We just lost two years — market years, that is.

OEX Lost Years
click chart to enlarge

As I write to you today, the S&P 100 (OEX) has abandoned 2011’s gains. Now it is staggering about like a blind-drunk bachelor stoned on Rohypnol, trying to find its way back to the steady gains of 2010.

Two years of blood, sweat, and toil blacked out and gone… completely wiped off the books in one insanely volatile summer.

I am not going to spend another column on which wise guy slipped us that deadly Mickey. The culprits are all too well-known, and really, any effort at detective work is better suited to figuring out what’s coming next.

Three Stocks Set Up to Fail

We can come at this issue several ways. I could point you toward various telling reports such as…

Famed über-investor Warren Buffett has claimed that he could find concealed diamonds in the foulest mud pit. But right here and now, when the cheerleaders are touting “record-low P/Es,” Berkshire Hathaway (NYSE: BRK-A) can’t think of anything better to do with its $47.89 billion in loose cash than to buy back its own shares.

(Irony alert: I am told that even this mealy move is really just a tax dodge, which is pretty damned funny after all of Uncle Warren’s scolding re: same!) 

Apple Famine?
FamineApple Inc (Nasdaq: AAPL) has been the stalwart crutch of its sector. There have been many, many days over the past few years when AAPL’s strength — and heavy weighting — was the only thing propping the tech SPDRs and ETFs. Indeed, sometimes even the entire Nasdaq seemed to be running on Apple’s gas.

Unfortunately, these days Apple has become a bit of a monoculture, depending almost entirely on sales of $700 touch-pad toys like the iPhone and iPad.

My Irish granddad taught me all too well what happens when an entire country comes to depend on a single crop. Do the words “potato famine” ring a bell?

Now it appears we are about to learn a new name for disaster…

Apple is still mum on the subject, but then again, Cupertino is infamous for saying nothing until bad news is beyond obvious (founder Steve Jobs’ battles with pancreatic cancer come readily to mind here).

But several of Apple’s less close-mouthed suppliers are telling of a 25% cut in parts orders over the past two weeks.

Theories abound as to why — including speculation of pending model changes and tales of Apple’s hard-assed ordering methodologies.

JP Morgan, on the other hand, chooses to believe that Apple figures to sell 25% fewer toys in the coming quarters, which include the vital holiday shopping season.

Santa in the Ditch

And speaking of the holidays, here’s another item straight off the Grinch’s own ticker: Reuters is reporting FedEx Corp (NYSE: FDX) has cut its full-year profit outlook from last June’s guestimate of between $6.35 and $6.85, to $6.25 to $6.75 per share, citing high fuel costs and a weak global economy.
Chief Executive Fred Smith does not see the shipper’s circumstances changing anytime soon: “We expect sluggish economic growth will continue, largely due to a lack of confidence that U.S. and European policy makers will effectively address current economic challenges.”

This disappointment drove shares over an 8.2% cliff. That’s sad, but not as worrying as this: FedEx is the perfect iconic proxy for the modern Internet-driven retail sector.

The value of packages handled by FedEx’s trucks and planes every year is equivalent to about 4% of U.S. gross domestic product and 1.5% of global GDP…

When FedEx sneezes, the whole damned world catches pneumonia.

Downside Technical Confirmation

I said earlier that there are several ways to look at this looming threat.

If you look back to the chart of the OEX at the beginning of the article, you can see clear technical signs that the wise guys have read the news, packed their Gucci suitcases, and are sidling quietly toward the exits.

Back in August, I pointed you toward the critical long-term sell signal when the blue chip’s price ripped down through the 10-, 50- and 200-day averages. That’s a flashing red light that precedes a major crash roughly 75% of the time.  

Off this one market move in August, readers of Viral Investing made up to 530% gains in DIS, 176% gains in GE, 243% gains in GS, 80% gains in TOL, and 76% gains in COH puts. You have to love making a lot of money when Goldman, GE, and Toll Brothers go down.

That downside move was put on hold as Bernanke was able to hold off the inevitable with the promise of infinite imaginary money. Now that fairy tale has lost its power to hypnotize investors.

There are now stacked sell signals at the bottom of the recent trading range.

The Third Way

I have loaded you up with a truckload of depressing news.

But there is still a third way to look at this pending crap storm…

For the idiots who don’t prepare themselves, it will be “the worst thing that ever happened.” But for those of you who are able to wrap your mind around what’s coming, it is a dozen different golden opportunities.

You go down Warren Buffett’s road, hunker down, and preserve your capital for the truly stellar deals that will be lying about in the wreckage after the storm passes.

This is also one of Chris DeHaemer’s favorite tricks.

Or, you can try the route Ian Cooper and I hew to — and buy put contracts on the weak stocks that will be decimated as the economy staggers back another year to the 2009 open.

The Next Three to Fall

As I said, my Viral Investing readers just cashed in on the major move in August. They are ready to do it again.

Investors just like you are already carrying put option contracts against major tech, retail, housing and transport players, with the expectation of doubling up on most of these positions by December.

Heck, I’ll even tell you the names of three of the companies we have slated to tip over the edge: Home Depot (NYSE: HD), International Business Machine (NYSE: IBM), and CSX Corp (NYSE: CSX).

If you like them, sell now and buy ’em back at the bottom. Or go short and ride them down. Either way, you’ll come out on top.

Good luck and good hunting,

Adam Lass
Editor, Wealth Daily