Mayday?

Not so long ago, May Day in fact, the tea leaves flashed a 'mayday' and stocks responded almost immediately by going down like one of the miserable adversaries of Manfred von Richthofen, the World War I flying ace also known as the "Red Baron." To extend the metaphor let's say Europe is the Red Baron whose reputation currently has his enemies, the financial markets, shaking in their flight suits. What these preoccupied pilots may not yet see, however, is that there is hope on the horizon.

Jim Rogers has said, "just about every time you go against panic, you will be right if you can stick it out," and panic has returned to the stock market as measured by a variety of indicators. As hard as it is to believe after a correction that is currently only flirting with the 10% threshold, the Citigroup Panic/Euphoria Model, Individual Investor Sentiment and Surveys of Wall Street Strategists demonstrate that investors are about as scared as they were during the depths of the financial crisis. This now familiar and pervasive despondency toward the equity markets has inspired the Financial Times, in very Business-Week-like fashion, to call it the 'death of equities' in today's edition.

While I haven't heard Jim Rogers say he is currently taking advantage of this situation in the stock market, two other all-star investors have publicly declared their fervor for the opportunity at hand. Warren Buffett and Carlos Slim, two men whose combined worth is greater than the economic output of most countries, are currently in the markets buying stocks as they go "on sale." Corporate insiders have also recently stepped into the fray in a validation of the faith contrarian investors like these two are placing in them.

It may pay to remember that, while the Red Baron justly earned his reputation, during his heyday many of his feats were exaggerated far beyond what he accomplished in reality. He was shot down and the war eventually ended. Likewise, the situation in Europe presents great risk to the global economy but it won't put the likes of Coca-Cola, General Motors or America Movil out of business nor will it go on forever without some sort of resolution. In fact, the smart money is betting on it.

Nasdaq's Dirty Little Secret

The following charts show the cumulative advance/decline lines of the New York Stock Exchange and the Nasdaq. Basically, each day you subtract the number of declining stocks from the number of advancing stocks on the exchange and wind up with a net positive or negative number. Add all the days together and the charts below are what you get.

Could there be a more dramatic difference in the two? 'What causes this massive dichotomy?' you ask. The answer, I believe, is very simple: the New York Stock Exchange simply has higher listing standards.

My guess is that many of the companies that go public on the Nasdaq do so because they don't qualify for the NYSE. Ultimately, they have a higher failure rate hence the long-term downtrend in the chart above. The bottom line is that the average Joe should be much more leery of potential IPO "faceplants" over at that exchange.

Faceplant

I don't really have much to say about the Facebook IPO other than my usual, 'when everyone and their mom thinks it's cool to buy something it's probably not the best time to buy it,' or some such thing. We've seen this story way too many times over the past few years. I just wanted to publish the title, really.

Hit the Links: We've Got Balls

• Ten investing insights from Ben Graham
• Americans Love Gold; Hate Bonds
• The euro crisis just got a whole lot worse
• The euro-zone crisis: Call it a depression
• Los Angeles teeters on the brink of bankruptcy
• This Must Be The Generational Bottom In Natural Gas
• Junk-Rated Companies Showered With Easy Money
• LOL: Greenspan Says U.S. Stocks ‘Very Cheap,’
• The Tea Leaves Are Telling Me to Take Profits
• Finally: Warren Buffett Gets His Own Infographic
• Stunned Home Buyers Find the Bidding Wars Are Back
• If You're Under 40, Don't Count on Social Security
• If You're Not Pissing Someone Off, You're Probably Not Innovating
• There are a lot of flawed teams left in the Stanley Cup Playoffs but the LA Kings aren't one of them
• 'The Scream' Just Sold For a Record-Breaking $119 Million
• Billy Corgan: the music industry now prevents artists from achieving the type of success his band enjoyed
• Why fiction is good for you

For more links like these follow me on Twitter

The Tea Leaves Are Telling Me to Take Profits

It's been a while since I ran down a few charts and those that follow are of major significance in my book so  let's take a look.

First up is the Philadelphia Bank Index. The numbers in red are DeMark sell signals (9 is a completed setup and 13 is a completed sell signal). The DeMark 9-13-9 is, at the very least, a red flag. Technically, to my eyes, it looks like the banks have broken down out of their 2012 uptrend and are now testing the break - usually a great sell setup in itself.

This next chart is the same index on a weekly time frame. While the major indexes have regained most of the ground they lost during the financial crisis the banks are clearly nowhere near doing so. This pennant pattern on the chart usually resolves in the direction of the trend that proceeded it (lower).

Below is a daily chart of the Russell 2000 Index which tracks small-cap companies. I love watching this index because I feel it is a good gauge for the overall health of the stock market. When small companies are trading well it tells me that the breadth or participation of a rally is healthy and vice versa. The clear head and shoulders pattern on the chart below, combined with the completed DeMark sell signal at the end of March (13 on the chart) suggests the small caps are at risk of giving up the rally.

Finally, taking a look at the weekly chart that goes back to the 2009 bottom, the small caps are still at risk of forming a very large head and shoulders pattern that would resolve about 40% below current prices.

I'm not calling for another epic bear market along those lines. I'm just saying that after the phenomenal rally we've had year-to-date it may pay to zig (get more conservative) while everyone else zags (counts their profits).

My Linus Pauling Problem

Ever since I read "How To Live Longer And Feel Better" nearly a decade ago I've felt a certain sympathy for Linus Pauling. You see he was trying very hard to put his wisdom to work to improve the quality of people's lives. His biggest problem in this regard was that his product/message had no potential for economic benefit for those that helped him spread the word or even sell it. How can one man with a very simple message hope to compete with the world's largest drug companies and their marketing budgets?

Now I don't dare put myself on the same level as a 2-time Nobel Prize winner (in 2 separate disciplines, I might add) but this is exactly the situation I find myself in with "Fire Wall Street." I very strongly believe that almost everyone should read it and implement its methods but because nobody will profit from this (myself included) it's reach will be severely limited.

But I knew this going in. I never had any dreams for the book greater than just giving away a few copies to friends who have asked for my advice in the past. And ultimately it feels good just to know that it's out there.

The Ultimate Irony

The ultimate irony in the financial markets is that they inspire people to do precisely the wrong thing at exactly the wrong time. Residential real estate over the past decade is a great example of this.

Back in 2005 I knew more individuals that were buying up as much residential real estate as possible than I could count on two hands. Today prices are, in many cases, less than half what they were then and the cost of ownership, due to rock bottom interest rates, is just a small fraction of what it was. How have people reacted to this once-in-a-lifetime opportunity? By swearing they will never buy another house as long as they live.

At the same time, Warren Buffett considers this his #1 investment idea (buying homes and renting them out). This is what makes a successful investor: the ability to not just leave the lemming parade but to take advantage of the opportunities it creates.

To some degree this is happening in every security in every asset class every day.