My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

TIP OF THE WEEK - A New Recommendation For Purchasing Foreign Currencies to Guard Against the Dollar Decline

A New Recommendation For Purchasing Foreign Currencies to Guard Against the Dollar Decline

Jason Brizic

August 12, 2011

Back on May 20th, 2011 I wrote a Tip of the Week advocating the use of Everbank to buy foreign currencies.  It was titled: How to Buy Foreign Currencies in the US to Guard Against a Dollar Decline.  I subscribe to Gary North’s wonderful website (www.garynorth.com).  I consider him a mentor in the areas of Austrian economics and entrepreneurship.  He has just brought some new information to light regarding Everbank.  You should find another company from which to purchase foreign currencies.  There is a new recommendation at the end of his article.

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A Warning to All Everbank Clients

Gary North
Aug. 12, 2011

Because I have publicly recommended using Everbank as a way to hold foreign currencies, I am posting this report. I no longer recommend the firm.

I have forums on my site. Members discuss problems. This was posted a week ago.

Well I just got a eye opening about "our" banking system and privacy rules. I made a purchase of coins from the Moneychanger, and set up a wire to transfer the funds (over $50k) to his bank. I set it up online thru my bank (Everbank) that night, for transfer the next day. The next morning, I get a call from Everbank, asking about the transaction. They want to know what this is for. I told them its for a purchase. They ask what was being purchased. I asked, "what does it matter". She wanted to know if it was for my business, and I said no. She kept asking what the purchase was for, and need to know before the wire goes thru. I said I authorized the wire and know who its going to and trust them, and its not their business to know what I am buying. She said they are federally regulated, and need to know. After going round and round with her, she finally said she will write down and note what I have said. After I got off work and came home and checked to see that it still didn't go thru. I called them back and talked to a supervisor. She said the same thing, and I asked for her to email me the documentation that says they have to know what I'm buying. After asking that several times she said there's no documents, but its under the "Know Your Customer". ( I knew I would eventually deal with this somehow). She said they have the right to not send the wire transfer if they don't know about it. So I told her it was for an investment. Then naturally she asked, what kind of investment, which I replied, its private. After going round and round with her, she said she would not send the wire. I asked to talk to her supervisor, and she said she would have her call me. Then after about an hour, the lady I was talking to called me back and said she did some research into the place I was wiring the money to, and found it was a precious metals dealer, so she said she would send the wire thru. I'm still in disbelief this happened. I was going to just send a check , but I'll bet they would of stopped it or frozen my account, after that conversation I had with them. Not sure if anyone else had something like this happened to them, and I'm not sure how to handled it any differently next time. So beware!!!!

http://www.garynorth.com/members/forum/openthread.cfm?forum=1&ThreadID=23672#116597

I followed up with Everbank to assess this. On August 5, I contacted the bank by email here:

https://www.everbank.com/contact.aspx

I told them who I was. I told them what I was about to do. (This article.) I asked them to have Chuck Butler contact me by phone. He and I have known each other for years. He writes the bank's daily column: http://www.dailypfennig.com.

Chuck never called. I have no doubt that he would have called, had anyone told him. I have drawn this conclusion: my request was not forwarded to him.

I received no response from anyone at customer service.

I am hereby withdrawing my recommendation for Everbank.

I will not deal with any financial agency that demands to know what I want to do with my money. I believe that the institution has no business asking.

I recommend that any Everbank customer write to the bank and ask for a response in writing. Ask the bank if it is bank policy to demand full disclosure from its customers about what they intend to do with their money before the bank will release any money in the customer's account. See what response you get. Then decide what you should do.

You have a substantial profit in your Everbank account if you bought the currency I recommended in the spring of 2009. You must decide whether it is worth paying the tax by canceling the account and moving it elsewhere. It may not be. But I recommend that you have another bank or institution in mind where you can transfer your funds whenever you decide to close the account. Do not tell anyone at Everbank what you intend to do with your money. Just get it out.

If you want a hard money account, I recommend that you use Merkfund. It does not have FDIC insurance. But it does not ask snoopy questions about what you intend to do with your money. I have found their customer service team to be responsive.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

TIP OF THE WEEK - Spot changes in price trends and momentum using the MACD

Spot changes in price trends and momentum using the MACD

Jason Brizic

August 5th, 2011

I love the moving average convergence-divergence indicator (aka the “Mac-Dee”) because it allows me to spot changes in price trends and momentum.

Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend following and momentum. MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

I use the commodity channel index (CCI) for identifying overbought and oversold levels.  To learn more about the CCI see this tip of the week: http://bit.ly/q2loA8 

Now back to the MACD.  The standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted with the indicator to act as a signal line and identify turns. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Interpretation

As its name implies, MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the moving averages move towards each other. Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movement. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security.

MACD oscillates above and below the zero line, which is also known as the centerline. These crossovers signal that the 12-day EMA has crossed the 26-day EMA. The direction, of course, depends on direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing.

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In the example above, the yellow area shows MACD in negative territory as the 12-day EMA trades below the 26-day EMA. The initial cross occurred at the end of September (black arrow) and MACD moved further into negative territory as the 12-day EMA diverged further from the 26-day EMA. The orange area highlights a period of positive MACD, which is when the 12-day EMA was above the 26-day EMA. Notice that MACD remained below 1 during this period (red dotted line). This means the distance between the 12-day EMA and 26-day EMA was less than 1 point, which is not a big difference.

Signal Line Crossovers

Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of MACD. As a moving average of the indicator, it trails MACD and makes it easier to spot turns in MACD. A bullish crossover occurs when MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move.

Due diligence is required before relying on these common signals. Signal line crossovers at positive or negative extremes should be viewed with caution. Even though MACD does not have upper and lower limits, chartists can estimate historical extremes with a simple visual assessment. It takes a strong move in the underlying security to push momentum to an extreme. Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover at the extremities. Volatility in the underlying security can also increase the number of crossovers.

Chart 2 shows IBM with its 12-day EMA (green), 26-day EMA (red) and MACD (12,26,9) in the indicator window. There were eight signal line crossovers in six months: four up and four down. There were some good signals and some bad signals. The yellow area highlights a period when MACD surged above 2 to reach a positive extreme. There were two bearish signal line crossovers in April and May, but IBM continued trending higher. Even though upward momentum slowed after the surge, upward momentum was still stronger than downside momentum in April-May. The third bearish signal line crossover in May resulted in a good signal.

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Centerline Crossovers

Centerline crossovers are the next most common MACD signals. A bullish centerline crossover occurs when MACD moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.

Centerline crossovers can last a few days or a few months. It all depends on the strength of the trend. MACD will remain positive as long as there is a sustained uptrend. MACD will remain negative when there is a sustained downtrend. Chart 3 shows Pulte Homes (PHM) with at least four centerline crosses in nine months. The resulting signals worked well because strong trends emerged with these centerline crossovers.

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There are more examples available at StockChart.com’s chart school: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve

I believe that the best opportunities to buy high dividend stocks at low prices can be identified when the MACD is below the centerline and after bullish signal line crossover.  I perform fundamental analysis first to decide what stocks to buy.  Next I use the MACD, CCI, and Bollinger Bands to time my purchase or sale of stocks.

I used this technique to buy gold at $840 per ounce in December 2009.  Gold has amazing fundamentals given the historic fiat money printing be perpetrated by the Federal Reserve.  Then I examined the technical indicators.  The MACD (the black line) was below the centerline and it had just crossed above the signal line (the red line).

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What works for commodities works for stocks as well.  I’ve been following SeaDrill (SDRL) for about six months.  Their chart shows how the MACD can help time a purchase.  I think SeaDrill should be bought at around $15.00 per share.  The MACD showed a steady decline in momentum during the first six months of 2010.  In June 2010 the MACD crossed the centerline into negative territory, then in July it turned upward and did a bullish signal line crossover.  The stock price bottomed at $16.64 just before these technicals came together

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AT&T’s MACD signaled a reversal in November 2008 and March 2009 along with the CCI and it Bollinger Bands.

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Pick one of your favorite stocks and type its ticker into the Ticker Symbol field.  Here is the link to the chart with the MACD and CCI set up for you:

http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p16270535585

Was the best time to buy your favorite stock when the MACD met my criteria above and in the linked CCI Tip of the Week?

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

TIP OF THE WEEK - Read the "Mystery of Banking" if you plan to invest

Read Rothbard's The Mystery of Banking
Jason Brizic
July 29th, 2011
 
You must read Murray Rothbard's The Mystery of Banking if you are going to invest your hard earned capital in markets tossed around by the Federal Reserve.  Gary North explains below.  You will never read a Wall Street Journal the same again after reading this book.  The is part of taking the "red pill" of Austrian economics.  Ignore it at your own financial peril.
 
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My 1995 Foreword to Rothbard's The Mystery of Banking
Gary Noirth

July 29, 2011

In 1995, I turned over the publishing rights to Murray Rothbard's 1983 book, The Mystery of Banking, to the Mises Institute. I thought that the Institute would do a good job in promoting it. I was correct.

Now that the Mises Institute publishes it online for free, I know it will be widely read. But the new edition does not have my original Foreword. I thought you might like to read it.

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You have in your hands a unique academic treatise on money and banking, a book which combines erudition, clarity of expression, economic theory, monetary theory, economic history, and an appropriate dose of conspiracy theory. Anyone who attempts to explain the mystery of banking--a deliberately contrived mystery in many ways--apart from all of these aspects has not done justice to the topic. But, then again, this is an area in which justice has always been regarded as a liability. The moral account of central banking has been overdrawn since 1694: "insufficient funds."1

I am happy to see The Mystery of Banking back in print. I had negotiated with Dr. Rothbard in 1988 to re-publish it through my newsletter publishing company, but both of us got bogged down in other matters. I dithered. I am sure that the Mises Institute will do a much better job than I would have in getting the book into the hands of those who will be able to make good use of it.

I want you to know why I had intended to re-publish this book. It is the only money and banking textbook I have read which forthrightly identifies the process of central banking as both immoral and economically destructive. It identifies fractional reserve banking as a form of embezzlement. While Dr. Rothbard made the moral case against fractional reserve banking in his wonderful little book, What Has Government Done to Our Money? (1964), as far as I am aware, The Mystery of Banking was the first time that this moral insight was applied in a textbook on money and banking.

Perhaps it is unfair to the author to call this book a textbook. Textbooks are traditional expositions that have been carefully crafted to produce a near-paralytic boredom--"chloroform in print," as Mark Twain once categorized a particular religious treatise. Textbooks are written to sell to tens of thousands of students in college classes taught by professors of widely varying viewpoints.

Textbook manuscripts are screened by committees of conventional representatives of an academic guild. While a textbook may not be analogous to the traditional definition of a camel--a horse designed by a committee--it almost always resembles a taxidermist's version of a horse: lifeless and stuffed. The academically captive readers of a textbook, like the taxidermist's horse, can be easily identified through their glassy-eyed stare. Above all, a textbook must appear to be morally neutral. So, The Mystery of Banking is not really a textbook. It is a monograph.

Those of us who have ever had to sit through a conventional college class on money and banking have been the victims of what I regard---and Dr. Rothbard regards---as an immoral propaganda effort. Despite the rhetoric of value-free economics that is so common in economics classrooms, the reality is very different. By means of the seemingly innocuous analytical device known in money and banking classes as the T-account, the student is morally disarmed. The purchase of a debt instrument--generally a national government's debt instrument--by the central bank must be balanced in the T-account by a liability to the bank: a unit of money. It all looks so innocuous: a government's liability is offset by a bank's liability. It seems to be a mere technical transaction--one in which no moral issue is involved. But what seems to be the case is not the case, and no economist has been more forthright about this than Murray Rothbard.

The purchase of government debt by a central bank in a fractional reserve banking system is the basis of an unsuspected transfer of wealth that is inescapable in a world of monetary exchange. Through the purchase of debt by a bank, fiat money is injected into the economy. Wealth then moves to those market participants who gain early access to this newly created fiat money. Who loses? Those who gain access to this fiat money later in the process, after the market effects of the increase of money have rippled through the economy. In a period of price inflation, which is itself the product of prior monetary inflation, this wealth transfer severely penalizes those who trust the integrity--the language of morality again--of the government's currency and save it in the form of various monetary accounts. Meanwhile, the process benefits those who distrust the currency unit and who immediately buy goods and services before prices rise even further. Ultimately, as Ludwig von Mises showed, this process of central bank credit expansion ends in one of two ways: (1) the crack-up boom--the destruction of both monetary order and economic productivity in a wave of mass inflation--or (2) a deflationary contraction in which men, businesses, and banks go bankrupt when the expected increase of fiat money does not occur.

What the textbooks do not explain or even admit is this: the expansion of fiat money through the fractional reserve banking system launches the boom-bust business cycle---the process explained so well in chapter 20 of Mises's classic treatise, Human Action (1949). Dr. Rothbard applied Mises's theoretical insight to American economic history in his own classic but neglected monograph, America's Great Depression (1963). In The Mystery of Banking, he explains this process by employing traditional analytical categories and terminology.

There have been a few good books on the historical background of the Federal Reserve System. Elgin Groseclose's book, Fifty Years of Managed Money (1966), comes to mind. There have been a few good books on the moral foundations of specie-based money and the immorality of inflation. Groseclose's Money and Man (1961), an extension of Money: The Human Conflict (1935), comes to mind. But until The Mystery of Banking, there was no introduction to money and banking which explained the process by means of traditional textbook categories, and which also showed how theft by embezzlement is inherent in the fractional reserve banking process. I would not recommend that any student enroll in a money and banking course who has not read this book at least twice. Of course, had I thought that there was even the slightest chance that such students would heed my advice, I never would have relinquished the rights to re-publish this book.

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1. P.G.M. Dickson. The Financial Revolution in England: A Study in the Development of Public Credit, 1688--1756 (New York: St. Martin's, 1967); John Brewer, The Sinews of Power: War, Money and the English State, 1688--1783 (New York: Knopf, 1988).

2. The historian Paul Johnson rediscovered America's Great Depression and relied on it in his account of the origins of the Great Depression. See his widely acclaimed book, Modern Times (New York: Harper & Row, 1983), pp. 233--37. He was the first prominent historian to accept Rothbard's thesis.

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For more tips of the week click here:

TIP OF THE WEEK - Create a Stock Market Watchlist

Create a Stock Market Watchlist Using Morningstar.com
July 22, 2011
Jason Brizic
 
You can use Morningstar.com to create a watchlist for your stocks to buy near the next stock market panic.
 
After you've researched your first batch of companies (read my articles, the public filings, and visited company Web sites), it's time to set up a watch list. How do you do this? Fortunately, Morningstar offers these services for free:

1. Go to the Morningstar.com and click on the tab labeled "Portfolio."
2. In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio."
3. You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue."
4. Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done."
5. In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again.
6. Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com.

By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.
 

TIP OF THE WEEK - Using the CCI to help time buy and sell decisions

An indicator that shows if a stock, commodity, or ETF is overbought or oversold

Jason Brizic

July 15, 2011

Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels.

To learn more about how the CCI is calculated and excellent examples read the rest of the StockChart.com chart school entry on the CCI.  It is available here: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in

I perform fundamental analysis first to determine if a stock, ETF, or commodity is worth buying.  Then I use technical analysis to help time my buy or sell.  The CCI can help you make buy and sell decisions.  This also works with shorting stocks.

You can use the CCI to help spot price bottoms.  The best opportunities to buy often occur when the CCI is in the “red”.  That means a value of -100 or greater.  You can also use the CCI to help spot price tops.  The most opportune times to sell often occur when the CCI is in the “green”.  That means a value of +100 or greater.

I use the Commidity Channel Index when I create free charts on www.stockcharts.com.

Here are the steps I take to setup my charts in less than 10 seconds:

  1. Leave the Type of chart: set to SharpChart.
  2. Type in the ticker symbol and click Go.
  3. Change the Period to Weekly.
  4. Scroll down to Chart Attributes; change Size to Landscape.
  5. Check the following checkboxes: Full Quote, Price Labels,
  6. Uncheck the Log Scale checkbox.
  7. Scroll down to the Overlays area.  Change the one that says –None- to Bollinger Bands
  8. Scroll down to the Indicators area.  Change the one that says RSI to CCI

I used the CCI along with Bollinger Bands and the MACD indicator to time my purchase of gold in November of 2008.  Notice that the price of gold was deep in the “red” on the CCI indicator in late 2008.  I has risen steadily since 2008.  Look at all those “green” peaks.  The green peaks will continue until the Federal Reserve tightens monetary policy.  There will be a day to sell gold, but that day is likely years away because the Federal Reserve is not facing inflationary pressures yet.  But I disgress.  Let’s get back to the CCI.

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3 year gold price chart: http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p21431362973

I recently wrote about AstraZeneca (AZN) as a potential high dividend stock worth buying.  AZN’s 3 year chart is very instructive on how the CCI could be used to help time stock purchases.

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When was the best time to buy AstraZeneca stock in the past three years?  The answer is in March of 2009 when the US stock market was bottoming after the Panic of 2008.  The CCI was deep in the “red” at a value of over -200!  The MACD and Bollinger Bands confirm the bottom of AZN in April of 2009.  Just take a look at how often the price bottoms coincide with the CCI in the red.  Likewise, so many price tops are near the green CCI peaks.

This method is not foolproof.  The United States Natural Gas Fund ETF traded as UNG shows us how ignorance of the prerequisite fundamental analysis that Benjamin Graham advocated many years ago can lead you into investment peril if you only rely on technical indicators.

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I’m going to analyze the fundamentals of UNG in the not too distant future.  This might not be the bottom.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

TIP OF THE WEEK - The Usefulness of Bollinger Bands

The Usefulness of Bollinger Bands

Jason Brizic

June 8, 2011

Bollinger Bands are a technical trading tool created by John Bollinger in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was dynamic, not static as was widely believed at the time.

The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.

Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle band is a measure of the intermediate-term trend, usually a simple moving average, that serves as the base for the upper band and lower band. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average. The default parameters, 20 periods and two standard deviations, may be adjusted to suit your purposes.

You can use Bollinger Bands to help you time your purchase of high dividend stocks, commodities, and contrarian stocks.  Price bottoms tend to occur when the stock price lifts off the long downward slide down the lower band.  Price tops tend to occur when the stock price falls from hitting its head on the top of the upper band.  I use the MACD and CCI in conjunction with the Bollinger Bands to confirm a top or bottom because just using the Bollinger Band alone can get you burned (the UNG example below).

I use Bollinger Bands when I create free charts on www.stockcharts.com.

Here are the steps I take to setup my charts in less than 10 seconds:

  1. Leave the Type of chart: set to SharpChart.
  2. Type in the ticker symbol and click Go.
  3. Change the Period to Weekly.
  4. Scroll down to Chart Attributes; change Size to Landscape.
  5. Check the following checkboxes: Full Quote, Price Labels,
  6. Uncheck the Log Scale checkbox.
  7. Scroll down to the Overlays area.  Change the one that says –None- to Bollinger Bands
  8. Scroll down to the Indicators area.  Change the one that says RSI to CCI

I discovered the usefulness of Bollinger Bands when I tried to time the recent bottom in the gold price back in 2008  Here is the 3 year gold price chart:

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http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p99091791121

When was the best time to buy gold on this chart? $681 in late October 2008.  What happened right after that point?  The price lifted off the bottom Bollinger Band.  The CCI was deep in the red and the MACD turned upward from negative territory.  Those confirmed the bottom.  I bought at $820.

The natural gas ETF trading as UNG provides a good example of how the solely relying on the Bollinger Bands alone can trick you into buying too high.  Look at this chart:

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http://stockcharts.com/h-sc/ui?s=UNG&p=W&b=5&g=0&id=p99958479096

Wow!  This fund has lost a lot of money.  The price of UNG lifted off the bottom Bollinger Band many times, but never enough to bust through the middle band.  The CCI and MACD indicators were good at around March 2009, but the price didn’t break through the middle BB.  Knowing the fundamentals of UNG were horrible was enough to stay away from the fund.  However, just carefully examining the technicals was also enough.

I use the fundamentals to decide to buy or sell.  Then I use the technicals to time my entry or exit.  I will write about the CCI and MACD in upcoming tips of the week.

The fundamentals of Safe Bulkers were strong during the big market crash of 2008-2009.  You could have used Bollinger Bands to get this gem at around $3.00 per share.

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http://stockcharts.com/h-sc/ui?s=SB&p=W&b=5&g=0&id=p24023572905

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

TIP OF THE WEEK - Get out of debt, save, and start your own business

Get out of debt, save, and start your own business serving unfulfilled customer needs.

Jason Brizic

June 24, 2011

One of your goals should be to insulate yourself from the coming economic calamity that will result from the insane actions of money-printing central bankers and deficit spending politicians.  Starting a side business to provide a second stream of income is a very good idea.  Many millions of people have lost their jobs.  This will continue to occur due to misguided Keynesian economic policies.  But where do you get the capital to start your business?

Savings are crucial to capital formation.  You use your savings to purchase producer’s goods that you will use to produce goods for others to consume.  The classic example is the lemonade stand.  You start with some money you saved.  You use your savings to buy lemons, sugar, ice, a large cooler, cups, some signage, and some wood to build you lemonade stand.  You didn’t need a business loan from a local banker (debt) to start your lemonade stand.  You started small with just a little bit of savings and a little entrepreneurial savvy of where some thirty customers might be located.

The key to savings is getting out of debt first.  Creating and sticking to a budget that includes savings will allow you to build capital in order to pursue some entrepreneurial efforts without quitting your current job. 

You can get out of debt in several years before massive price inflation hits your checkbook and impairs your ability to save.  I suggest you save between 10 – 15% of your pretax income.  Use this money to repay debts.  When the debts are gone you will have the budget and discipline to save 10 – 15% because you just did it while paying down your debts.

Gary North provides a free get out of debt course with specific action steps to follow.  This is similar to what Dave Ramsey teaches, but it is free. http://www.garynorth.com/public/department125.cfm

Invest in value priced high dividend stocks, precious metals, and rental real estate when you need to diversify some of your savings you are earning from your successful side business.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

TIP OF THE WEEK - The Yield Curve: The Best Recession Forecasting Tool

The Yield Curve: The Best Recession Forecasting Tool

Jason Brizic

June 17, 2011

There is a lot of talk about the economy going into a double-dip recession.  Keep your eye on the yield curve.  Gary North explains.  Visit his site www.garynorth.com.  There is a lot of good free stuff there.  This came from the free portion.  An inverted yield curve will destroy the profitability of mortgage REITs like Annaly Capital (NLY) and American Capital Agency Corp. (AGNC).

The Yield Curve: The Best Recession Forecasting Tool

Gary North

It was on the basis of this indicator that in the November 2006 issue of my Remnant Review newsletter, I predicted a recession in 2007. It arrived in December 2007, according to the National Bureau of Economic Research.

The yield curve is a "curve" of interest rates for debt certificates.

The interest rates for more distant maturities are normally higher the further out in time. Why? First, because lenders fear a depreciating monetary unit: price inflation. To compensate themselves for this expected (normal) falling purchasing power, they demand a higher return. Second, the risk of default increases the longer the debt has to mature.

In unique circumstances for short periods of time, the yield curve inverts. An inverted yield occurs when the rate for 3-month debt is higher than the rates for longer terms of debt, all the way to 30-year bonds. The most significant rates are the 3-month rate and the 30-year rate.

The reasons why the yield curve rarely inverts are simple: there is always price inflation in the United States. The last time there was a year of deflation was 1955, and it was itself an anomaly. Second, there is no way to escape the risk of default. This risk is growing ever-higher because of the off-budget liabilities of the U.S. government: Social Security, Medicare, and ERISA (defaulting private insurance plans that are insured by the U.S. government).

What does an inverted yield curve indicate? This: the expected end of a period of high monetary inflation by the central bank, which had lowered short-term interest rates because of a greater supply of newly created funds to borrow.

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely, and is almost always followed by a recession.

There have been exceptions, as this report by the Cleveland Federal Reserve Bank indicates.

Here is a great page, published by Fidelity, that explains the four major slopes of the yield curve and how they form. There is even an animated graph that lets you run through almost 30 years of curves, month by month. You can click the Play button, and the graph scrolls by. Stop it at any point. Click here.

For skeptics who want a detailed explanation of the relationship between the inverted yield curve and recession, they can read a 2004 Ph.D dissertation by Paul F. Cwik, which is available on-line at The Ludwig von Mises Institute's web site.

The yield curve for U.S. Treasury debt certificates is the one that investors use to predict the economy. Investors assume that the Treasury is the safest lender -- the least likely to default -- and therefore the rates on Treasury debt are least affected by risk.

The Treasury publishes the various rates here: Treasury debt rates

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TIP OF THE WEEK - Learn to use the Stock Market Fear Index to Maximize Your Profits

Learn to use the Stock Market Fear Index to Maximize Your Profits

Jason Brizic

June 10, 2011

 

There have been some amazing stock market declines since the 1987 crash of 25% in one day.  I wasn’t invested in the stock market in 1987, but I have been an avid market participant since 1992.  I experienced the 2000-2003 bear and sidestepped the 2008 crash.  Rampant fears lead to jaw dropping selling.

 

“Buy when there is blood in the streets…”, said the shrewd Mr. Rothschild.  I am not fan of central bankers, but Rothschild's advice here is excellent.  In other words, “Buy when others are fearful; sell when others are greedy.”  You can use the S&P500 volatility index (aka the fear index) to help time your buying and selling of the stock market.

 

The following excerpt comes from a 2008 Zeal article that I link to at the end of this “Tip of The Week”.  This is a concise explanation of the VXO index.

 

To drive such exceedingly rare big down days [he’s talking about the 7% down days in 2008], incredible levels of fear are necessary.  Fear is such a fascinating emotion.  Its potency is very asymmetrical compared to greed.  Fear flares up much faster.  But like greed it still leads traders to make poor decisions.  So all good traders must ultimately suppress their own fear to escape its bad influence.  Then they must simultaneously game others’ fears by going long when popular sentiment is scared, which leads to great bargain prices.

 

While this ethereal emotion is not directly measurable, some great tools exist which infer its levels.  My favorites are the implied volatility indexes.  These brilliant tools collate and analyze real-time options trades on stock indexes, actual bets made with real money, and distill them out to one number.  It expresses the annualized expected volatility of an index over the next month.  An implied volatility level of 30 indicates options traders expect 2.5% swings (30% divided by 12 months) in either direction in the coming month.

 

The flagship volatility index is the venerable VIX.  Launched in 1993, it estimated near-future volatility in the S&P 100.  The S&P 100 is the top 20% of the S&P 500 stocks, or the biggest and best American companies with very high trading volumes.  In times of great distress, it is these S&P 100 companies that are sold the hardest.  Their great liquidity ensures traders can sell fast with minimal price impact for any individual trader.  So when fear drives selling, these elite companies are the go-to stocks to cash out.

 

Unfortunately today’s VIX is not this original battle-tested version.  In September 2003 the same VIX moniker was given to a totally new implied volatility index based on the broader S&P 500.  This sounds innocuous and reasonable, but the VIX’s custodians also considerably changed its calculation methodology.  Thus today’s VIX has never been tested in a stock bear so we have no idea what extreme fear levels for it really are.  Thankfully the original S&P 100 VIX was preserved in the form of the VXO.

If you read the rest of the article you will learn to:
1) Sell the S&P 500 Index using the short ETF (ticker SH) when the VXO goes below 20.  Greed is greatest with the VXO below 20.

2) Buy the S&P 500 Index ETF (ticker SPY) when the VXO goes above 50.  Fear is greatest above 50 on the VXO.

 

There are other long and short S&P 500 ETFs and ETNs listed here: http://etf.stock-encyclopedia.com/category/s&p-500.html  I just picked the biggest ones for an example.

 

Here is the link to the article on the VXO and its inverse relationship to the SPX (S&P 500 index).  I can’t explain it any better than the guys at Zeal LLC as you can see from the excerpt above: http://www.zealllc.com/2008/vxospx2.htm

 

See the last three years of the VXO for yourself.  It bottomed in late April at 13.43 and has been rising steadily.  Market participants have been lured into a greedy state of market conviction.  It is time to short the S&P 500. http://bit.ly/FearIndex
 
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TIP OF THE WEEK - See if Insiders are Buying or Selling Their Stocks

See if Insiders are Buying or Selling Their Stocks

Jason Brizic

June 3, 2011

It’s always a good idea to see if company insiders are net buyers of the high dividend stock you are considering purchasing.

Sometimes this can give you a warning even if you haven’t done the deep analysis on a company yet.

You can use Morningstar.com to see insiders transactions and total shares held.

I was curious to see how much American Capital Agency Corp. (AGNC) stock insiders own.  Go to www.morningstar.com.  Type in AGNC in the text box and then select Insiders tab.  There are several sub-tabs.  I like the one called Insider Activity.  There is table below that with the tabs Transaction History and Holding Summary.

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Several executives of AGNC own no shares of the company.  That’s not a good sign.  Do the same on a stock you are curious about.

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