Last week the Vickers Weekly Insider Report listed current insider selling at 4.16 to 1. That means more than four times as many shares owned by insiders are being sold than bought.

The last time this indicator was this high was the beginning of one of the biggest sell offs in history, October 2007, the top of the 2002-2007 bull market. Read the full story

If you expect to make money in this market or capitalize on the predicted W-shaped recovery you need to start looking at the jobs numbers as a predictor of a recovery, not something that follows one.

70% of this economy isn’t functioning as it should and won’t until there is a significant change in the employment numbers. Shoppers will return to the stores and the cash will come back to the markets when investors and consumers sense there is a future that includes a reliable paycheck.

Employment figures in the past have been a lagging indicator of economic activity. In other words, in past recessions unemployment did not improve until after a recovery had started and the stock market had moved up.

The rules have changed. Jobs have been cut at a rate we haven’t seen since the great depression and the average consumer is scared, for good reason.

The most telling jobs number of 2009 is that 112 of 372 reporting areas have reported unemployment of 10%, up from just six areas last year.

The Bureau of Labor Statistics reported that all 372 reporting areas in the U.S. had year over year increases in unemployment. 15 areas had unemployment over 15%, and two had rates as high as 23% and 26%.

In this recent earnings season virtually every company whether they met or exceeded their earnings estimates did so by cutting costs. That means they employed fewer people.

Cost cutting, cost containment, margin performance, call it what you like, what it really means is unemployment. The single biggest expense for any business is personnel. When a company says cost cutting what it means is job cutting.

If you’ve ever had to worry about where your next paycheck is coming from, you know what scared means. More importantly you know the affect it has on your sense of well being, or lack of it.

This loss of a sense of well being, by both investors and consumers, is at the root of our W-shaped recovery and a double dip recession.

In a system that is almost three quarters dependent on the consumer, we’re going nowhere without consumer confidence and that will come with jobs.

In every recession since 1950 a decrease in initial jobless claims was a leading, not a lagging indicator of a recovery. It will be the first reliable sign that real sustainable growth is on the horizon.

It’s published weekly and is one of the easiest of all the indicators to understand, just look for a downward trend. It also has been a consistently reliable market buy signal that can put you in the front of the pack.

There is an unofficial rule in the stock business called the “Odd Lot Theory”. It states that when small investors buy into a stock it’s a sell signal. A “small investor” is defined as someone who buys small lots (hundred share orders rather than thousands of shares) or odd lots (less than one hundred shares).

The reasoning is that the small investor is consistently wrong about when and what to buy, so if the little guy is buying, it’s time to sell. This unofficial rule has been painfully accurate during my 25 years in the markets.

The small investor consistently takes too little risk or too much risk or buys in after the market or an individual stock runs up. These are the only consistent qualities of this class of investor and they always result in losses.

Take a look at what the small investor has been doing lately.

A recent Wall Street Journal article, “A Taste for Risk-Again,” listed the activity of mutual fund buyers, the favorite of small investors, since last year’s sell off.  Purchases in emerging markets, China, and junk bond funds, sectors that have already seen big run ups and that are considered high risk compared to domestic large cap funds, have sky rocketed.

Investors in the first five months of 2009 have poured $4.9 billion into diversified emerging market funds compared to pulling out $2.6 billion in the same funds last year. Investments in the riskier junk bond funds are up 10 times over last year.

At the same time, large cap U.S. stock funds have had $11.2 billion withdrawn in ’09 in addition to the $52 billion withdrawn last year.

What’s the explanation for this surge? Small investors are trying to recoup their losses from last year by jumping in late on higher risk investments. See the pattern? Too much risk, too late.

At the other end of the risk spectrum, the risk adverse small investors who took their losses and ran from the market last fall have been hoarding cash. The savings rate in the U.S. is up from 0% of after tax income in 2008, to 7% in 2009. The cash sitting on the sidelines is gigantic and all of it is generating an after tax and inflation loss.

Despite the run up in the market since March of this year, the best companies in the world are still available for pennies on the dollar and are offering huge dividends. As always, the small investor wants nothing to do with these high quality, lower risk investments.

Merck for example is off about 55% from its January 2008 high. It has a dividend of about 5.7%, that alone is almost three times money market or savings rates, and it’s literally one of the best companies on the exchange.

Merck, and a hundred others just like it, is appropriate for just about everyone and could be a core holding in almost anyone’s portfolio. At a 55% discount it is essential.

Large cap, dividend paying stocks are one of the best places for small investors. It gives them income and stability they can’t get in any other investment and a risk level that is perfect for all but the most risk adverse.  But, as usual, the small investor is 180 degrees out of sync with what he should be doing.

The small investor historically will not be interested in a stock like Merck until it is at or near its 52-week high and the dividend is in the one to two percent area, exactly where you should be taking profits.

The Odd Lot Theory works. Use it to change how you are managing your money rather than being a victim of it.

Take a look at Sounds Profits. It’s a newsletter that focuses on using time proven investment techniques to help its readers use things like the Odd Lot Theory to their benefit.

Good luck.

Steve

The carnage of the past two years in the stock market is giving investors a clear warning; learn a new way of doing things or get ready for more of the same. Read the full story

Wall Street has a cousin they don’t want anyone to know exists. He’s kept out of sight and is only talked about in hushed tones. Read the full story

The market has gone up 41% since March 9th. Lots of investors are wishing they could have pocketed that 30% gain so they are jumping in now, hoping the ride will continue. Read the full story

The market is in the most troubling of all possible situations.

We have a split decision by the experts; a pull back with a W chart pattern or an extension of the amazing bull run since March. I’m here to tell you, it doesn’t matter. Read the full story

One of the saddest things I have ever had to do was drive through an old steel town in Ohio around 1990. I was dating a woman from the area and we had gone home to visit her family. Read the full story

The American auto industry, GM and Chrysler in particular, have been tumbling since the last real financial collapse in this country in the 1970’s. They were in trouble then for the same reason they are in trouble now; bad business decisions, bad taste and an inferior product. Read the full story

While the market surges and the herd stumbles around trying to decide if this 30% run in the market is real, there is another scenario unfolding that could very well be the single biggest driving force in our economy and the rest of the world.

The problem is the details of this developing story aren’t exciting or anything the average person wants to hear about. Most have little or no understanding about the specifics and frankly don’t want to know. But, this is a story that will be the make or break issue in the stock market, our economy, and the recovering world economy.
Read the full story