The Outlook for the Economy

Reuven Glick of the San Francisco Fed with the outlook for the U.S. economy:

FedViews, by Reuven Glick, FRBSF: In the preliminary report on first quarter GDP, growth was revised down to 0.6% from 1.3%, largely due to greater inventory liquidation and greater imports than estimated in the advance report.

The report also showed weakness in residential investment. Carrying the economy forward in the quarter was continued strength in consumption spending. The downward revision to GDP led to a corresponding revision in nonfarm business productivity for Q1 from 1.7% to 0.7%.

Retail sales in May were very strong, which surprised many forecasters. Overall retail sales rose 1.4%, following a decline of 0.1% in April. Excluding vehicles, sales rose 1.3% in May after a scant rise of 0.1% in April. Going forward, consumption will face stiffening headwinds from high gas prices, mounting debt obligations as mortgage rates rise, and a squeeze on the equity wealth in their homes as house prices decline.

Housing market data for the past couple of months give very mixed signals about whether residential investment has reached bottom. In April, housing starts rose 2.5%, but permits were off significantly—8.9%—from the previous month. The picture reversed in May, with starts falling modestly and permits rising.

Home sales data likewise are mixed. In April, new home sales rose a surprising 16%, while existing home sales fell 2.6%. There is some evidence also that house prices have not only appreciated more slowly but have actually declined: According to the National Association of Realtors, existing house prices are down 0.8% from a year ago; the Case-Shiller index indicated a 1.9% decline over the year. Residential construction spending—down 14% over the past twelve months—clearly has been a drag on GDP growth, but it has been offset by private nonresidential and government construction spending, leaving total construction spending down only 2% over the past year.

Orders for nondefense capital goods (excluding aircraft), a proxy for investment demand, appear to be regaining momentum this quarter. In April, these orders rose 2.1% following a 4.6% jump in March.

The manufacturing sector enjoyed solid growth in April, rising 0.5% following a 0.6% increase in March.

The labor market continues to be robust. Employers added 157,000 jobs in May, bringing the average increase in jobs for the last three months to 137,000. The unemployment rate remained at 4.5% in May, unchanged from April.

Evidence from retail sales, nonresidential and government construction spending, and manufacturing activity provide confidence that growth will rebound to above 3% in the second quarter, particularly as inventories are restocked. After the inventory swing ends, growth is expected to slow in the second half of the year. A downside risk to this forecast is that weakness in the housing sector could become more severe and persistent than expected. An upside risk comes from improvement in net exports due to solid growth abroad.

Inflation has been coming down recently. Over the past 12 months, inflation for the core personal consumption expenditures price index fell from 2.4% in February to 2.1% in March to 2.0% in April. (The core CPI fell from 2.7% in February to 2.5% in March to 2.4% in April to 2.3% in May.)

We expect inflation to hover around 2% in the quarters ahead. Risks to the inflation outlook include tight labor markets and low productivity, possibly leading to upward pressure on wage rates.

Long-term interest rates rose significantly; for example, 10-year Treasuries are up roughly 50 basis points since the last FOMC meeting. Expectations of higher inflation explain only a minor amount of this rise, as TIPS (Treasury inflation-protected securities) have risen by almost as much. Rather, the jump in nominal rates mainly reflected an increase in real rates related to expectations of a stronger U.S. economy and possibly of stronger economic conditions abroad. Financial markets no longer expect the FOMC to cut the fed funds rate this year, as evidenced by the basically flat fed funds futures path.

In recent years, burgeoning trade deficits have been a drag on the U.S. economy, reducing annual GDP growth by almost one-half percentage point on average.

Reversing this development requires some combination of depreciation of the dollar and stronger foreign demand, both of which we have seen to some extent. A weaker dollar tends to dampen U.S. imports by making them more expensive to U.S. consumers, while boosting U.S. exports by making them more competitively priced abroad. The broad dollar has fallen by roughly 20% since its peak in the second quarter of 2002.

However, this exchange rate adjustment has apparently not passed through one-for-one to U.S. consumers, as non-oil import prices have risen by only about 10%; one explanation is that foreign producers are afraid to lose market share in the U.S., so they try to avoid raising prices.

In addition, foreign growth has exceeded U.S. growth by an increasing margin, particularly in 2006 and 2007, with strength not only in most developing countries, but also in industrial economies, such as Japan and Europe. Taken together, these developments should give a lift to U.S. net exports, making them a significant upside factor to the GDP growth outlook.

The real story behind USO

Some commodity-tracking ETFs actually hold commodities under lock and key. Others, like United States Oil Fund (AMEX:USO - News), hold futures contracts -- storing barrels of gooey oil would be too messy.

The result is that USO investors have been nearly as big a group of losers as SUV drivers. While light, sweet crude oil ran up just shy of $70 a barrel, a 14% rise this year, USO is up a measly 1% this year. PowerShares DB Oil Fund's (AMEX:DBO - News) returns have come closer, with a 12% gain.

The IPath S&P GSCI Crude Oil Total Return Index (NYSE:OIL - News) exchange traded note has dropped 6.4%.

Contango Compounded

USO shows the compounding results of contango. You get contango when the next month's futures contract is more expensive than the current month's.

So every time the contract rolls from one month to the next, the fund has to buy the next month's at a higher price. Thus, the fund loses money.

John Hyland, director of portfolio research at Victoria Asset Management, which runs USO, could not comment on the matter because his firm has filed two other oil ETFs that track U.S. heating oil and gasoline with the SEC.

But in an April SEC filing, the company said: "It is not the intent of USO to be operated in a fashion such that its net asset value will equal, in dollar terms, the dollar price of the spot price of WTI Oil (West Texas Intermediate light, sweet crude oil) or any particular futures contract based on WTI Oil."

Furthermore, Victoria said USO aims to track changes in the price of the futures contract on WTI oil. Therefore, the fund does what it was designed to do.

Unlike the underlying commodity, futures contracts are highly sensitive to interest rates. Because buyers put up only a small amount of cash to buy the futures, they can invest the rest of the money in Treasuries to earn interest.

There's also liquidity issues and tracking problems, says Jeff Buetow, chief investment officer for XTF Advisors.

"Whenever you're using an underlying investment strategy that's tied to complicated derivative structures, you're going to get unexpected return performance that's materially different from the underlying commodity that you're trying to track," he said.

Backwardation

But investors can benefit from the opposite of contango: backwardation. That's when the next month's contract costs less than the current month's. So investors get to sell high and buy low.

This happens when supplies are tight and buyers are willing to pay more for spot prices. They're more concerned about immediate access than the cost of storage.

To complicate matters, there's Claymore MACROshares Oil Up Tradeable Shares (AMEX:UCR - News), which is up 19% this year, and Claymore MACROshares Oil Down (AMEX:DCR - News), which is down 21%. But these aren't ETFs. The explanation for their performance is a story for the near future.

Money Flows

Suppose we have an indicator that keeps a running total of every trade made in a stock. It multiplies the price of the stock times the volume of the trade to provide an indication of the dollars that go into the trade. If the trade occurs on an uptick, it is added to a daily cumulative total; if it occurs on a downtick, it is subtracted from the total. The resulting measure at the end of the day is a measure of money flow: the dollar volume that enters or leaves the market.


Watch for these flows to go negative or remain net positive. Similar pullbacks of late have represented good buying opportunities.


More important, we can see that a major shift in investors' allocations occurred following the June/July, 2006 lows. There was a surge in dollar volume, suggesting that much more money was being put to work in the stock market. After the late February/early March pause, that surge continued. This shift in allocations is what bull markets are made of.


I chart the money flows specific to eight S&P 500 sectors. This shows us that, while flows have slowed, they remain at positive levels--and in some cases remain above their long-term averages, even after the market weakness of last week.

The chart above shows us that money flows into stocks broke out from a long-term range. That has created a sustainable rally. Do such money flow breakouts occur in individual stocks, and might that become a basis for stock picking? More to come on this promising measure.

I chart the money flows specific to eight S&P 500 sectors. This shows us that, while flows have slowed, they remain at positive levels--and in some cases remain above their long-term averages, even after the market weakness of last week.



As long as these pullbacks in money flow occur at higher price lows, we have to consider the uptrend to be intact

Commitments of Traders Report

SMART MONEY AND DUMB

The "COTs," as they are known, give data on trillions of dollars of futures and options holdings in over 90 markets - everything from crude oil to the U.S. dollar, gold and the NASDAQ. The reports are issued every week by the U.S. Commodity Futures Trading Commission. They can be downloaded for free from the CFTC's website each Friday at 3:30 p.m. (Eastern Standard Time).

But the data in its raw form is hard to make use of - or even understand. Each weekly report gives the total position held in each market by three groups of traders.

First are the commodity producers. Analysts call them the "smart money." Also known as commercial hedgers or just "the commercials," they are seen as the folks with the best market information. When they are increasing their positions in crude oil, for example, it's probably a good time to get some energy stocks.

Then there is the dumb money - the "non-commercial" category. These are the large speculative investment funds, usually called the "large speculators" or simply the "large specs" - or just the "dumb money." They are trend-followers. Analysts say they are usually wrong at market extremes. If they are buying oil, it's probably a good time to sell your energy stocks.

The third group is the "non-reportable" category. These guys are seen as the really dumb money. They are the small-time traders who apparently don't know what they're doing at all and don't provide any meaningful market information. Or so say most analysts.

WHAT TO DO?

To make any sense of all this data, analysts say, you have to compare each group's position in a market to what it held last week. So that's what I started to do.

I wrote down the weekly positions for all three groups for a couple of dozen markets - the S&P 500, the NASDAQ, crude oil, gold, silver, the U.S. dollar, the Yen, the 10-year Treasury bond and others.

But then I was stumped. What should I do with all this information? The price of gold, for example, rarely went up just because the commercials had bought more gold or because the large specs had sold it. And sometimes, the commercials and large specs were both buying the NASDAQ at the same time. What would I do then?

The data looked interesting, but there didn't seem to be any clear way to use it.

LOOKING FOR TRENDS

After doing this for a while, I started to download the data into Microsoft Excel and make charts out of it to see if I could spot trends. I still couldn't get much use out of it. I tried to find correlations between the COTs data and underlying cash prices. I couldn't find much of any use.

(One bizarre discovery I made was that some equity indexes have very high correlations with subsequent COTs data many months later. However intriguing, that didn't seem like very useful information for investing.)

To my knowledge - despite many studies by economists and statisticians - no one has found any correlations you can bank money on and made this research public. (If I'm wrong on that, let me know. I'd love to see the study.)

Just then, a couple of interesting books came out by COTs gurus Larry Williams (who wrote "Trade Stocks and Commodities with the Insiders") and Floyd Upperman (author of "Commitments of Traders"). Both analysts suggested the COTs were most useful when the commercials or large specs had accumulated historically extreme positions.

In other words, if the commercials have a multi-year high net long NASDAQ position, it's probably a good time to buy.

But when is an extreme position truly extreme? That's the real question. Commercials and large specs often accumulate record positions for weeks and even months, without any change in the underlying markets. Anyone relying only on such "signals" would probably lose lots of money.

The same problem exists with many technical analysis tools. A market can be overbought or oversold for weeks without a change in trend. You can be right, but if your timing is wrong, well, you won't be trading for long.

As a result, COTs analysts say the data can't be relied on solely to time trades. They suggest the COTs are most useful as guideposts for possible future market turns. But the data must be combined with technical analysis for a signal.

A RELEVATION

While I was on paternity leave with our second baby last summer, I had one of those revelations that sometimes comes when changing a poopy diaper or sitting in a rocking chair past midnight with a sleeping baby on your shoulder.

Why not use technical analysis to study the COTs? There must be a way, I thought, to prove once and for all if the COTs positions have any impact at all on subsequent cash prices. Could the tools of technical analysis help?

I looked again at the S&P 500 data going back to 1995 (when the COTs first came out for free in electronic form). I wanted to see what happened to the index after traders acquired an extreme net position. I defined "extreme" as two standard deviations or more from the 27-week moving average.

The results were pretty exciting. An extreme net position usually led to returns that beat the market. For example, if you bought the S&P 500 index when the commercials were at an extreme net long - or when the large specs or small traders were at an extreme net short - your returns over the next weeks and months were usually better on average than if you had just bought the market at any random moment.

For example, the return for the subsequent week was 0.6 percent, compared to the S&P 500's average one-week return of 0.2 since 1995. For the subsequent three weeks, the average return was 2.5 percent, compared to 0.5 percent for the S&P 500. Over the subsequent 10 weeks, the average return was 6.6 percent, compared to 1.7 percent for the S&P 500 since 1995.

The superior returns continued for up to 40 weeks after the extreme position was first registered - as far out as I measured.

And there were superior returns in most time frames for both the large specs and even the usually-ignored small traders.

What it meant was the data could be the basis for a trading system after all.

TIMING SYSTEM

There were still a bunch of questions to resolve. Which group of traders should I follow? What if they give contradictory signals? And I still needed to figure out the best way to measure an extreme position in the first place, since I had picked the two standard deviations and 27-week moving average arbitrarily. Were better results possible with another definition of "extreme"?

Using Excel, I started to test returns with various combinations of moving averages and standard deviations. I was stunned at the results. With many of the combinations, a simple switching system of buying the S&P 500 when the commercials were at an extreme net long position and selling when they were at an extreme net short would have given market-beating profits. The returns were in some cases more than double those of buying and holding the index.

The results were just as interesting fading - or trading opposite to - the large specs. But the biggest surprise was that the best results came from fading the small traders - the guys everyone was ignoring.

I found a way to automate the testing with help from a clever journalist colleague, Mike Gordon, who is an expert in computer-assisted reporting.

MARKET-BEATING

In every index or commodity I analyzed, I found that a market-beating trading system could be found. I discovered that it was possible to increase profitability, in some cases, by delaying the trade for one to four weeks after a signal was given.

Also, I found the most profitable results came from using not the net number of contracts of each group of traders, but rather their net-percentage-of-open-interest position. This makes sense, I believe, because of the explosion of futures and options trading in recent years. The net-percentage-of-open-interest numbers have probably preserved their internal consistency better during this time.

The best news for me is that the system requires only one or two trades a year in most of the markets. There can certainly be something exhilarating about swing trading or day trading. It feels like you can actually behold the entire world - all its people, their anxieties, their hopes, the events that shape their lives - in motion at once, like a raging and crashing ocean. It can be so absorbing, I find it's often a struggle to focus on anything else.

Now, I need no longer fret about daily market ups and downs. All I do is spend just a few minutes each week downloading the latest COTs data and executing any trades, then sit back and relax.

Important Rules of Technical Trading

1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale "map of the market" provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.


2. Spot the Trend and Go With It
Determine the trend and follow it. Market trends come in many sizes -- long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.


3. Find the Low and High of It
Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new "low." In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies -- the old "low" can become the new "high."


4. Know How Far to Backtrack
Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.


5. Draw the Line
Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.


6. Follow that Average
Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.


7. Learn the Turns
Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.


8. Know the Warning Signs
Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.


9. Trend or Not a Trend
Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.


10. Know the Confirming Signs
Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.

30 Rules For Investing in the Stock Market

Rule Number 1. Sell your losers and let your winners run. How many times have you sold a stock that was up a few points while keeping one that was down? Guess what? Wrong move. The stock going up is doing what you expected; the one going down is not doing what you expected. Sell the loser! Not the winner.

Rule Number 2. Never buy a stock just because it has a low price . Price can be one of your parameters, but it should not be the only one. Buy stocks that you think will go up. I would much rather own 200 shares of a $20 stock that has earnings behind it, than 2000 shares of a $2 stock that has nothing but a story behind it. If you want to gamble, go to Las Vegas.

Rule Number 3. It is better to average up than to average down. Stocks go down for a reason. If you buy a stock and it goes down, why buy more? If you have a stock that is going up, well, wouldn't you want to own more of your winners?

Rule Number 4. Buy when the people that “know,” buy. Who are the people that “know”? The people who run the company of course. If the officers and/or directors of a company are making purchases of the company stock in the open market, that is a good sign. Remember, we don't mean if they are exercising options they have been granted. We mean buying stock in the open market, just like you do.

Rule Number 5. Buy…Sell Higher. People are use to hearing buy low and sell high. You don't have to buy low. You just have to buy stocks that you think will be going up. That's how you make money.

Rule Number 6. Watch the trend. Stocks tend to move in groups. That's why many stocks in the same sector like technology, health care, or banking, as examples, move in the same direction at the same time. You don't have to look for a star in a sector devoid of other bright lights. When possible, find your stars in clusters of other stars. It could make for a longer, straighter ride.

Rule Number 7. Only use margin if you understand what it is and can afford to lose more than you invest. Margin is borrowing money to buy more securities. I have known some brokers who actually told their clients, and I quote, “The amount of money you make in the market is predicated on how many shares you own.” Guess what! It's not! It is predicated on whether or not the stock you own goes up! If it doesn't go up it won't matter how many shares you own. You'll lose money. Make sure you know how much money you have at risk.

Rule Number 8. Stocks that split can offer great opportunities. And even better opportunities are sometimes found with stocks that announce a dividend increase along with the split. Sometimes after a split, a stock will come down a little because of a run up in price caused by the announcement. Look for the bottom, if that happens and enjoy the ride.

Rule Number 9. Buy a Winner, Own a Winner. That's right. You don't have to reinvent the wheel to be an investor who makes money. By that I mean, you don't have to find an undiscovered stock to do well. Buying companies that consistently do well is a good concept.

Rule Number 10. Buy on rumor. Sell on News. Many times the price of a stock will go up because there is a rumor about a company. A rumor is different than a “story.” A rumor is based on fact. A story might not have any facts attached to it. Where do these rumors come from? Who knows? But who hasn't heard of the company that has a drug with a scheduled FDA hearing and the thought is, they are going to get approved? Or the buyout that is going to happen? Or the big deal that makes sense for a company? If you are buying into one of these rumors, sell when you hear the news, good or bad, most times you will be better off. By the way, if the rumor never turns into an announcement, pick your time to sell. You bought the stock for a reason. If the reason is not there…SELL.

Rule Number 11. Don't take tips from your neighbor. Unless, of course, he is qualified. But most of your neighbors aren't qualified. Most likely your neighbor is just repeating something he heard from someone else. Kind of like the game whispering down the lane. We all know how that works. Yes, stories change. Do your own research, or use a professional.

Rule Number 12. Look around you before you invest. A great way to invest is to look for companies you know or do business with. Is your bank a public company? Do you shop at the large homebuilding stores? What about your supermarket? Is there one that stands out? Which products do you like? Look around and you might come up with a great investing idea.

Rule Number 13. Don't take large positions in illiquid securities. You don't want to buy a lot of stock in a company that doesn't trade much or one that has a very small float. When you go to sell your stock you could easily drive the price down. If you get into a stock, make sure you will be able to get out of it.

Rule Number 14. P/E/G not P/E. It is not enough to look at the Price Earning Ratio of a company. You need to look at the P/E Ratio versus the past, current and estimated future growth rate. If a company has a P/E of 15 and is growing at 12% annually, all things being equal, it probably will not do as well as a company with a P/E of 20 which has a growth rate of 25%.

Rule Number 15. Diversification can save your life…your investment life that is. This is the proverbial “don't put all your eggs in one basket,” rule. We are not trying to gamble here; we are trying to invest. Don't put so much money in one stock that if it doesn't work out it will change your lifestyle for the worse.

Rule Number 16. Over diversification can give you a false sense of security. Most people don't need to own more than 4 or 5 mutual funds to have maximum diversification. If you invest in multiple mutual funds of the same type, large cap growth for an example, you will find they will own many of the same issues. That is duplication, not diversification.

Rule Number 17. Act, and act quickly. Let's say you call your broker to buy a stock, or perhaps your broker has called you and you decide you want to enter an order. Once you have made the decision you should live by the “Nike” slogan. Make it your credo. “Just Do It.” Don't inquire about other stocks or ask how the family is doing. If you make a buying or selling decision, do your business so you don't miss your price. Sometimes stock prices change quickly. Ask your other questions after you have made your trade(s).

Rule Number 18. Limit your limit orders. If you are an investor, the difference of an eighth of a point shouldn't matter to you. Putting in a limit order to buy could cause you not to get an execution on a stock that you like and is moving up. If you want to invest in a company, invest in that company, don't leave it to chance.

Rule Number 19. If you are an investor, don't over trade. Investors do just that, they invest. For the relatively long haul, at that. If you buy a stock for a reason and the reason does not change and there are no mitigating factors. Hold the stock. Remember, let your winners ride and sell your losers.

Rule Number 20. Consider buying when there is blood in the streets. Of course we don't mean this literally. But the historical fact is that the stock market goes up, the stock market goes down and then the stock market goes back up. When the market has been slaughtered there are always opportunities.

Rule Number 21. Don't give stop orders that are too tight. If a stock has a normal trading swing of 1 ½ points in a day, don't put in an order to sell if your stock drops 1 point from where you bought it. You could get “stopped out,” not because of a drop in the stock price, which was caused by something extraordinary, but because of the normal price gyrations of the stock.

Rule Number 22. Marry your wife (or husband), don't marry a stock. Many people get caught up in one or two stocks or one or two industries and hold them forever, even if they are holding on for dear life. There are stocks that go down a lot and never come back. Divorce them.

Rule Number 23. Beware the wicked witch. The third Friday of the months of March, June, September and December are triple witching months. That means that options on stock, futures and index's all expire at the same time and often cause wild gyrations in the market. It can create opportunity, but could also be dangerous. Do not take these facts lightly if you are going into the market around triple witching day.

Rule Number 24. Don't be penny wise and dollar foolish. There are a lot of people out there offering advice on investments. If you are taking advice, concern yourself with more than the commission or the fee. After all, if you own stocks such as First Pacific Networks, Sci-clone Pharmaceuticals, Singing Machine, Magic Restaurants, or Continental Savings and Loan Preferred, it doesn't matter how much you paid for commissions or fees, you probably have lost a lot of money. Value is in the total profitability of your investments, not in the commission costs.

Rule Number 25. Beware the Hustler. There are three types of people in the investment business. There are those that hurt you because that is what they do for a living. There are those that can hurt you because they don't know any better, they just don't know what they are doing. Then there is the third group, the group that Michael Gold and Lee Siler belong to. That is the group of financial professionals who truly can help you. So the next time someone calls you on the telephone and tells you they have the next great stock and it is going to run to $50 and then split and run to $50 again and then split again and run to $50 again and then split again. Look into the telephone and tell them to call you back once the stock has run to 50 and then split the first time. You will still make a lot of money if the scenario comes true. When someone calls you and says they have found a company that can make aluminum out of sand (we actually heard this one), and that the stock will have a big run up in price, tell them to call you after the product is in production and is selling in the United States. Buy quality and earnings, not stories. Oh, one more thing, when someone tells you that you should buy low priced stocks because it is easier for a $2 stock to double than a $20 stock, do yourself a favor and hang up the telephone. In the long run, you will save yourself a lot of money and a lot of heartache.

Rule Number 26. Remember, the masses are usually wrong. When all the pundits on CNBC say the market can only go lower look for a turn up. By the same token, when everyone says the market is surely headed much higher brace yourself for a correction. Pay attention to extreme investor psychological levels in both directions as they usually mark both bottoms and tops.

Rule Number 27. Remember that analyst estimates are just that: estimates. Companies may earn significantly more or less than analysts believe they will. It is more important to watch the stock price performance heading into an earnings announcement than to focus on what analysts are saying. You will often see a stock's price run up significantly BEFORE the company announces better than expected earnings.

Rule Number 28. B uying options is a speculation, not an investment. When you buy an option you have to be right about both the move in the underlying security as well as the timing. This is why eighty percent of options expire worthless.

Rule Number 29. Tax consequences must come second to performance. Do not hold a stock solely to avoid paying a capital gain. If the stock is headed lower at some point you must protect yourself and pay the IRS. We have seen numerous instances where people have not sold a stock to avoid paying a capital gain only to have that gain disappear.

Rule Number 30. Find your comfort level. At night you need to be able to put your head on your pillow and go to sleep. If you can't do this owning a handful of Internet stocks, then don't own Internet stocks. It is your money, not your broker's. If you are not comfortable with the investments you own then it is time for a change.