Today, I’m going to show you how you can use two separate timeframes to fine-tune your market analysis. Checking out the context of the shorter-term move could save you heartache when the pattern follows the big picture story in the charts. It might even help you discover a hidden trade that would not have been visible on a daily chart…

Let’s begin our analysis with a chart of the Russell 2000. It looks pretty nasty:

The chart above is a daily candlestick chart of the Russell. And some pretty interesting things are going on here…

For those who aren’t familiar, the Russell 2000 is an index made up of a group of two thousand small- and mid-cap stocks — when the Russell makes moves, it’s often a hat tip that the broad market is about to do the same thing. And if you’ve been watching a chart of the Russell lately, you’d know it’s crashing.

Frankly, all of the indexes have been falling lately. In fact, with the Dow Jones Industrial Average down 12 out of its last 13 sessions at Friday’s close, the blue chip index was seeing its biggest losing streak since 1974 until today’s bullish open. But none of the indexes were as clearly bearish as the Russell.

In the above chart, the pattern to watch is a head and shoulders top. It’s formed by two intermediate peaks at around the same level (called shoulders) separated by a higher peak called a head. The pattern indicates exhaustion among buyers. Because of its unique look, it’s a popular setup for newer traders.

The break below the neckline at 780 last week was a sell signal for the index…

And now, with our momentum gauge (RSI) pushing into oversold territory, things aren’t looking great for stock investors.

The market looks vulnerable right now. But becoming super bearish could be a mistake —even for a swing trader. In order to develop a better picture of the market’s

A glimpse at a second timeframe for the Russell reveals something interesting going on in the longer-term:

This second chart is still the Russell 2000, but it’s a much longer-term timeframe. Here, every candle marks a whole week’s worth of trading instead of just a day.

In the long-term, things are looking a whole lot less scary. In fact, they’re looking downright positive — that’s because the R2K index is forming a bullish inverse head and shoulders pattern (the opposite of the pattern in the first chart) at the same time. In the context of this bigger setup, the bearish head and shoulders top in the first chart is just forming the right shoulder of the bigger-picture setup.

And when it comes to technical trading patterns, the big-picture setup always wins out…

Looking at the daily chart of the Russell, it’s tempting to go out and make a bet against the index — but the R2K is starting to catch a bid at support just a few points from the price objective that the topping pattern spit out. That means that we could be in store for a stop to the selling this week. Looking at the longer-term picture provided clarity that the more common short-term trading picture couldn’t.

For investors who were quick to act, there was money to be made in the short-term drop, but now it’s likely run its course. Now, a more interesting setup is what happens in the weekly chart if shares can breakout above resistance at 850 — the same price objective rule applied to the upside in the R2K puts a price target at 1050. That’s a 23.5% upside possibility when it happens…

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Use These 2 Charts to Play the Market Drop was originally featured in the Penny Sleuth.

The idea of selling in May and going away is an old Wall Street adage that’s based on the seasonality of summer stock prices. Historically, May through September tends to be the weakest period of stock performance — and that fact is fresh in recent memory. In 2010, the S&P fell 8.2% in May. In 2011, Mr. Market fell more than 17% during the summer months.

But don’t get too startled by the numbers. Two years does not a market rule make…

Think about it: if everyone decided to blindly sell in May and go away until the Fall, then June would become a pretty good time to buy — stocks would become so undervalued that opportunistic buyers could pick up bargains by the fistful. And a quick Google search shows just how popular this “market rule” is; a quick search of the phrase returns 54.7 million hits.

In reality, “sell in May and go away” is just another one of those clichés that doesn’t mean a whole lot without context. It’s like telling someone to “buy low and sell high” or “diversify”; unless you know specific steps to do those things correctly, it’s worthless.

In the context of a bearish market, sell in May and go away can be a bit of added information that the drop is going to be especially painful. But in the context we’re in now (a correction after a bull run), it’s meaningless…

To show you that context, I want to share three charts that add some important color to what’s going on in the S&P 500.

The first is a look at the S&P’s advance-decline line, a measure of market strength:

Taking a look at the indicator, it’s clear that the uptrend in the A-D line is still in force. In a nutshell, that indicates that a larger number of stocks are still participating in this rally. So even though the S&P has corrected for a few weeks, the underpinnings of the market remain strong.

Next up is volatility, as measured by the Bollinger Bandwidth of the S&P 500:

In case you’re not familiar, Bollinger Bands are statistical measures of how volatile stocks are right now. When the bandwidth reading gets higher, it tells us that stocks are “risky” right now; when it shrinks, the market is relatively smoother. With the bandwidth reading trending towards 52-week lows right now, we’ve got a good indication that volatility readings are due for a spike.

In other words, if that S&P 1,430 target is correct, it could come quickly…

But that leads to another important question: just how high can stocks safely go right now? Taking a look at historical levels, the answer may surprise you. This chart from Bloomberg tells an interesting story:

The chart measures the value of the S&P 500 as a percentage of the gross domestic product of the United States. In other words, it’s a look at how valuable [predominantly] U.S. companies are versus the value of all of the trade that takes place within U.S. borders.

Historically, stock values have eclipsed GDP — barring the massive price swings of 2008, the market hasn’t been holding at these “cheap” levels for the better part of a decade. Typically, I’m not a huge fan of platitudes like “stocks are cheap”, but in this case, it does do a good job of showing us what’s going on in the broad market.

From there, we’re clear to apply solid technical analysis to figure out which stocks investors think are cheap right now, and pounce when high probability trades pass through our crosshairs.

The bottom line is this: don’t sell in May and go away. Instead, look for the trades with big targets on their backs. Technical traders should be looking for breakouts and bounces off of support. Fundamental investors should be scooping up the bargain names. Buying in May and deciding to stay could fuel your gains for the rest of the summer…

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Selling in May and Going Away was originally featured in the Penny Sleuth.

Let me show you how…

Yes, option investing can be intimidating. After all, the financial press blames derivatives (like options) for a major part of the financial crisis of 2008. Options move violently — and they can expire completely worthless. It’s no surprise, then, that most investors avoid options at all costs.

But when used intelligently, options can significantly increase your profitability by magnifying stock gains while limiting risk to your initial investment (unlike traditional leverage, which can actually leave you owing money).

To be sure, options can be incredibly complex. Today, we’ll just look at an overview of how options work — and how they apply to your next trade.

How Options Work

Basically, an option is a contract that gives its owner the right to buy or sell a stock at a predetermined price on a predetermined date. Buying call options gives you the right to buy shares of a stock at that price, whereas buying put options gives you the right to sell them at that price.

Time is an important factor for options. Options expire on the third Friday of each month (unless it’s a holiday, in which case they expire on the preceding Thursday) — that date, known as the expiration date, is a major contributor to the option’s value. The further that date is from now, the longer the stock (known as the “underlying”) has to increase in value. That potential value (known as extrinsic value) decreases as time passes.

An option’s real value is the difference between the strike price (the price you can buy or sell on the contract) and the price of its underlying stock. For an oversimplified example, let’s say that today is Jan. 1, and you own $10 March call options on General Electric. If GE currently trades for $15, the difference between the $10 strike price and $15 share price is the stock’s intrinsic, or real, value.

It’s the option’s real value because it’s the gain you’d book if you exercised the option today — think about if you use the option to buy GE shares for $10 and then resell them on the market for $15. That’s a $5 per share profit. But that option doesn’t trade for just $5 — because GE still has months to appreciate, the option may cost closer to $6. That possible extra dollar is the extrinsic, or time, value.

Options are interesting because of the size of their moves. If GE moved $2 higher, the company’s stock would have gained 13% — not bad for a blue chip. But our $6 option would have gained more than 33% in real value alone.

There’s a difference between being an options investor and being an options trader. Generally speaking, traders have little interest in holding onto options plays until expiration — I’m a fan of that camp myself. Instead, we aim to buy for a jump in our options’ prices and then sell for a gain…

So, how do you get started in the options game?

To start, look back at your trading portfolio and see what would have happened if you’d bought an option instead of a stock. By experimenting with how options would have impacted your profits after the fact, you can get a much better idea of how different strike prices and expiration dates impact option prices.

I would strongly advise against adding options to your portfolio until you have some experience paper trading them and understand more of the technical features of options. But as a starting point, experimenting with your past real world trades is a great way to flatten the learning curve.

I’ll show you some more options tricks in the coming weeks. If you have any options questions for me, send them to editor@pennysleuth.com.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

An Option to Supercharge Your Gains was originally featured in the Penny Sleuth.

Here’s what you need to know:

Rule 1. Write Your Own Risk Level

Understanding risk is one of the most important elements of investing in anything — from penny stocks and options to commodities to currencies — no matter what, you need to enter each trade knowing exactly what’s at stake when you trigger your trades.

Risk is inherent in all investments (don’t believe anyone who tells you otherwise). But risk isn’t necessarily bad.

You see, risk and reward are interrelated. Higher-risk investments, like penny stocks, obviously come with greater chance of loss, but they also have the potential for much larger gains if trades go our way. The trick to successful trading is managing risk intelligently…

So, how do you reign in risk? I always set mental stop loss levels and potential target prices before I trade any stock. To do that, you need to add some basic technical analysis to your investment strategy.

Stops can be very useful when they’re placed under a stock’s support level (the price level that a stock has trouble falling below). That’s because to a trader, a price level below support generally means that the stock could be breaking out much lower. Essentially, you’ll want to place stops just under where you’re likely to find a glut of demand for shares.

To avoid exceeding your comfort zone on a loss, think of your “maximum pain threshold” as a dollar amount rather than a percentage. Then, size your position so that you’re stopped out before your losses exceed that level. Trailing stops, which are typically used to lock in gains, can be used a little bit more arbitrarily.

Ultimately, your risk tolerance is up to you. But regardless of how aggressively you opt to trade, there’s a potentially lucrative option available to you…

Rule 2. Don’t Chase Trades

Sometimes, you won’t be able to act on a trade in time. Maybe you’re on vacation and away from a computer when a nice setup pops up. Maybe you’re stuck in a meeting. Whatever the case, if you miss out on a trade, it’s essential not to chase it.

Trading is exciting. Part of what draws traders to playing the market is the thrill of executing a trade and cashing in on gains — it’s that adrenaline rush that keeps things interesting.

But on the flip side, it’s all too easy to get into a trade at a bad time just because of the excitement of seeing a stock start to run up. When a trade triggers, it’s crucial not to buy into the frenzy that often comes with a breakout. Instead, set you maximum buy price ahead of time, when you’re weighing the risk/reward tradeoff of a particular setup. Sometimes that’s a tough edict to swallow — especially when hindsight shows you what would have been a winning trade. But emotion has no place for traders. Don’t fall for the irrational exuberance of a late trading opportunity.

Rule 3. Buy the Right Number of Shares

Do you know how many shares of a stock you should buy? Don’t guess — the number of shares you buy has everything to do with how much profit you take home…

With (normally) flat costs like commissions taking a bite out of your trading profits, you need to make sure that the position sizes you’re taking are enough to make up for your commission fees. If you buy a $100 stake in a small-cap stock, with a $10 commission each way (when you buy and when you sell), your break-even gain becomes 20%. That is, you’ll need 20% gains just to avoid posting a loss. That’s a sizable challenge.

If you buy a $500 stake, however, your break-even gain drops to a much more manageable 4%. If your commissions are only $5 per trade, then your break-even tumbles even further down, to 2%.

Always know what kind of gains you need to see to profit from a trade before you place an order with your broker. Again, this ties back into our first rule, writing your own risk level. By focusing on low-risk trades, you can afford to take on larger positions while maintaining the same level of risk – and as a result, you’ll take home bigger gains every single time.

I’d recommend you save this message. Then, before you click the “buy” button on your brokerage account, keep these three rules in mind. Follow them, and you’ll guarantee yourself bigger gains…

Cheers,

Jonas Elmerraji

3 More Rules That Guarantee Gains was originally featured in the Penny Sleuth.

Forget buy and hold. Trading is all about quick, repeatable profits. Forget balance sheets or income statements. Trading focuses on technical analysis instead. But just because the old rules no longer apply doesn’t mean that no rules apply to successful trading.

In fact, following a specific set of principles could mean the difference between racking up substantial trading profits — and suffering sizable losses.

Follow these three rules and you’ll quickly see bigger trading gains…

1. Paper Trade Your Way to Profitability

As with anything worthwhile, there’s a learning curve to technical trading. That’s why it’s so important to hone your abilities before you invest your first dollar in a technical trading opportunity. The best way to do that is by paper trading.

Paper trading is essentially simulated trading that uses hypothetical money instead of cold, hard cash. When you trade on paper, you get to see what your trading would have yielded without worrying about succumbing to costly rookie mistakes.

That’s because — believe it or not — there’s a whole lot more to successful trading than buying the right stock. Even with guidance from professional research services, there are variables you’ll want to get a handle on before you put your cash on the line. Lots of factors can cut into your trading profits: broker commissions and your position sizes are just a couple of them…

Paper trading also does one other important thing: It builds your confidence as a trader. When you see your hypothetical trades booking profits, you’ll become more comfortable holding out for bigger gains and cutting your losses on the odd trade that goes against you. That’s an essential part of becoming a successful trader.

So how do you paper trade?

If you’re using a broker whose trading platform has a paper trading feature (just call them to find out), I strongly recommend that you use that. By paper trading on the same platform as you’ll be trading your real money, not only will it be exceptionally easy to track your paper trades, you’ll also learn exactly how to best use your platform of choice.

Many brokers — like Scottrade, for example — let you open a paper trading account without actually having to fund it. That gives you an ideal way to test out whether or not their services are a good fit.

If you don’t use a broker that has a paper trading option, you can still paper trade. There are a slew of “simulated investing game” websites out there, and you also have the option to track your hypothetical trades yourself on paper or with a spreadsheet program.

2. Always Use a Limit Order

When it comes time to actually place your trades (either on paper or with real cash), the buying and selling terminology can be confusing. With market and limit orders, stops, trailing stops and a slew of other broker orders, pulling the trigger isn’t as simple as “buy” or “sell.”

For the most part, you don’t need to worry too much about the type of order you place with your broker to buy or sell shares of a penny stock. Complex orders (like buy stops, or market on close orders) aren’t something that novice traders need to be hugely concerned with.

But there’s one type of order you should avoid at all costs: the market order.

Market orders essentially tell your broker to “buy shares right now, whatever the cost.” While that’s not a terribly big deal when you’re buying shares of a heavily traded stock like Exxon Mobil or GE, it is a big deal when you’re trading penny stocks that have less trading volume and larger bid-ask spreads. When a stock makes a big move, it’s not uncommon for your actual execution price to happen at a less-than-attractive price.

Instead, always make sure you’re using limit orders when you buy or sell penny stocks. Limit orders tell your broker to buy (or sell) shares of a stock up to a certain price limit — they ensure that you have control over your buy and sell prices, not the market.

3. Avoid Extended Hours Trading

9:30 a.m. to 4:00 p.m. five days a week — those are the hours that make up the standard trading day. We’re talking about only 6½ hours per day, 32.5 hours per week.

For us, that’s plenty of time to take advantage of the market’s moves.

But not for everyone. That’s why the powers that be instituted extended hours trading. Extended hours trading gave investors the ability to trade stocks pre-market and after-hours (AH), making it possible to buy shares of a stock on most markets from 8 a.m. to 8 p.m…

As we all know, however, just because you can do something doesn’t mean you should.

There’s a reason that after-hours trading is called “amateur hour” trading in professional circles — extended hour investors often get their trades executed at poor prices. While extended hours trades are a viable tool for value investors looking to get into shares of a deeply discounted stock, they’re bad news for traders.

That’s because low trading volumes in the extended session mean that smaller positions can make a material dent in share prices. As a result, price swings before and after market hours are often poor indicators of how a stock will trade during the regular session.

Extended hours trading can be a good indicator of market sentiment before and after regular trading hours — but that’s about it…

Ultimately, you can’t guarantee investing success. Sometimes, trades will move against you. The key to successful trading, though, is to gain an edge to limit the number of bad trades you take on and maximize the good ones…

Following these three trading rules is just such an edge. Follow these suggestions for bigger gains and you’ll ensure that you avoid major trading missteps.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Tips That Guarantee Bigger Gains was originally featured in the Penny Sleuth.

Earnings Season May Challenge U.S. Stocks

…Survey Indicates Stock Market Rally About to End

Much of US stock rally might be over for 2012

Are we getting a common theme here? Seemingly out of the blue, investors are expecting the market to top in April. But I’m not buying it — and you shouldn’t either…

There’s nothing the financial media loves to do more than react to the market. Unfortunately, it’s not just the financial media that loves to do it; so do the talking heads that grace TV news and opine about Mr. Market’s innermost feelings. Looking at the news coverage of the stock market in the last couple of weeks, it feels like stocks have pulled back pretty dramatically, right?

If you look closer, you’ll see that it’s not the case. People are just reacting to a couple of days of stock selling:

Yes, stocks have slowed down a bit in the last few weeks, but let’s not forget that we’re coming off the heels of the best first quarter for stocks in more than a decade. And while the S&P 500 has pulled back in the last couple of weeks, it’s not flashing any sell signals just yet.

Looking at the S&P’s price, there are a couple of things that should stand out first and foremost. One is that the latest pullback hasn’t exactly been the “massive selloff” that the media has been exclaiming — the market is merely trading sideways.

The other is that the primary uptrend in the S&P is still intact. We’re testing trendline support right now, but this trendline has already withstood three other major tests since the rally started.

Another metric worth watching is the 14-day RSI graph at the top of the chart. RSI stands for Relative Strength Index — it’s a measure of momentum. Although momentum has been declining in the very short-term, we’re coming in within a few points of the neutral 50 level in RSI right now. The last time we hit 50 was back in March, just as the S&P started on the second leg of its rally…

And you guessed it, scores of investors were sure that we’d hit a 2012 top back in March too.

At this point, the technical outlook of the S&P 500 still looks cautiously optimistic.

It’s way too easy to let emotion rule your trading in markets like this. That’s why it’s crucial to keep looking at the market’s most recent moves in context. Don’t get caught up reacting to the last few trading days. Looking at a four to six month chart of the S&P 500 at the start of every trading week is a good way to avoid getting caught up in the media’s echo chamber.

You can pull up a free, live copy of the chart I showed you by visiting StockCharts.com There, you can annotate and analyze the chart to your heart’s content. I’d suggest bookmarking the page — it’s worth referring back to each Monday to get a clearer picture of what’s happening on Wall Street.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Why The Rally Isn’t Over… Yet was originally featured in the Penny Sleuth.

Absolutely nothing.

But you wouldn’t know it to look at the Wall Street Journal on Friday…

After all, the lotto was featured as a major economic story in the WSJ this weekend. All told, I counted seven different lottery articles on the Wall Street Journal’s homepage.

Seven!

While I know yesterday was April Fool’s day, I only wish I were joking about that part. Of course, WSJ wasn’t the sole offender. You can also read about the lotto in CNN Money and Bloomberg. The absurdity is a little easier to spot because the lotto story is completely asinine. But the media does a much better job of disguising their bogus market attribution most days of the week.

For 95% of investors, major media outlets are the go-to place for understanding why the market’s moving on any given day. We’ve been programmed to turn to the news to understand why something’s happening. But today, I want you to see why it pays to be one of the 5% of investors that ignores the noise.

The “Mega Millions connection” isn’t the worst offender — it’s only the most obvious one.

Here’s another:

“Investors flocked to consumer-oriented shares after data showed U.S. consumer spending rose by the most in seven months in February, even as personal income increased only modestly,” says an article that ran in Reuters on Friday.

How much “flocking” were those investors doing? They added 0.4% to the S&P Consumer Discretionary Sector Index…

As a trader, you’ve got to ask yourself whether investors were flocking to consumer stocks, or whether a Reuters journalist was looking for some reason to explain Mr. Market’s unimpressive trading. My guess is that example is a case of the latter…

I’ve said for a long time that Wall Street has an attribution problem. Investors see a big pop in stocks, and they look for the nearest headline as a reason for the move. It’s important to break from that frame of thinking if you want to find success in stocks.

More often than not, the headline being touted by Wall Street doesn’t matter…

To be sure, sometimes news really does move stocks. More often, a news blip is one of a thousand inputs that are pushing stock prices in a certain direction. For every investor who buys consumer stocks on marginally changed consumer spending data, another is buying because he thinks they’re cheap, and another is selling on a tip. But when real market moving news hits, you know it.

That’s why I rely on technical analysis…

At its core, technical analysis is the study of how supply and demand is impacting stocks in the marketplace — after all, supply and demand are the only two factors that actually impact a stock’s price. I don’t care what’s causing the supply or demand forces (it could be a news story or earnings improvements — heck, or even the $80 jillion Mega Millions drawing on the planet Jupiter).

All I care about is where those pockets of supply and demand are located, and how they can cue us to high probability trades.

If you’re new to technical analysis, I’d strongly recommend taking a look at the Penny Sleuth’s Research Reports section — there, you’ll find primers on putting technical analysis to work for your portfolio. It’s a starting point to help you ignore the daily noise — and focus solely on factors that actually move the market.

Happy trading,

Jonas Elmerraji
for The Penny Sleuth

What the Mega Millions Means for Stocks was originally featured in the Penny Sleuth.

Even if you’ve never heard the name BATS before, if you’ve ever bought or sold a stock there’s a good chance it played an important role in the transaction. BATS is an exchange that currently makes up as much as 12% of all trading volume on any given day. That’s huge.

So it’s no surprise then that BATS’ catastrophic embarrassment on Friday was equally huge…

On Friday, BATS was slated to go public in an expected $113 million deal that would have valued the firm at more than $600 million. But things went sour when a glitch in the exchange’s own computers caused an issue when the system tried to open the “BATS” trading symbol. You just can’t make this stuff up.

The glitch caused trading errors in a slew of other stocks too, including a “flash crash” in Apple that caused the world’s biggest firm to halt trading temporarily in Friday’s session. Because of the issue, BATS withdrew its offering by the afternoon, cancelling out trades by anyone who managed to buy shares during the first few trades of the day. Oh, to be a fly on the wall of the firm’s boardroom on Friday when popped champagne turned into popping blood vessels in execs’ necks.

Major media outlets have been paying a lot of attention to the story over the weekend, and in a lot of ways, that’s more telling about market conditions than the BATS embarrassment itself. Sure, BATS got some very public pie on its face on Friday, but the crash had momentary effects on the market at worst. It’s Mr. Market’s reaction that we should be concerned with — when sentiment is struggling, we’d expect traders to be actively searching for reasons to sell. Instead, the S&P 500 reversed early morning losses on Friday.

And this morning, it’s looking pretty solid with the S&P 500 pushing past the 1,400 level as I write…

BATS will likely live to see another chance at an IPO in 2012 after management answers a few more embarrassing questions from journalists and this second “flash crash” becomes a less recent memory. If the market’s current trajectory is any indication, it’ll be looking at a market filled with investors eager to forget and open their wallets…

In the near-term, the BATS debacle gives us a major cue about the market’s willingness to forgive right now. At this point, Mr. Market’s still in rally mode.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

What Wall Street’s Biggest Blunder Tells Us About the Market was originally featured in the Penny Sleuth.

That’s because sitting next to Walgreens, in the same storefront that you’d expect to find a Hallmark or AT&T store, is a shooting range. No, the display cases aren’t filled with cell phones; they’re filled with handguns. And behind the (presumably bulletproof) glass are 16 lanes of climate-controlled shooting stations.

The location isn’t the only thing that doesn’t fit stereotypes. For some, the customers may be just as surprising…

There’s the lady in her early ’30s putting holes in the paper “bad guy” target 25 feet away — she’d never shot a gun before setting up in the lane next to me. Neither had the couple who rented a pistol to try for fun on a Wednesday evening…

Not everyone there was new to firing a gun. The corporate cowboy in a polo shirt and khakis — stopping on his way back from a day at the office — was showing up for a competitive shooting match taking place that afternoon. Don’t even try shooting here on a weekend unless you’re ready to stand around. The wait for a lane runs about an hour during peak times. In fact, you won’t find the range empty even in the middle of the workday.

“It’s like this every day,” said the range’s manager, looking tired. Clearly, business was booming a bit too much. “I mean, look around — it’s a Wednesday afternoon and this place is packed!” Around the country, the stories are pretty much the same.

Yes, the gun world is changing dramatically in 2012. While Black Friday 2011 was relatively tame by most retailers’ standards, it was a banner sales day for guns. The FBI’s NICS database (which provides instant background checks for gun buyers) got nearly 130,000 hits on Black Friday, the most the database had ever received in a single day. Not much later, December set a new record for the most hits in a month. And for the full year, 2011 turned out to be a record year itself, registering more than 16.5 million hits to the NICS database, a 15% increase from 2010.

Clearly, the trend of gun buying is still accelerating at a breakneck pace. But digging a bit deeper into the demographics of who’s buying provides even more interesting results…

It turns out women are driving some of the biggest trends in gun ownership. According to a Gallup Poll from October, 23% of women personally own guns, up from just 13% in 2005. That’s a massive increase in ownership by a group that has traditionally shied away from firearms.

We likely have the media to thank, in part, for the demographic shifts that are going on in the firearms business. Gun-centric TV shows such as Top Shot and Sons of Guns are giving publicity to gun ownership for recreation and protection. At the same time, guns are becoming a less politicized topic: While Republicans tend to be gun owners at a higher rate than Democrats, Democratic gun ownership has spiked in the last decade. Today, 40% of Democrat or left-leaning households own at least one firearm, the highest level in a decade.

That’s not to say that politics aren’t still central to the gun business. With an election year well under way, the National Rifle Association is already actively railing against the Obama administration. While it seems unlikely that a candidate on either side would tighten gun restrictions given the current pro-gun climate, the political message is still likely to do quite a bit to fuel the gun-buying fires this year.

Sincerely,

Jonas Elmerraji

Why You Should Bet Big On Guns was originally featured in the Penny Sleuth.

I’ll admit, treasuries aren’t the most exciting investment out there. That’s why they’re typically relegated to people like me — professional investing nerds — most retail investors don’t go talking about the latest t-bond series they bought; stocks are more interesting, easier to relate to, and they historically generate much bigger gains than treasuries.

But treasuries can give investors major hints about where the stock market is going. That’s why every stock investor needs to pay attention to treasuries from time to time. Let me show you how…

Let’s start at the beginning. The term “treasury” is a catch-all word to describe debt issued by the U.S. government — when Uncle Sam needs to borrow money, he issues treasuries. Because lending money to the U.S. is essentially considered risk-free, treasuries don’t pay a whole lot. In fact, treasuries have lately offered up investors negative real yields thanks to the impact of inflation; so why would anyone want to buy them? We’ll get to that…

As an investor, it’s critical to remember that anything you invest in doesn’t live in a bubble. You probably already realize that your investment in a single stock can be impacted by what’s going on in the market on any given day. Well, the stock market can be impacted by what’s going on in other markets on any given day.

The reasoning is simple — the thing that all the major asset classes (bonds, stocks, and commodities) have in common is who their market participants are. In other words, if I’m a sophisticated investor, I have the option of investing in a combination of stocks, bonds, and commodities. Because all of the money is coming from the same place (my brokerage account), the markets are interrelated. There are a few other reasons why markets are interrelated, but for our purposes today, the flow of funds from stocks to bonds (and vice versa) is the most important one.

So, back to why the heck anyone would want to buy treasuries to earn a negative return…

People buy treasuries because they’re a safe place to park cash. That means that when people buy treasuries at current rates, they’re willing to essentially pay for the privilege of staying away from “scarier” assets like stocks and commodities. It’s a move that reeks of desperation…

But it’s one that tells us a lot about the stock market. After all, if people are so desperate to get away from stocks that they’re willing to effectively pay the government to hold their money, you know that investor anxiety is a real problem. And for most of 2012, it has been.

Treasury prices have been sitting at historic highs for months now, without any real signs of backing down. We know that’s a bad thing, right? After all, if treasuries are high then that tells us that people are still extremely anxious about stocks, and money is still being withheld from the rally that Mr. Market’s been enjoying for most of 2012. That’s not the type of behavior we’d expect to see during a rally. Worse yet, extreme investor anxiety levels mean that stocks could get knocked lower much more easily than if there was more buyer participation taking place in stocks.

But something changed in the last week or so. The chart below shows the relationship between the S&P 500 and 10-year treasury notes:

That recent pullback in the orange line means that treasuries are finally getting sold off in favor of stocks — a very good sign. It’s only the first step though — there’s still a lot of money in treasuries right now. The flip side to that coin is that there’s a lot of money that could move into stocks and help support this rally. Expect more selling in treasuries to make current treasury owners question whether they should be switching that money to stocks right now…

Yes, treasuries are too boring for most investors. And obviously, treasuries aren’t a very good place to park your money when stocks are rallying. But, as I’ve just shown you, watching the treasury market can give you a significant leg up on what’s going on in the stock market.

I’d recommend occasionally checking on how treasury prices are moving compared to stock prices. You can see both charts together by clicking here.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Why Treasuries Point to Gains in the Stock Market was originally featured in the Penny Sleuth.