Fundamental analysis studies products, markets, management, earnings, market share (among other factors) of a company.  Fundamentals help investors spot undervalued opportunities. Fundamental analysis helps identify potential for growth.

Does this make fundamental work better, more important (or more relevant) than Technical analysis?

Generally speaking, technical analysis covers the price action of an investment.  Technical Analysis pays little or no matter to a company's market share, earnings, management or any other fundamental factors.  The trend is either moving up or moving down.

To a certain degree, technical analysis assumes (or expects) that all of the fundamental information has already been processed into the decisions made to buy or sell.

In 2010, many Wall Street firms, and the media that follow the markets, still rely on fundamental analysis to declare whether a company's stock is investment-worthy.  This reliance on fundamental work (indicates to me) that Wall Street — and their clients — still believe an advantage can be gained by speaking directly with company management and following the company activity on a daily basis.

But "human intervention" is what makes fundamental analysis imperfect.  In plain terms, "stuff" happens to companies.  Products do not sell as well as expected, and yet some new products do much better than expected.  Sometimes layoffs occur, or key people leave a company.  A merger of two companies may be negotiated behind closed doors, to the surprise of many.  And people will occasionally be "less than forthright" (in other words, omit material facts, mislead, gloss over details, or simply lie) about business conditions.  And periodically, companies discover an error and need to go back in time to "re-state" earnings for a previous quarter (or previous year).

These are a few examples where the fundamental picture of a company can drastically change.  And a company that was under-valued at today's market price could suddenly be over-valued.

Technical analysis looks at the price and trend, and then paints the picture for all to see.  While fundamentals try to "project" or forecast what a company may do in the future, technical analysis indicates what the share price has done in the past, and the current trend of the stock.

Regardless of the news, if more people believe the company is on the right path, they will buy the stock.
If there are more buyers than sellers, there is more demand.
More demand brings a higher price.

If more people believe a company is on the wrong path (regardless of the news), they will sell the stock.
If there are more sellers than buyers, there is more supply.
More supply brings a lower price.  Too much supply of anything (tomatoes, houses in New Jersey, shares of a stock for sale) brings lower prices.

Remember, technical analysts believe the reason "why" a stock is rising or falling does not really matter.  More on that later.

After all, well-run companies, with great management and spectacular earnings have seen their stock prices collapse.  And there are examples of poorly run companies — companies with NO earnings (and some with gigantic losses), where the stock price has skyrocketed.

There is no blanket answer whether fundamental or technical analysis is better.  Technical Analysis and Fundamental analysis serve different needs.  It is far better to choose investments that have good (or great) fundamentals — and — have a strong technical picture as well.

Technical analysis is a way to study investments only using prices.  By comparison, fundamental analysis is a way to study the value of an investment using practically everything else.  Prepared as charts, some forms of technical analysis use (or incorporate) trading volume and moving averages, rates of change, among other measures.  But the primary measure for technical analysis is price.

Using technical analysis can help you determine whether an investment is in an uptrend or downtrend.  These types of tools can help to determine if a particular investment is merely pulling back in an otherwise orderly uptrend, or starting a new downward trend.

In 2010, more and more investors are starting to include some form of technical analysis to help them make better investment decisions.  Tom Dorsey, of Dorsey Wright & Associates, often equates using technical and fundamental analysis to using two hands to play the piano.  Where technical or fundamental analysis may only tell you one side of the investment story, using some combination of both the technical picture and the fundamental backdrop allow you to get a better image of what is actually happening with an investment.

There are different types of charts used in technical analysis:

• Line Charts
• Bar charts
• Candlestick charts
• Point and Figure charts

There are more, but these are four well-known types of charts.  Additionally, there are some fairly well-used terms in technical analysis, like bands, oscillators, stochastics, relative strength, which will be covered in other articles.

Line charts often use the closing price of an investment, then connected one day after the next.  It can give you an image to help paint a picture if this investment is trending up or down.  A bar chart takes the information from the line chart and adds a dash where the opening price is each day and another dash where the closing price is each day to the chart. The open price for the day will be on the left side of the bar, the closing price will be on the right side of the bar.  If the bar for the day (or the week) has a higher dash on the right side (close), this means the investment has moved up. Candlestick charts add even more information, showing the difference between the open price and the closing price.  Depending on what happened that day (or week) will determine the pattern that is added to that candlestick chart.

Point and figure charts were created by Charles Dow, the first publisher of the Wall Street Journal and creator of the Dow Jones Industrial Average.  Even though Dow was actually a fundamental investor, Dow created these point and figure charts (called "figuring" in his time) to help eliminate the day to day rumors, wiggles and "noise" in a stock.

Technical analysis really does not care about a company's market share, or a new product coming out, or whether or not that corporation met their quarterly earnings estimates.  All that really matters with technical analysis is the price.

And this is where technical analysis really differs from fundamental analysis. Technical analysis believes that all the news is already known.  People will buy and sell for all kinds of reasons.  These buyers and sellers may be short-term flippers, or someone with inside information, or a long term investor.  The point is: if enough people show up to BUY a particular security, this indicates something "in demand." When enough folks decide it is time to sell a security…regardless of the news or event, this investment now has "supply."

When there is demand for something (anything: tomatoes, oil, real estate, stocks), prices must rise.  When there is too much supply (too much oil, too much milk, anything), prices must fall.  Technical analysis helps to determine (in a visual chart) whether the investment you are looking at is in demand or in supply.

So, while the fundamental backdrop for an investment may paint a glowing image for a bright and sunny future, the technical picture could show sell signal after sell signal, and a cascading stock price.

There are two basic ways to analyze investment opportunities:

• Fundamental analysis, and
• Technical analysis.

Fundamental analysis examines topics like the management of a company, the markets they serve, the products they create, manufacture and sell. Fundamental analysis also covers company earnings, corporate balance sheets and other financial data.  A large portion of fundamental research rests on the projections for future sales, estimates future revenue growth and predicted market share.

Using fundamental analysis can tell you if the stock price of a particular company is relatively cheap (or expensive) compared to their peers, or compared to the entire market in general. Much of the investment community in 2010 (still) relies on fundamental analysis to make investment decisions.

What could be wrong with fundamental research?

First, look at what was written a few lines earlier: fundamental research rests on projections.  Call them estimates, forecasts, predictions, or projections. Fundamental research and analysis is based on information provided by management.  But the information can be wrong (intentionally or not).  The forecasts are nothing more than educated guesses at what the future will bring:

• When will their new product be available?
• How much market share will this company grab in the next year?
• What will be the future sales revenues?
• What will the earnings for this company be next quarter?
• Will the earnings for next year be higher?  And by what rate will the company grow?

This is what all investors want to know: what will happen in the future.

What ELSE could go wrong with fundamental research?

All companies change over time.  Companies will expand, some will contract.  Some corporations will hire many people, which may slow down their rate of growth (as new employees get trained).  This will also increase expenses, which may mean their earnings do meet forecasts.

Other businesses may close a division, lay off workers.  Severance pay can hurt their earnings short term.  Sometimes companies need to raise capital and will raise money by selling stock, or borrow money (and then pay interest).  Businesses may sink money into research and developing new products.  Or they move relocate their offices, or refurbish locations.  Or sell entire parts of their company.

All of these "one-time" expenses can change earnings over time.  They can also change what the company looks like (are they now larger or smaller?) going forward.

Accounting and tax laws are often changing.  This creates events where companies might recognize "one-time" gains or losses.   And there have been plenty of times where companies have gone back and "re-stated" earnings for a previous quarter (or even previous years).

The point is, none of this can be extremely predictable.
And that lack of predictability makes forecasting a tough job.

Now, after all of these events that can change the forecast for the future of a company, now add in the fact that management is often judged on "how they are doing" by the company stock price.  At times, management of a business may be too optimistic (or too aggressive) in their belief of what the future will bring.  Or they can misjudge their markets.

And this isn't limited to company management.  The analysts that follow these companies can also be too aggressive or too optimistic.

Which makes this "prediction" business difficult. It is hard to predict the future.  In the next article, we will examine technical analysis, and (going forward), we will compare the two types of analysis.  I will share why both fundamental and technical analysis matter, to get a better understanding of how markets work.

It's against human nature to be bullish these days.

You don't have to think long and hard about it: the economy is in the tank, your neighborhood real estate values are falling every week, we ALL have friends who have been out  of work for a year-plus…with no new work in sight.

No credit, low bank balances, and oh…have you looked at your brokerage statement lately?

So yes, it's against human nature to be bullish these days.

Which could be a big mistake.

Each month, the University of Michigan releases a "Consumer Confidence" report.  You may have heard of this on the news.  It is called the University of Michigan Consumer Sentiment Index.  And this month (July 2010), "consumer confidence" has fallen to the lowest levels in a year (Bloomberg).

The objective of the survey is to gauge attitudes about business, personal finance, spending and forecast future spending.  This monthly survey basically takes people's temperature (optimistic/pessimistic) about the economy.

In a nutshell, here's the twist: Since the survey began, when people feel generally optimistic, over the coming five years the market does poorly (S&P 500).  And, when people are generally gloomy, the market (S&P 500) tends to do well over the coming five years.
(source: systematicrelativestrength.com)

I have a few "personal indicators" too.  Like a few clients I do not hear from often and have a tendency to call at extreme turning points in the markets.

Here is just one example:  I have a client who I speak with a few times a year who called me on April 23rd (the recent peak in the market) wondering if we should put more money INTO the market.  Which would have been a mistake – then.  This very same person called me back – just last week, as indicators are starting to turn up.  This time, they were wondering if we should be selling more.  A good "contrarian" indicator!

The main message here is try to set aside emotions, and almost ignore what's happening in your world.  Your local universe can have an influence on your decisions.  When things are looking good, you know it might just be a mirage.  Likewise, when things are looking pretty grim, it could also just be a mirage.

I like using these point and figure charts to help manage your money.  They carry no news or events on them – just X's and O's.  These charts form patterns and trends, and give us clear signals when to make changes.   And, as so many of you have heard me say, "when the charts change, we change."

When you can set aside the news (or noise), it makes making investment decisions easier.

We saw a pretty significant signal recently from the oil sector.   A relative strength sell signal.

This does not mean oil immediately becomes a terrible place to have money at work in March or April 2010.

But longer term, it suggests oil will (likely) under-perform the overall markets.  And, it's possible the sector could significantly under-perform.

This is really important, in more than one way.

First, let me walk you through another example where a sector gave a relative strength sell signal. The Financial sector gave a relative strength sell signal in April 2007.  Think about that.  That signal came before any of the mortgage stocks melted, well before Bear Stearns imploded (like nearly a year before that event) and significantly (18 months) before Lehman Brothers collapsed. And long before things like "sub-prime mortgages" and "TARP" became household terms.

And since "financial companies" were the largest component of the S&P 500 (at the time), it was a pretty serious signal for the whole market.

What was even MORE significant was that April 2007 was the first time that chart had flashed a relative strength sell signal…period.

Sure, some financial stocks rallied – and were even good trades AFTER the relative strength sell signal in April 2007.  But those gains were fleeting, and most were only short term trades.   You were trying to swim upstream in downward environment.

What relative strength charts can tell us is which areas will out-perform (or under-perform) their peers (or the whole market). And relative strength signals tend to last (on average) about two years.

Relative strength is not a trading tool.

So, oil, as a sector, has now given a relative strength sell signal. This is important because as the market has improved over the past year we've seen some common characteristics: as oil prices climbed, the dollar fell.  Are these two actions mutually exclusive?  Probably not.  However, in some ways, in the last twelve months oil became a proxy for inflation – and for the markets overall.  We saw areas rich in natural resources (like Latin America) perform really well over the past 12 months.

And now, in the last few weeks, we've seen the dollar strengthen (somewhat), we've seen emerging markets slow down (again, somewhat) and the price per barrel of oil has leveled off around the high 70's-low 80's area.

This does not imply oil will collapse with absolute certainty.  After all, the market generally looks pretty virile.  It also does not mean we will absolutely see Lehman-style collapses in the area either.  But never say never.

This is the first relative strength sell signal the oil sector has given, dating all the way back into the 1990's.

This is one big reason why I have stopped buying in the oil patch and the emerging markets.  These areas were "hot to trot" a year ago.   Now, I am more skeptical about investing in these areas. Too many times, investors will look at "what did the best last year" and blindly stick their 401k money there, or invest in the hot mutual fund of 2009.  Last year's superstars may become this year's (or next year's) duds.

Be careful!  Again, this signal could foreshadow conditions that may not appear for a few months, or even a year.  Or not at all. The sector could just stall.  But I'd rather be early, than a minute late.

Just what the heck does that mean…"back on offense?"

When I refer to "offense" and "defense" I mean which team currently controls the momentum of the market.

If the defensive team is on the field, then "supply" is in control.  If the offensive team is on the field, then "demand" is in control.  When the market is on defense, news can be interpreted as either "no news" or "bad news."  Meaning "surprises" (good and bad) usually bring lower prices.  Nearly everything can become a reason to sell.

When the offensive team is on the field, "demand" is in control of the football.  We don't know how long we'll have the ball.   It could be "3 and out" or it could be a sustained drive culminating in a touchdown.  We don't know the outcome.

But we know the plays to run when which side is in control.

See, a lot of folks (in my line of work) just run "offensive" plays, all the time.  Yes, ALL the time!

And when the things don't work out, they lament "well, right now the market is bad."
What kind of _____ answer is that?

I've got a fiduciary O-B-L-I-G-A-T-I-O-N to my clients to make sure we invest this money prudently. If we are on defense, the first play in my playbook is to STOP buying.   There is an entirely different set of plays I run whether we are on offense or defense.

You should know the market can go UP even when we are on defense. Or markets can just hang around doing nothing.  Defense means the risk of losing money is greater.

Here's an example: in this recent defensive period, the Dow Jones climbed to their highs for the year, but most individual stocks — and most sectors — pulled back and stalled.  You probably noticed in the 4th quarter that your accounts stayed flat, while the Dow moved up.  Most stocks and most sectors pulled back to the middle of their trading band.  So we didn't get hurt during this defensive period.

Ok, for this time around…defense was on the field and didn't give much yardage.  But we can spend more time talking about defense later.
For the present time, we are back on offense.

Which means the chance of making money is better now than in the recent period (when we were on defense).  Yes, the market can (and does, sometimes) go down while on offense.  But the odds of making money in the market improves when on offense.

Some areas will out-perform others.  My work keeps us in those areas.  But the tone on offense is a rising tide.  And a rising tide lifts all boats in the harbor…good and bad.

So a lot of lousy investments may go up when we are on offense.  When the football goes into defensive hands, the lousy investments will be exposed.  Warren Buffet said "It's only when the tide goes out that you learn who's been swimming naked."

We have the football.  Let's get to work.

Interest rates — short term interest rates turned negative on Thursday November 19th. Rates have been low and look like they could stay there awhile…but who knows? In this video, we discuss the purpose of a bank, and one possible reason rates may be so low.

Here is a quick video I put together to help explain the difference between equal-weight and cap-weight investment "baskets" like the S&P 500.

I had several calls this week from clients regarding money market funds and government insurance.  Essentially, the conversation would go something like this:

"Tom, I heard recently that the government will no longer be insuring money market funds.  Should we do something about this?   Should we be concerned?"

And I would reply "you DO know, that money market funds were never insured before last fall…right?"

"Really?"

It's true.  Most money market funds were not insured before the fourth quarter 2008.   Oh sure, there were "insured" money market options/choices around before 2008.  But their yields were so low, you needed a microscope to see them.  And in case you did not know, the actual technical name for money market funds…ALL money market funds…is "money market MUTUAL funds."  Which is why you get a prospectus when you open a money market account.

The objective of a money market mutual fund is to maintain its' $1.00 per share price, and return you a few bucks in interest/dividends.  Make sure all those assets they were invested in added up to $1.00 every night.  That's it.  Their marching orders: Keep that $1.00 price per share.  Or die.

And last fall, a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day.  More on this part in a moment.

Anyway…when the "financial crisis" spilled over into 2009, the Government continued to extend their "insurance" on money market funds.  That coverage will cease in October 2009 (very soon).

Part of the reason why interest rates on money market funds fell to zero was because:

• The Fed aggressively cut interest rates — and promises to keep them low, at least for the present time
• There is no incentive to pay a higher rate to attract deposits — all money market funds essentially became the same everywhere
• What's the price (yield) for safety?

Knowing that the "government backstop" of money market funds may not be renewed in October, I instructed TD Ameritrade (during the month of August) to move all money market assets from their traditional money market fund (which carried the government backstop) to an FDIC insured money market fund.  There is no cost or transaction charge involved in this move.  It was done strictly for peace of mind.

Why did the government have to insure money market funds in the first place?

The answer: Lehman Brothers

Don't misunderstand: Lehman Brothers themselves did not kill the safety of money market funds.  It was "allowing Lehman Brothers to go under" that dragged money market funds with them.  Like it or not, Bear Stearns and Lehman Brothers were two major players in the commercial paper market.

And commercial paper is what "drove the bus" called money market funds. 

You didn't really think money market funds were just T-bills, did you?
So…how was it that a money market fund at a bank or brokerage firm would be paying (for example) 1% and an outfit like ING could pay 3%?

Hmmm.   Exactly what WAS in that money market over there? It certainly wasn't all treasury bills.

But I digress.  Lehman Brothers was not only a market maker/facilitator for the commercial paper market.  They also borrowed heavily to fund their day-to-day operations with commercial paper.

OK, so remember a moment or so back when I wrote "a few money market mutual funds had some trouble maintaining their $1.00 per share price.   Their assets get priced every business day"?  Here is where things fell apart:

Lehman was a big player in the commercial paper market (as were all the big banks, along with GE Credit, Ford, GM and AIG, and others).  When you manage a money market fund, and your balance sheet is choking on stuff like short term financing notes (commercial paper) from companies that may not open for business the following Monday…well…what do you think you can sell those investments for?

A lot less than you paid for them.

Which is why suddenly, money markets assets stopped "adding up" to $1.00 per share.   It's like walking home with a lousy report card in your hand.

Bad.
Taking Bear Stearns and Lehman Brothers out of the commercial paper market is like taking the umpires off the field in a Little League game.  All that's left are little kids who don't know the rules.  Actually, it's not fair to compare those two companies with umpires.  But a Little League game without umpires looks like disorganized chaos.  And that's when Uncle Sammy pulled up to the field, and change the rules.

The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client).  He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.

I have to tell you, I really like this guy.  I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity).  Also, he is a good athlete — and umm, well, I like sports.  Over time, I've learned there are many common threads where our lives cross paths.

Wait a second…what does this have to do with point and figure analysis?

Everything.

I really believe I would have never met him if it weren't for point and figure analysis.  See, like many folks, he was referred to me — by another client.  If I didn't use the point and figure approach in managing the risk for my clients, I am not sure  he would be my client today!

Time out.

Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there.  The game plan, as directed by the home office, was "gather assets, place the assets with a money manager — or in mutual funds run by "professionals," then go find more assets."

When I was a financial adviser, there were many of those "episodes" where Toto pulled back the curtain and exposed the "Wizard" of the marketing department.  You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down.  I got tired of watching people's investment accounts getting blown up — through no fault of their own.

It's a wonder anyone made money.

There wasn't "one defining moment" in my 16 years as a broker that pushed me to change.  It was more like a "body of evidence."  And in 1997, I started looking at alternatives to "fundamental analysis."

Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.

Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.

Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?

Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.

You say you didn't own that stock back then?  Ummm…OK.

Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?

Hmmm.  Oh well, onward…

Know this: fundamental analysis does have a purpose.  But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.

What I was able to show my friend — in screenshots — is how the market has moved from a "negatively trending market" to a "positively trending market."

For the first time in about a year and a half!

That darn chart makes it crystal clear there are times you should be "in the market," and times when you should be "out of the market."

Fundamental analysis will never tell you when to get out.  Never.

My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.

With all they have going on, I'm happy they sidestepped a lot of potential damage.

And what about you…what's your story?  Is getting a game plan for your investments important today?

This is precisely why I use point and figure analysis… point and figure simply measures price.  And price IS the ultimate indicator — as it reflects changes in supply and demand.

In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.

Feel better my friend, you are on my mind.

There's an old saying: People want to do business with folks they know, like and trust.

A few years ago, I took a long look at my website and thought "if you cover up the name at the top of the screen, it's just like every other investment firm out there."

Yuck.

Now if you click over to Mullooly Asset Management, I think you'd agree — it looks nothing like any other adviser's site.

I wanted to put my own spin on the business.  After all, it's my name on the front door.  And people have told me repeatedly, "I like doing business with you because — unlike other money managers — I can talk directly to you, and we have gotten to know each other."  I can say many great friendships have unfolded over the past 23 years.

So…why Facebook…LinkedIn…Twitter?

OK, truth be told, I first went on Facebook because my kids were there, and a part of me wanted to periodically …ya know…check in on them!

But I found Facebook – and also LinkedIn were great ways for folks who maybe weren't in my immediate area to get to know me a little better.  They can read about me, they can see some of my articles I have written, they can check out my friends, who I am in touch with.

Now, in my line of work, results matter.

But I'll say it again, people like to do business with someone they know, like and trust.

And in case you have not noticed, investment advisers really should not have (meaning: they are not supposed to) have testimonials on their marketing material.  That's right!  Even simple stuff like, "I like working with Tom because he explains things clearly."

Not permitted.

So what's an adviser (or anyone interested in marketing) to do?  They need to find a way to get people to know, like and trust them.  Here's what they ought to check out:

Facebook
LinkedIn
Twitter

These are three great ways to be "in the conversation" and three great avenues for me to stay in touch with clients of mine in other parts of the country.  And three great ways for someone who is "not yet sure" about working with me to feel more comfortable.

Facebook = definitely more social.
LinkedIn = more business-oriented, I need to really develop this avenue more.
Twitter = how to get answers/information quickly

Find me on all of these applications and let's spend some time getting to know each other better.
When your friends are tired of the same old message from THEIR adviser, tell them to sign up on my website, or just check me out on Twitter, Facebook or LinkedIn.

It's a great first step.  And no pressure.

The reason these sites work is because these sites really don't want you promoting your business outright.  That's why it's called "social media" or "social marketing."

Now, what if I bump into someone who has never been to Facebook, LinkedIn or Twitter?

I tell them to Google: Mullooly Asset Management.  There are nearly 2000 different items Google serves up on Mullooly Asset Management.  That's page after page of results of content.

A few weeks ago, I was giving a presentation and two of the questions from the audience were:

1.  Most people I know already have an investment adviser.  What makes you different?

2.  How can I get more information about you and your business?

I tell them to google my firm.  Or, they could also Google "NJ Investment Adviser"

Or try Investment Advisor in NJ on Google.  Or perhaps they could Google 401k adviser (where I have two listings in the top 5).  Maybe they should Google "find an investment adviser in NJ."

There are TONS of way to look me up that way on Google.

But I think my personal favorite is this.  Go to Google and type in:

Best stockbroker in NJ

See what you get.

So, head over to LinkedIn, Facebook and find me.

Or if you are on Twitter, check out (send a tweet to) 401kExpert.

Why didn't we buy…this or that?

Getting calls from some folks who are asking questions like:

"Why didn't we buy GE at $7?"

"Why didn't we buy Citibank at practically zero?"

"Why didn't we…blah blah blah…"

Many of these same folks were screaming "Make it stop!  Make it STOP!" only a few months (and in some cases, just a few WEEKS) before.

Human behavior is a great source for comedy routines.

Look, many people in my line of work want to over-complicate this stuff.  They want to talk over your head and use jargon to confuse you, and perpetuate their existence.  I know, they send "fan mail" to me all time.

Basics.  Just basics.  Look at pictures.  I would like to acknowledge the use of these charts from Stockcharts.com.  You can check them out here.

Would you buy anything that had a pattern like this?

You know this company.  They "bring good things to light…"

The only time I would think about buying a pattern like this would be if it were incorporating writing (selling) covered calls against the stock.  Otherwise, yecchhh…

That's just way too much risk for me.  Do me a favor.  Read the next line carefully:

The definition of RISK, as a verb, is "to act in spite of the possibility of injury or loss."

I don't know about you, but that first chart looks like risk to me.  Take a look at the next chart.

The picture is heading in a completely different direction than the first picture.  Yes, it is heading up!

OK.  But you say…

"I don't buy stocks.  I only invest in mutual funds."

Or,

"I only have 12 different mutual funds to choose from in my 401k plan at work."

Charts are charts.  Doesn't matter if we are looking at a chart of a mutual fund, a stock, or the price of gasoline.

I look at the charts in your 401k plan on a continuous basis.  If none of the charts are going up, here is our plan: we stay on the sidelines.  Pretty simple.  No need to be a hero.  This is money you will have to LIVE on some day.  (You're not counting on social security, are you?)

Today's Lesson: Buy things that are going up.

That's an important lesson, and a lesson MOST people overlook, or forget.

So, good job.  Now take the rest of the day off.

Probably the toughest part of covered call writing is finding the right idea.

And ideas change all the time — as markets change, prices change and the option prices (premiums) also change.

Let's quickly review what "covered call writing" actually means.

Covered Call Writing (sometimes called "buy writes") involves the simultaneous purchase of stock AND sale of options.  Remember, any time you sell something, you are bringing money into your account.  So you are BUYING a stock (you are spending money) and also SELLING something at the same time (bringing money in).

If you were to buy 500 shares of XYZ at $50, you would SPEND $25,000.  If you were to buy 500 shares of XYZ and also sell 5 calls with a strike price of $55 (sold at a price of $9), you would only SPEND $20,500.  Put another way, your "net" cost would be $41 (buy the stock at $50, sell the calls for $9).

With me so far? 

Great.  Onward.

Now, whenever we examine any stock, there are three possible outcomes:

• Stock moves up
• Stock does nothing
• Stock goes down

In only one of those scenarios will you make money if you simply buy the stock.  Right?

Now what we have done in this example is this:

• We lowered our out-of-pocket cost to buy the stock from $50 to $41.
• We have protected our "downside."  Yes, the stock trades around $50.  But we are at break-even – even if the stock falls to $41. And the charts will clearly define where we should have a stop order to protect us.
• Yes, we have limited "upside" — the stock could be taken away from us at $55, but we were paid $9 for that chance. (By the way, if that happens, what is the gain?  Bought at $50, called away (sold) at $55 for a 10% gain, plus you were paid $9 as well.  Sweet.)

When looking for candidates for call writing, here are a few things I try to keep in mind:

Covered call writing works well when the market is confused.  Like now. We have short periods of time where the market runs straight up, and then reverses quickly.  In the big picture, we are still in a negative trend for most major indices, but getting closer and closer to testing resistance lines.  We still do not have confirmation this is a significant turning point, and no clear signals the market is turned a page.

So covered call writing is also an excellent way to get some money into the market, and still protect your downside exposure, or simply just bring in additional money into the account.  It's a great way to goose the yield on your money as well.

But the main thing to know is that you need individual stocks that are in uptrends.  A few weeks ago, there were only a small handful of stocks in uptrends.  Now there are more.  Here are some stocks that are in uptrends that may make good covered call writing candidates.  These are *NOT* recommendations. Call me and we can walk through what makes sense for your own individual situation.

Again, I am not recommending writing calls for everyone on the following:

IBM, Amazon, Reliance Steel, Imperial Oil, Scotts (Miracle Gro), Apple, EMC, Borg-Warner, AutoNation, Staples, and many more.

We need option papers on file.  And we need to have a thorough discussion so you understand clearly how this works.  I would not write about this if I did not feel comfortable at least discussing the topic with you.

It's worth a look, don't you think?

The Treasury Department said Friday that Sun Bancorp Inc. of Vineland, New Jersey, repaid $89.3 million, money it originally received on Jan. 9.  They gave back the TARP money.  Does that make it a good investment?

Sun Bancorp has sufficient funds to complete the redemption.

Additionally:

"When the Capital Purchase Program (which is part of the Troubled Assets Relief Program, or TARP) became available to well capitalized and healthy financial institutions like Sun, it was a positive partnership between the government and business to stimulate the economy through additional lending and community support," said Thomas X. Geisel, president and chief executive officer of Sun Bancorp.

Geisel continued: "The partnership then became politicized, the rules and regulations changed, and the dynamics of the partnership substantially shifted.  These changes significantly restricted the way we support our customers and communities, as well as the way we run our business."

Sun Bancorp was well capitalized by regulatory standards before accepting the CPP investment and will continue to be well capitalized under the same standards after the redemption.

Great.

I'm sure the Bank did not appreciate the Government getting into their business anyway.  Neither would too many businesses.

But here is where it gets interesting:

The Company also issued a Warrant to purchase 1,543,376 shares of its common stock to the Treasury Department at an exercise price of $8.68 per share.  According to the Company, they expect the Treasury Department to liquidate the Warrant following the full redemption of the Preferred Stock.

Part of the TARP deal was return of the money, plus interest, — plus warrants — to purchase shares in the bank.  1.5 million shares of the bank.  This represents nearly 7% of the entire shares issued.   They can exercise the warrants at $8.68, the stock closed Friday at $7.00.  This creates significant overhang in the stock.  I say that because a major stockholder (the US Government) will be looking the sell shares as the price moves up over $8.68.

So what does the chart look like?

Wow.  The story sounds great, but the chart looks terrible.   This is a stock that is stuck in a long term negative trend.  And that trend will not change until the stock can break through that red overhead resistance line.  That line is currently sitting at $11, a long way from $7.00.  And in between $7 and $11, there is a significant amount of stock that will be for sale starting as soon as the stock moves beyond $8.68.  This is a good example how we have to "marry" fundamental work with technical work.  The fundamental story sounds compelling.  The technical story looks ugly.

Good for Sun Bancorp, but I'd rather find somewhere else to put money to work.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.

Hey, I don't want to turn you into an "economics professor."  You would need your own beanie hat with a propeller to do that.  But let's cover the cocktail party "economics" conversation, so you can hold your own at a party.

There really is no "textbook" formula "how recessions end," but patterns tend to emerge.

First, understand why recessions start in the first place.  Banks stop lending.  Money supply shrinks.
Like it or not, the world runs on credit.  When credit dries up, business evaporates.
How do you get the machine moving again?  Lending.
And all the lenders have "gotten religion" recently, and are sticking to traditional lending yardsticks.

Often, two completely opposite ends of the market tend to move first when recessions end.  They give "clues" things are starting to loosen up: banks and commodities… especially precious metals like gold and silver.

See, the rising price of precious metals can sometimes signal that we're starting to see money back in circulation.  This would be a very strong indicator that the recession is coming to an end sooner than most people expect.   A rise in commodity prices tends to signal a pick up in economic activity.  And when you get enough economic activity, you get inflation.

A little inflation is a good thing.  Over the past year-plus, we have had no economic activity to speak of.

Now, there are plenty of people in the market today speculating that we will have massive inflation.  That's because the government has been printing money like crazy.  And when you stuff this much cash in one end of the pipeline, at the other end of the pipeline, you should expect runaway inflation. However (compared to other times), we have witnessed some massive price deflation in many areas of the economy: the price of your house, your stock portfolio and the job market.  So this massive "print job" the government has been doing (printing dollars) might actually just "offset" the price deflation we've seen.

Or not.
I suppose all of the pundits could be right!
When was the last time that happened?

See, the issue is not whether we MIGHT see runaway inflation or not.
The real question is: what are we going to do about it?

Over 23 years, I've learned the hard way.  Worrying about the future is really a waste of time.

We have to focus on what's happening right now.

As strange as it seems, we need to set aside what might — or might not — happen a year, two years or even three years from now.
So what is happening right now?

We have seen a massive bounce back in the financial sector.  Banks are far from being healthy, or even back on their feet.  But the selling was completely overdone.  So they are bouncing.  On the other hand, commodities: energy, natural resources (and the countries that are rich in natural resources) are really starting to move.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.
Here we go.

The other parts of the series:

The Economic Recovery of 2009, part I

The Economic Recovery of 2009, part II

The Economic Recovery of 2009, part III

How to get help with your 401k from Mullooly Asset Management.

This process will also help you with your 457 deferred compensation plan — or your 403(b) annuity at work.

First, if Mullooly Asset Management has never worked with an employee from your company before, we will need to get the list of investment choices available to you in your plan.  You can fax them to us at (732)223-9600, or you can send us the link to the website (if we don't need a password), or you could copy and paste the list into an e-mail or Word document.

We are not looking for your specific investments, or your most recent statement! What we need is an inventory — a list — of all the choices available to you within your plan.

We will need a day or two to review the choices available in your plan, take a look at the charts, and come up with a game plan.

We will then call you back — or set up by convenient time for us to speak — and review the best performing choices available to you in your plan at the present time.  This phone appointment should take no longer than 15 minutes.

Unlike financial planners or others in the investment advisory business (many use asset allocation pie charts), the recommendation you will be given will be based on what is working — right now — and are the best choices available in your plan today.  One of our core beliefs is "when the charts change, we change."

We will then alert you — usually by e-mail — when it is time to add, subtract, move money into, or out of — a particular investment in your 401(k) plan.

There are some years where we might make three or four changes.  There will be other years where we make significantly more changes.  The whole concept is to keep your money invested in the strongest asset classes at the current time.

Since Mullooly Asset Management is a fee only investment advisory firm, we have no product or investment to sell you.  We take a fiduciary obligation to manage your money strictly with your best interests in mind.  Unlike brokers (employees of brokerage firms) and some financial planners (who may work on a commission basis, or a "fee-plus commission" basis), a fee only investment advisor's only income comes from the fees generated by offering advice.

Therefore, it's in everyone's best interest (the Fee-Only advisor and the client) to avoid large risks and losses.

After we have had a chance to review the choices available in your plan, we encourage you to meet with us over the phone and be sitting in front of a computer with Internet access.

We use computer-sharing software.  This will allow you to see the charts of the choices in your 401(k) plan, as we describe the process to you.  This will also give you a visual demonstration of how we manage the risk for our clients.  We can usually accomplish everything on our agenda in less than 15 minutes over the phone with you.

We are not going to judge your prior investment performance.  We are primarily concerned with which investments are working today in the plan — and how to invest your money properly right now.  Since the future is unknown, it is a waste of time to predict what markets will do in the future.

At the conclusion of the call, if you are satisfied with what you've heard, we would be delighted to send you an investment advisory contract for you to review and sign.

The stock market has been posting gains the past few days.

After two very tough months to start 2009, what could go wrong?

Plenty, especially if you are focused on just the Dow Jones Industrial Average.

The Dow Jones has many financial-related companies, like Citibank, JP Morgan, Bank of America, American Express and quasi-financial stocks like General Electric and Caterpillar Tractor, which perform extensive lending and financing.

Remember, the financial stocks have led the charge the last two weeks, after Citibank's CEO circulated a memo to employees announcing the bank did well in January and February.  But two months do not make a full quarter, and the banks have posted significant losses in the previous quarter, as mentioned before.

In fact, JP Morgan CEO James Dimon mentioned on Friday, March 27, 2009 that March is shaping up to be a difficult month.  And financial stocks promptly swooned, bringing the rest of the market along with them.

What else could go wrong?

On Tuesday, March 31, we will finally hear the final revised 4th Quarter GDP numbers.  Remember, one month after each quarter, we get preliminary GDP numbers.  Then one month later, we get revised GDP numbers.

Then, at the end of the following month — which is also the end of the NEXT quarter — we receive the final revised GDP number.

The market took a beating on each of the previous two GDP announcements at the end of January and also February 2009.  If the number on Tuesday is revised downward, watch out.

We also will receive preliminary 1st quarter GDP numbers (1st quarter 2009) one month from now, at the end of April, 2009.  Fasten your seat belts.