Two Fold Formula Setups Are Appearing Mike Swanson (02/15/15)

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Two Fold Formula Setups Are Appearing Mike Swanson (02/15/15) Last week instead of breaking down to retest its lows the US stock market averages went up.

The stairway to heaven rally that began in December 2012 remains intact for now, because the US stock market averages still remain above their longterm moving averages.

1 Two Fold Formula Setups Are Appearing Mike Swanson (02/15/15) Last week instead of breaking down to retest its lows the US stock market averages went up. It s nice to see people make money for awhile more. The stairway to heaven rally that began in December 2012 remains intact for now, because the US stock market averages still remain above their longterm moving averages. The move up has people very excited. The S&P 500 has risen over a thousand points since December of 2012 and people seem to expect it to go up another thousand points this year. There is nothing like higher prices to make the masses want to buy, because what they do is CHASE. The momentum for the moment is up. There is no denying that. But how much upside is there? I d guess 3-5% from here till the Spring or the Summer and then we ll see a big loss of momentum. I am glad to see the market go up as it is nice to see people make some more money, even though I I still believe that we are in a very mature bull market and stage three topping process that will eventually lead to another bear market. Stock market cycles were not abolished last week. The reason that I still think that we are in a big topping process is that the participation in the market remains narrow. Internals are not strengthening with the market averages. Take a look at the percentage of stocks on the S&P 500 above their 200-day moving as one example. While the market averages have managed to go well above their September highs, the

2 2 percentage of stocks above their 200-day moving averages on the S&P 500 has yet to even get above it s December highs. But that doesn t mean anything about what the market averages will do this week. Every bull market brings the emergence of new bull market cheerleaders. In 1999 it was people like Henry Blodget. In the next bull market that ended in 2007 it was James Cramer who captured the imagination of the masses on his TV show. His ratings have collapsed though and now it is Jeff Macke on Yahoo Finance that is the bull market oracle of today. Last week he said that valuations do not matter, because price is reality. Most American stock market investors only look at the US stock market averages. So when they see the averages go up one week they feel like they need to buy stocks. So what do they buy? Typically they see something in the news up a lot and jump in and try to chase it hoping for more gains. It may be a stock that just reported good news or one recommended as a buy on TV. The problem is they rarely have any strategy at all when they make their buys. They just buy because they get caught up in the emotions of the moment. They like to buy something only after it has gone up for years on end. Even though I rather see the market go up and down for the sole reason that it helps more people, it personally does not matter to me one way or the other, because I m invested in a whole basket of various asset classes and markets that I think are going to all go up more than the US stock market will if it continues to go up and will go up even if it drops. On Friday I looked at my account on the close and while the S&P 500 was up 0.40% every single position I owned was up a greater percent. Now I did try to short the market going into the week through and SDS position, but just got out of that for a small loss. By investing in multiple markets you position yourself so that you are no longer dependent on one market or one trading idea to make money. That makes it is so you can be more objective about things and makes it easier to make greater returns with less risk in the long-run too. Right now I have 20% core positions in the CEF ETF which owns gold and silver, 20% in gold stock ETF s GDXJ and GDXJ, 20% in the cotton ETF BAL, and 20% in RSX, the Russian stock market ETF. With the remaining 20% right now I m using it to purchase smaller positions in individual stocks and ETF s. Right now I own small 3% each positions in UNG, VIP, and PRU, which trades on the Toronto stock exchange. If UNG, which is a natural gas ETF, were to consolidate for several weeks I d actually increase my

These are the type of valuations that the US stock market had at the bottom of the Great Depression. The US CAPE ratio is over 27 now, higher than it was in 2007 and only this high in 1999 and 1929.

3 3 position size in that. I m also watching the GREK ETF as a potential buy and at some point this year am likely to put on another short position. When it comes to global stock markets the most cheaply valued nations in the world are Greece, with a cyclically adjusted P/E less than 3 and Russia with one of 4.6. These are the type of valuations that the US stock market had at the bottom of the Great Depression. The US CAPE ratio is over 27 now, higher than it was in 2007 and only this high in 1999 and But as Macke says price is all people care about now and the higher something goes up the more people want to buy it. In 2012 I bought the GREK ETF, which owns a basket of Greek stocks, and doubled my money in it in less than a year. It was all in the news at the time and all the news was terrible. Now I sold that position in February of last year and Greece is once again in the news following the emergence of an anti-austerity party in that country that is being totally demonized on CNBC. I don t want to get into all of the politics in it, but at the moment the situation in Greece is very fluid and I m just watching it for now. In Russia the stock market crashed in December due to a big tumble in it s currency associated with the Ukraine crisis and the sharp drop in oil prices, which has a big impact on the Russian economy. There was an even bigger crisis in 1998 in Russia and you can see what the Russian stock market did after that by looking at the chart on the right. Currency crashes can cause valuations in a stock market to get out of whack and fall to super low levels that brings opportunities for foreign investors to take advantage of by buying cheaply thanks to the impact that the fallen currency has had on the valuation of the stock market. The same thing happened in Argentina a few years ago. The stock market there got super cheap for outside investors, because the Argentina peso fell into oblivion. But the stock market there bottomed and went up

4 anyway even though the peso continued to fall and all of the news was bad. When I bought Greece in 2012 the news was bad and stayed bad and the market went up.

That is what real investing is about and that is why I bought RSX. So I see a big opportunity in Russia going forward.

4 4 anyway even though the peso continued to fall and all of the news was bad. When I bought Greece in 2012 the news was bad and stayed bad and the market went up. People like Macke are wrong when they say that valuations do not matter, because cheap valuations in markets do in fact bring incredible opportunities for those that take advantage of them. That is what real investing is about and that is why I bought RSX. So I see a big opportunity in Russia going forward. However, I must admit that it is not something I am going to spend much time talking about publicly on the free area of my website, because a lot of Americans have been trained to completely hate Putin and Russia and I fear that some people will consider someone that advocates investing in Russia to be a traitor to the state. I don t want to deal with that type of harassment. We live in a total surveillance state and the last thing you want are people reporting on you. I know of a financial newsletter writer that bases his work on astrology. A few years ago he claimed that his analysis of the stars led him to believe that a terror attack was coming. Some bombings in England then happened and someone turned him into the FBI. His house was raided and he was interrogated for hours on end. It s lucky that they didn t think his astrology abilities were real, because if they did they might have put him in a CIA rubber room to make more of them. Look at the picture below. This is from some crazy church service in Washington state a few weeks ago. In my bible it says to love your

neighbor. At the end of this service the Pastor told the people to raise their right arm and promise to watch their neighbors and turn them into the government if they do anything suspicious.

5 neighbor. At the end of this service the Pastor told the people to raise their right arm and promise to watch their neighbors and turn them into the government if they do anything suspicious. Instead of talking to them and being friendly to them they were told to essentially fear and hate them. In this church Jesus and God have been reduced to mere lesser figures to what is their true religion, which is worship of the big brother of state power. Really? I mean what are the odds that the people living next door to you are engaged in sinister plots? The people who live next to me are in their 70 s. They seem nice enough to me. To me someone with that sort of mentality is simply terrified. There are many people today that have no problem with giving up the fourth amendment to the Constitution simply because they are scared. People so scared that they have little respect for their own private property are capable of anything. This is not the country it was twenty years ago. It is a nation of fear. I trust you and the readers of this report, but do I really want to advocate investing in Russia to thousands of people that go to my free website, some of whom are likely obsessed with hating the rest of the world and fear Putin? On CNBC last year I saw Joe Kernan say that Putin should be executed and on CNN I saw one of their main reporters say that he was mentally ill. People receive these images and believe them. No matter whether you agree with what Putin is doing or not, and I am not saying I do, I do not think that he is mentally ill or what Joe Kernan was saying is appropriate for TV. I am buying funds to invest in Russia not because I support Putin, but simply because I think it is an opportunity to make money. I do not like Goldman Sachs either, but I d buy their stock if I think it is going to go up. And Philip Morris kills people with their products. I really do not buy stocks because I like a company or country or short them out of dislike either. And right now there simply are better opportunities to make money in the financial markets than to just buy the S&P 500 and hope for a 3-5% gain. Russia is one of them. And so is gold. Gold stocks have been pausing now right below their long-term moving averages now for several weeks and are likely to breakout of this consolidation range and go on a big run for the rest of the year. The HUI mining stock index is trading in a range with resistance in 5

6 the 205 area and support around 185. At the same time the HUI divided by gold relative strength ratio is trending up, which means that the stocks are acting better than the metal is. I have found this to be the best leading indicator for when gold and mining stocks are going to do and as long as this is trending up I will continue to expect to see higher prices for both precious metals and mining stocks. Few people share this view. In 2011 a bear market in gold began and big drops hit every year that followed. The drops have shaken people up and few are bullish on gold anymore and it seems like every week someone forwards me an about some prediction someone is making for another big gold crash. So some expert last week claimed that the commitment of traders report shows that gold is going to crash. Well last week commercials reduced their gold short position by 30,000 contracts so I do not know what they are seeing. But even more importantly I really have not seen a way to use the data in the commitment of traders report to time tops in commodities. I have found it very useful to spot bottoms, but not tops, because as a market goes up commercials tend to short on the way up and there doesn t seem to be some magic level that always brings a top. For example last fall I noted that there was a record net short position for commercials in regards to the US dollar index. But that hasn t mattered so far and the US dollar index has continued higher. It is only in timing bottoms when commercials have historically low net short positions or are even net long that I have found that data in the commitment of traders reports to be useful. When it comes to gold and mining stocks the HUI divided by gold relative strength ratio is the most reliable indicator that I know of and it is not confirming these bearish crash predictions people are making at all. In my view when bull markets begin few believe it and that is what we are seeing in gold. The best setups for individual stocks come at the start of bull markets. And I am seeing exciting setups in places like Russia and in mining stocks. There are two ways you can buy stocks. You can just throw money at them like a gambler and experience crazy results or you can look for repeating setups that work and use them to make money. In my opinion most people that are trading stocks are simple gambling degenerates. They just like to buy stocks to experience roller coaster emotional excitement. They would never admit to themselves that they are really in it for the action and are not really serious about making money. 6

7 The truth is if they were really serious about making money than they would use a pattern or system consistently to do so. The most profitable pattern I have ever found when it comes to buying stocks is something I call the Two Fold Formula. I call it this because it combines technical and fundamental analysis and also looks for two step stock price gains. I outlined it in my book Strategic Stock Trading. What it basically looks for are stocks with a low valuation that have high earnings growth prospects and/or pay dividends. The simplest way to look for stocks like this is to find ones with low PEG ratios. The price to earnings growth (PEG) ratio looks at the estimated earnings projections for the next five years and divides them by price. So while the traditional P/E ratio only looks at the price you are paying for this year s earnings the PEG ratio looks at the price you are paying for future earnings. Most Wall Street traders only look at growth stocks and become willing to pay any price for growth. Looking for low PEG ratios though enables you to buy high growth stocks at a cheap valuation. Now the problem with this is that such stocks really only appear after a bear market or in individual sectors that have already gone through a bear market. When a market has gone up for years on end there are few growth stocks with low valuations anymore. A PEG ratio of 1.0 is considered to be fully valued and 0.50 is considered cheap. Most of the DOW stocks have PEG ratios over 2.0! The technical pattern that makes up the Two Fold Formula is a very simple one that also appears in stocks at the beginning of a bull market and not at the end of one. All the examples in my book Strategic Stock Trading come from the time period and none of them were in 2007 or 2008 even though the book was written in This pattern is very simple. It consists of looking for a stock that has had a big price movement of at least 30%, and the more the better, off of a bottom in a very short amount of time. The stock then must pause for at least a week and consolidate. The big move off the bottom shows you that the stock can make big moves and is therefore likely to make another one. The consolidation period provides a safe entry point. On such a chart typically the 20 day Bollinger Band comes together over 2-3 weeks as the stock consolidates. If the stock then turns up and breaks out you usually get a gain of similar size to the one that occurred off of the bottom. So if you combine this chart pattern with a stock with a truly cheap valuation you have essentially what is the best pattern for buying individual stocks I have ever seen. 7

Looking for this is how I buy my stocks. The good thing is I have a very specific thing that I look for that I know has a good chance to bring me big gains.

8 Looking for this is how I buy my stocks. The good thing is I have a very specific thing that I look for that I know has a good chance to bring me big gains. The bad thing is if you look for this pattern you won t find it in FB, TSLA, and the stocks that are so popular with people right now that they want to find any reason to buy them. However, the pattern is appearing all over the place in mining stocks and stocks that make up stock markets like the Russian stock market that appear to have made major bottoms and this is an exciting thing to see. One example is with Russian telecom stock VIP, which I bought last week. VIP crashed with the Russian stock market in December. It then made a double bottom and rallied from $3.35 to $4.72 a share in just a few days for a 40% gain. That big gain shows what it is capable of. The stock then paused and broke out last week. If you recall I sent a report a few days ago saying I had bought it around $4.50 before the breakout happened. It has gone up 20% since I ed that report. The two step stock pattern is only half of the Two Fold Formula. The other half is that VIP has a PEG ratio of 0.31 and pays a 1.20% dividend. Yes I think the stock is going to continue to go higher. I d say in fact that it can go much higher. But I am not telling you to buy it now, because it has already broken out. The Two Fold Formula IS NOT about chasing stocks, but getting in before they make another big move up. 8

9 If you are interested in Russian stocks another one I am watching as a potential buy candidate if it consolidates here is Russian bank SBRCY. It has a P/E of 2.33 and pays an 8% dividend.

trading on the US stock exchanges anymore. But it is such valuation metrics that lead to big gains.

9 9 If you are interested in Russian stocks another one I am watching as a potential buy candidate if it consolidates here is Russian bank SBRCY. It has a P/E of 2.33 and pays an 8% dividend. The only way you would be able to invest in a bank at that valuation level in the United States is if you bought private stock from one, because you won t find valuations like that for bank stocks trading on the US stock exchanges anymore. But it is such valuation metrics that lead to big gains. Such valuations of course are available in the mining stock world thanks to the big gold bear market that took place from 2011 till last November. As we go forward I will be looking for at least one stock like this for you every week. One I bought this week is Perseus Mining, which trades under the symbol PRU on the Toronto stock exchange. You can see that it rallied from 18 cents a share to 40 cents a share off of its December low. It more than doubled, which means that it is capable of big moves. A few years ago it traded over $4.00 a share. At the moment it is consolidating following this big move with resistance at 40 cents and support at 33 cents. If it breaks through 40 cents then I fully expect to see it have a big rally from there, most likely to at least the 60 cents area, which was its high last year. That would be a gain of 50% from 40 cents. The S&P 500 and all these big cap tech stocks people are chasing will not go up like this, but many mining stocks will if the HUI breaks out in the coming weeks. Perseus is a $150 million market cap emerging junior mining company with mining operations in Australia and Africa, some of which it is planning to bring into production in the next few years, which causes analysts to have high earnings growth estimates for it. It currently produces over 200k ounces of gold a year at least than $1,000 an ounce.

10 10 Disclaimer WallStreetWindow.com is owned by Timingwallstreet, Inc of which Michael Swanson is President and sole shareholder. Both Swanson and employees and associates of Timingwallstreet, Inc. may have a stock trading position in securities which are mentioned on any of the websites or commentaries published by TimingWallStreet or any of its services and may sell or close such positions at any moment and without warning. Under no circumstances should the information received from TimingWallStreet represent a recommendation to buy, sell, or hold any security. TimingWallStreet contains the opinions of Swanson and and other financial writers and commentators. Neither Swanson, nor Timing- Wallstreet, Inc. provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on any TimingWallStreet publications may be deemed investment advice, such information is impersonal and not tailored to the investment and stock trading needs of any specific person. Past results of TimingWallStreet, Michael Swanson or other financial authors are not necessarily indicative of future performance. TimingWallStreet does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements published on its web sites, its alerts, podcats, or other media. The information provided should therefore be used as a basis for continued, independent research into a security referenced on TimingWallStreet so that the reader forms his or her own opinion regarding any investment in a security published on any TimingWall- Street of media outlets or services. The reader therefore agrees that he or she alone bears complete responsibility for their own stock trading, investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from TimingWallstreet. Consequently, the reader understands and agrees that by using any of Timing- WallStreet services, either directly or indirectly, TimingWallStreet, Inc. shall not be liable to anyone for any loss, injury or damage resulting from the use of or information attained from TimingWallStreet.

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