Wednesday, February 6, 2008

Where is the money going?

The money in the stock market is leaving the financial sector, but after yesterday's 2.9% loss, we're sure that it's leaving other places, too. One might be quick to say that the investment pulled out of American markets is going to other markets, but the huge losses in China and Japan tell us otherwise.

Of course, lots of money is leaving the stock market and being put into gold, bonds, and other interest bearing accounts. This risk averse strategy is also a low-yielding one, though.

Even more money is leaving the stock market in another way. It's disappearing into thin air. When I first started trading, it took me a while to understand this concept. The main point to remember is that the stock market is based on speculation. A stock's value might increase or decrease 50% between the time you go to bed one night and the time you get up the next morning. Value can increase or decrease without a single transaction.

It's kind of like buying a baseball card. You might buy the card for a dollar and hope that over time it'll be worth five. The next day, you might wake up to find out people believe there are only a few like it in the world and offer you ten times your money for it. You might also wake up to find out that people believe that baseball cards support terrorism and your card might not be worth a penny anymore until people believe something else again.

Right now, more people believe that stocks are going to be worth less in the future, and so they're selling their stocks now. Even with that general sentiment in the market, there have been a number of mini-rallies. If you're in the market right now, profit taking during the mini-rallies to free up cash for investment a few months down the line is probably a good strategy.

I've been watching the mini-rallies, and I can tell you where the money is going! Generally, in a bear market, investors run to so called "recession proof" stocks for safety. These stocks generally include consumer staples, strong tech stocks, agriculture, mining, energy, and stocks with a strong international component.

This is no normal volatility, though! Consumer staples are suffering. Let's take a look:

Kroger (KR): down 18% in two months.
Pepsi (PEP): down 17% in less than a month.

Tech stocks are suffering even more. Take a look at two of the long time leaders of the sector:

Apple (AAPL): down 38% in two months.

Research in Motion (RIMM): down 37% in three months.

There is, however, a way to make some green during the mini-rallies! I have two lists of stocks that I want to describe to you. One is called "Contrarian" and the other is called "Safety". The Contrarian list contains all the financials, consumer cyclical stocks, and others like Home Depot (HD) and General Motors (GM) that have been battered pretty heavily. The list called safety includes stocks from the sectors of agriculture, mining, and energy.

Without fail, whenever the "Contrarian" stocks are up, it is at the expense of the "Safety" stocks. When the market hits these mini-rallies, the "Safety" stocks are scoring huge gains.

Tomorrow, I will tell you which safety stocks are most successful right now.

I will leave you with a word of caution, though. The stock market is in a contractionary phase right now, whether we like it or not. Even buying stocks that should rebound during mini-rallies is risky. It is difficult to predict what the temporary lows are. You may be think you're getting a real bargain, when in reality, the market has a long way to go down before the best of the stocks pull the market back up. See you tomorrow!

In play: Ultrashort Dow30 ProShares (DXD), the only stock I've recommended, is up 9% since last Friday. The Dow itself is down almost 500 points. Now that's smart investing!

Dollar Bill did not own any shares in any of the stocks he's mentioned at the time of publication.

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