Three Reasons Stocks Are Going Up

Written By Christian DeHaemer

Posted May 21, 2010

Their panic is your best friend. And today I’m going to tell you why.

Unless you live in a cave, you’ve heard about the 12% correction on the Dow and the fact that oil is down 22%.

Heck, even gold has sold off 4.7% this week to $1,166 per ounce…

This week’s stock market correction has all of the perma-bears pounding their chests and dancing a victory jig.

Richard Russell said recently:

Do your friends a favor. Tell them to ‘batten down the hatches’ because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid… Tell them that Richard Russell says that by the end of this year they won’t recognize the country…

And Nouriel Roubini commented, “Stocks are likely to continue their aggressive decline and shed another 20 percent in value as the world economy weakens.”

Take a look at the fear index. Volatility (NYSE: VIX) is through the roof:


I say poppycock — I love this type of market.

Over the past few months, I’ve been taking gains like 111% on QQQQ puts, 251% in Unilife, and 57% off a three-day eBay trade.

In fact I sold off most of my Crisis and Opportunity portfolio two weeks ago.

On April 16, 2010, I put out an alert with the headline “We are Overdue for a Correction.”

I went on to write:

I’m not saying we are going to drop 60%… But I do believe the market is looking for an excuse to take profits, and we could easily be down 10 to 20% by mid-summer. This is a solid opportunity to make money.

I’m not telling you this to brag. It is my job to make my readers money. And unlike the people on Wall Street, who make money no matter what, my readers fire me if I’m wrong.

So, I do my job well.

My readers were able to bank 111% in a few weeks on those QQQQ puts. That, coupled with taking profits leading up to the current correction, means that they have cash to buy the lows. This is a good thing.

Fear-Induced Panic

These types of fast-moving corrections are nothing new… In fact they are quite common.

The S&P 500 has suffered 93 corrections since its inception, and they happen about once a year on average — once every 234 days.

It is no wonder that fear is running rampant today. The market lost 56.8% two years ago; it suffered losses of 49.1% in 2000-2002.

The memory of that loss is hard to shake. It’s a real psychological shock when your life savings are suddenly cut in half…

But those who held their stocks — or better yet, averaged down — ended up winning.

Coming off the last big bull market rally in 2003, the S&P 500 had a difficult 2004. There were four serious corrections, but those with intestinal fortitude gained another 46%.

Fear at the Top

At its heart, the market is a psychological beast. It is moved by the whims of humans, and humans are apt to sell fear and buy greed.

This is the exact opposite of what you should do — and it’s why I created Crisis & Opportunity. Right now, I am buying this fear.

I don’t think we’re seeing “the top.” It’s a top alright, but it doesn’t feel like the top.

In most market corrections, you get a sense of euphoria at the top.

In 2000, the dot-coms were going to change the world and everyone would be rich. You didn’t need bricks and mortar; your potential buyer was anyone with a computer. All you needed was a sock puppet and eyeballs.

Of course, it didn’t work that way… but even the guy selling you hamburgers would tell you to buy Yahoo!.

Yesterday, my dentist told me he wasn’t watching the market anymore. He didn’t want to look at it.

This, my friends, is not a sign of a top.

Wall of Worry

There are three things that are driving the market these days, and these are the chief bricks in the proverbial “Wall of Worry” that Wall Street is always climbing:

  1. Fear of Greece’s debt;

  2. Fear of U.S. debt;

  3. Government regulation in banks and on Wall Street.

The first has already been taken care of.

From Bloomberg today:

German lawmakers approved their country’s share of a $1 trillion euro-region bailout in a vote today, allaying market concern that they would balk at approving a second emergency aid package in as many weeks.

The second — fear of U.S. debt — is already changing due to newly elected officials. Rand Paul crushed his opponent for a Senate primary in Kentucky. Longtime Senator Arlen Specter (D-Pa.) was defeated, and Governor Christie of New Jersey is winning the fight against the privileged unions.

This surge in fiscal conservatism is reminiscent of the 1994 Republican Revolution led by Newt Gingrich. A moderate Bill Clinton in the White House coupled with budget hawks in Congress led to a balanced budget and the most prosperous decade of our lives.

The third fear is government regulation of Wall Street. You have to ask yourself — given the past decade of greed and avarice, rewarding failure, and ignoring outright scams — whether more regulation is a good idea or not…

In the end, it doesn’t matter if you believe in free market corruption or government ineptitude. We are getting financial regulation. The market will take this as good news.

UBS Analyst, Phillip Finch writes today:

Passage of US financial reforms could remove a key overhang on the sector. At our Global FIG conference in New York last week, a number of participating banks had said that they were holding back from lending, growing their businesses, increasing dividends, etc, until they knew the new regulatory rules of the game.

Mr. Finch is correct. It’s hard to do business when the laws are all being changed. Once the laws are known, business will move forward.

What to Buy?

While I think we are oversold today, I remain very cautious about what I’m buying and when.

There are a number of bullish trends I believe in right now. I like Mongolia boom, the surge of 4G telecom, and small oil exploration companies with good prospects.

I also believe in the India infrastructure boom, and I select special situation stocks like ones that will benefit from 3D TV.

In fact the recent correction means that you can get in on some nice names at very good prices. There is a nice pure play on a Mongolian oil company that looks fantastic at $0.70. This company is sitting on up to $614 million barrels of crude.

Click here for your free report.

Christian DeHaemer
Energy & Capital

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