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The New Conference Board Leading Economic Index

Courtesy of Doug Short.

Yesterday the Conference Board released its latest Leading Economic Index (LEI) for the U.S., an announcement I haven’t yet featured with a series of charts and commentary. Frankly, I’m still grappling with the major overhaul of the index, which includes extensive changes that extend to its earliest data in 1959. But here is a first effort at highlighting the changes.

Early in January the CB announced that it would be changing the index. See for example this Bloomberg news release. Actually, a couple of weeks before the announcement, some CB researchers published a SSRN paper on the topic, 29 scholarly pages, which included an overlay of the old and new LEI data.

The essence of the changes is made clear in the SSRN abstract:

In this paper we present the case for replacing three of the components and making a minor adjustment to one other component. The resulting index addresses structural changes that have occurred in the U.S. economy in the last several decades. The changes in the LEI composition include: 1) incorporating in the LEI a new Leading Credit Index (LCI) rather than real money supply (M2) starting in 1990 (real M2 remains in the index before 1990); 2) replacing the ISM Supplier Delivery Index with the ISM New Orders Index; 3) replacing the Reuters/University of Michigan Consumer Expectations Index with an equally weighted average of consumer expectations of business and economic conditions using questions from surveys conducted by Reuters/University of Michigan and The Conference Board; and 4) replacing “New Orders for (nondefense) Capital Goods” with “New Orders for (nondefense) Capital Goods excluding Aircraft.” These changes are assessed using turning point analysis, probit models and an indicator scoring system based on Markov Switching models. Real time out-of-sample forecasting exercises are used to confirm that the changes to the composition help the LEI forecast more accurately future economic conditions.

Here a chart overlaying the complete LEI series in its legacy and revised states. I’ve also documented recessions as identified by the NBER.

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For a closer look at the magnitude of the changes in the context of the last two recessions, here is an overlay starting in January 1994, a point at which…
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Whither Rates?

Courtesy of Doug Short.

It is that time of the year again: that brief moment when we confess that 2012 is the year for those overdue changes we now vow to see through. Not surprisingly, the resolutions we make annually are pretty consistent from person-to-person. Shed those ten pounds, save by forgoing the daily latte, spend more time with family or quit gripping and seek a better job — all will recognize these ambitions since we all share the same foibles.

Now, judging from the text of the minutes for the December 13th meeting of the Federal Reserve Open Market Committee (FOMC), we believe Chairman Ben Bernanke’s resolution for 2012 is to perhaps make the future direction of monetary policy a little less opaque. As an oracle (of sorts), the FOMC’s pronouncements are open to interpretation. The ancient Greeks could commiserate: in their mythology an oracle’s utterances are often misconstrued, often to the misfortune of those seeking its guidance.



Perhaps with this in mind, the FOMC proposes to make its intentions a bit clearer for us mere mortals. Commencing this month, the Federal Reserve plans to incorporate forecasts for the targeted federal funds rate in its Summary of Economic Projections (SEP), which is published four times a year with the FOMC minutes. (For those who have forgotten, the fed funds rate this is the interest rate banks charge each other when they trade excess reserve balances held at the Fed. The rate is set periodically by the FOMC and is a key lever used by the central bank in implementing monetary policy.)

The SEP already includes Fed forecasts for three key economic variables (real gross domestic product growth, the unemployment rate and changes in consumer prices) which guide the FOMC’s deliberations. Projections are made for the current calendar year and the next three thereafter. The Fed’s latest projections were released on November 22nd in conjunction with the minutes for the November 1st FOMC meeting.

In its latest assessment, committee members see the economy expanding at 2.3 to 3.5% in 2012 (versus a range of 2.2 to 4.0% in its June forecast), with unemployment between 8.1 to 8.9% (versus 7.5 to 8.7% in June) and consumer prices advancing by 1.4 to 2.8% (versus 1.2 to 2.8% as of June). The picture painted is hardly one of an economy…
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A Portfolio-Construction Tip from the TIP ETF?

Courtesy of Doug Short.

A New Year has started, yet many of last year’s financial debates remain the same.

Will Inflation or Deflation be the major theme in 2012? Will the Currency winner will be a stronger Dollar or Euro as a rising wedge has formed (see post here)? Will Global falling resistance hold or break? (see post here) Flag/Pennant patterns in the broad stock market will be resolved to which side? Is TLT facing resistance at the 2008 financial crisis highs (see post here)? Can TLT rally in 2012 like it did in 2011, up over 25%?

A “Helpful Tip” could well come from the TIP ETF as it has formed an Ascending Triangle over the past 5 months.

 

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Tips can be affected by rising and falling interest rates and inflation/deflation. This pattern could still take a few weeks to resolve, yet how TIPS break from this pattern could well become a HUGE TIP for portfolio construction!

 

(c) Kimble Charting Solutions
blog.kimblechartingsolutions.com

 

 

 

 





Graphical Representations of the Fed’s Effort to Stimulate Bank Lending

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs).

It’s easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession.

The charts below offer a stunning narrative of the Fed’s efforts and the results to date.


Base Money Supply

Money Multiplier Theory

The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth.

Alternate (Correct) Bank Lending Theory

  1. Banks do not lend simply because they have the money.
  2. Banks lend as long as they have credit-worthy customers provided the banks are not capital impaired.
  3. Reserves are not an issue. Lending comes first, reserves follow if needed.

With some charts below created by my friend “BC” let’s take a look at Bernanke’s efforts to stimulate lending.

Bank Loans Divided by Base Money Supply

Annualized Percent Change in Bank Loans Divided by Base Money Supply

Loans to GDP

Loans to GDP Annualized Percent Change

Loans to Private GDP

Loans to Private GDP Annualized Percent Change

M2 Multiplier: M2 Money Supply Divided by Base Money

M2 Velocity: GDP Divided by M2

The above charts show that it is taking more and more money just to keep the economy afloat.

US deficit spending is $1.4 trillion dollars, Bernanke is flooding banks with cash, interest rates are at record lows, mortgage rates are at record lows, and velocity of money is falling like a rock.

Excess Reserves

Of the $1.8 trillion Bernanke has added to base money supply since the start of the recession, nearly all of it is sitting parked at the Fed as excess reserves.

Interest Paid on Excess Reserves

As you can see, banks have parked close to $1.6 trillion with the Fed earning .25 percent annually. This is free money…
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Cycles in Dow Market History: Where Are We Now?

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Following on from my overall summary chart of 110 years of the Dow Jones Industrial Average (DJIA) published here last week, further detailed analysis serves to demonstrate that volatility has been reliably consistent for the past 110 years, and now is no different. Leading on from last week’s DJIA summary, I discovered on the 10base LOG chart that there was an approximate 16.6 year bounding box with 43% depth that could be repeatedly applied throughout the entire DJIA price history ? stacked vertically and added horizontally. I have since discovered this was no accident, and the chart below shows you how it was derived, in both time and price.

 

The completed annotated DJIA chart ? (using LOG based quartiles)

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Notations show alternating periods, highlighted volatility, and the amount of growth in quartile boxes (in blue). A similar chart can be done using a quintile LOG chart, but the repeating range is predominantly in quartiles.

After a bit of Photoshop pasting with an overlay of Doug Short’s Q Ratio analysis (sourced here), we get this interesting result.

 

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The chart above shows that the previous growth cycles have all commenced on a Q Ratio low, as it did in 1983, and would also be timed similarly for lows in other market value ratios such as cyclical P/E ratios, etc. It further confirms the current level of the Q Ratio, after the growth period into 2000, is yet to reach anywhere near the low levels of the three previous consolidation periods.

Where do I think we are now?

As of January 2000, we had just completed another ten-fold increase in the DJIA index, as a result of a clear up-leg with excess rate of growth that was almost 3% steeper that the growth out of the 1932 low. This…
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Real Final Sales Set to Decelerate?

Courtesy of Doug Short.

With the release of the Advance Estimate of Q4 2011 GDP less than two weeks away, the economists surveyed by the Wall Street Journal are forecasting accelerating growth for the US economy and generally discount the odds of a recession in the next 12 months (more here). With this optimism for context, let’s take a step back and look at some interesting correlations between components of GDP and the onset of recessions.

Recessions began in the past when Real Final Sales of Domestic Product (note) and Real Personal Consumption Expenditures (PCE) fell below 2.5% year-over-year and Real GDP overall fell below 2%. Why? Evidently 2.5% is the effective threshold below which consumption cannot sustain employment, labor force growth, and production replacement (capital and labor).

Note in the first chart below that Real Final Sales (the red line) have yet to accelerate above the historical recession threshold. And the final revision of Q3 2011 GDP (not shown) came in at 1.8%.

However, the 2.5% recession threshold in the past was maintained with the average real GDP trend of 3.3% (2.3% per capita), whereas the trend for real GDP has been cut in half since 2000 (and is below 1% on a per-capita basis) See this GDP chart for a look at the long-term GDP trend.

As the next chart illustrates, the YoY Real Disposable Income likewise bodes ill for the economy. It is at a level lower than its trough in six of the past eight recessions. Only once, during the Crash of 1987, has this metric fallen to the current level outside the bounds of a recession.

With Real Final Sales still effectively in historical recession territory, it is not inconceivable that a new lower threshold for YoY real growth has emerged for an “official” recession to be declared.

Might the new “new normal” threshold for an “official” recession be 1% or slower instead of 2.5%? Economists and politicians will be able to claim that the economy “continues to recover” at a slow, steady, “non-inflationary” rate, all the while the unemployment rate only falls because the long-term unemployed fall off the rolls and Boomers in accelerating numbers leave the full-time regular labor force en masse.


Note: Final sales of domestic product is GDP
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WSJ Economists’ GDP Forecasts: 3.1% in Q4, Falling to 2.2% in Q1 2012

Courtesy of Doug Short.

On Friday of next week (January 27th) we’ll get the Advance Estimate for Q4 GDP from the Bureau of Economic Analysis. Meanwhile, the Wall Street Journal’s January Survey of economists is now available. Let’s see what their crystal ball is telling them about Q4 GDP (download Excel File).

First, some context: The BEA’s Final Estimate for Q3 GDP came in at 1.8 percent, a downward revision from the 2.0 percent Second Estimate, which was a downward revision from the Preliminary Estimate of 2.5 percent.

With the successive downward revisions in Q3 GDP, have the economists become less optimistic in their forecasts for Q4? No indeed! In December the forecast median and mean for Q4 GDP was 2.9 and 2.8, respectively, with a mode (the most frequent forecast) of 3.0 (see the previous survey). In January the median and mean have risen to 3.2 and 3.1, respectively, and the mode is a stunning 3.5 percent. The latest mode is above the 3.3 average GDP since the inception of quarterly GDP reporting in the late 1940s and over double the 1.7 percent 10-year moving average of GDP (illustrated here).

What about Q1 2012 GDP? We see the same pattern as last month — a contraction in optimism. The median and mean drop to 2.1 and 2.2, reflectively, and the mode is 2.0, a big tumble from 3.5 for Q4 2011.

Thus far we’ve looked at the forecasts for quarterly GDP. What about the WSJ survey forecast for 2012 annual GDP? The most recent the Federal Reserve economic projections date from November 2nd, which are available here (click on the PDF attachment). The Fed’s range of estimates for 2012 was 2.3 to 3.5, with a “central tendency” of 2.5 to 2.9.

Now let’s have a look at what the WSJ economists think about the 2012 annual number.

So, with a 2.4 percent mean and 2.3 percent median, the economists are a bit less optimistic than the Fed about next year’s growth.

Odds of a Recession

The WSJ survey questionnaire again this month included a question about the probability, on a scale of 1 to 100, of…
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Weighing the Week Ahead: Have Big Companies Lost Their Earnings Mojo?

Courtesy of Doug Short.

Earnings season starts in earnest this week. There are a number of key questions:

  1. Have slowing economies in Europe introduced a big drag on profits?
  2. What about the dollar strength? Bad for profits?
  3. Profit margins have been at historic highs. Is the long-awaited mean reversion taking place?
  4. What about the outlook? Can there be any confidence about future profits in the face of so much uncertainty?

As I write this on Saturday, with a three-day weekend ahead, I know that the news from Greece will dominate on Tuesday. Whatever I write tonight could look silly, but I have been there before:)

By Thursday, we’ll all be talking earnings.

I will discuss how to play this in the conclusion. First, let us do our regular review of last week’s news.

Background on “Weighing the Week Ahead”

There are many good sources for a comprehensive weekly review. My mission is different. I single out what will be most important in the coming week. My theme for the week is what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.

Unlike my other articles at “A Dash” I am not trying to develop a focused, logical argument with supporting data on a single theme. I am sharing conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am trying to put the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week’s Data

Last week saw an interesting change in tone. The news from Europe (at least until Friday) was better, while the US economic data was worse. The dollar strengthened, which for many months has been the signal for lower prices on commodities and stocks. With that in mind, stocks did pretty well.

The Good

  • 2012 Earnings. The best news of the week is something that you will not see mentioned


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The Nasdaq 100 Twelve Years After the Tech Bubble

Courtesy of Doug Short.

Post bubbles can be painful! The Nasdaq 100 (NDX) hit its all-time high back in 2000, yet 12 years later this key tech index has been unable to rally above its 38% Fibonacci retracement level.

For the past year the NDX has attempted to break this resistance, only to be held in check. Now the NDX is within 3% of the highest weekly closing price of the past year and back at Fibonacci resistance.

Can this index do something different this time around and break resistance? Stay tuned!


 

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(c) Kimble Charting Solutions
blog.kimblechartingsolutions.com

 

 

 

 





Demographic Headwinds: The Decline of Peak Spenders

Courtesy of Doug Short.

Demographer Harry Dent was recently a featured guest on Bloomberg TV in an interview that was promoted with the frightening tease “S&P 500 to Fall 30-50% in 2012.” The video clip is available at YouTube here.

The rationale for Dent’s grim forecast is primarily based on the demographics of the peak spending years, an age cohort he refers to in the interview as ages 46 to 50. If we use the Census bureau five-year data groupings, the cohort in question is Age 45-49 (which is the range Dent normally refers to in his publications).

A search on “demand curves” at Dent’s website produces a link to a fascinating PDF file illustrating the life-cycle buying habits of households by the age of the head of household for about 240 different product categories. If you spend a few minutes looking over these pages, you’ll quickly grasp the significance of demographics for spending patterns and why the 45-49 cohort earns the reputation of peak spenders.

Let’s study a graph of the Census Bureau historical and forecast data for the peak-spending cohort population in the US from 1980 to 2050.

The Age 45-49 cohort peaked in 2009 and will bottom out in 2022 after an estimated decline of 13.4% from the 2009 population. The Census Bureau’s estimate for 2012 would give us an additional 8.8% decline in numbers for the big spending cohort before bottoming out.

Economists and market analysts often think of retiring boomers as the primary drag on the economy with their the transition from the accumulation to the decumulation phase of their life-cycle. But if we understand of the crucial role of consumption for our economic health (about 70% of GDP), a significant decline in the number of peak spenders is a demographic headwind that will challenge us for years to come.

 

 

 

 

 

 





 
 
 

All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Zero Hedge

Housing Bubble Pop 2.0: Remodeling Collapses To 1 Year Low

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

On the way up, every sell-side strategist points to remodeling as a leading indicator for the housing recovery as confidence in the value of their home prompts real people to "invest" in upgrades and remodel their homes. That has been the story... until now. As NARI reports, the Remodeling Business Pulse (RBP) data of current and future remodeling business conditions show current condition ratings fell significantly in March - in fact they fell from multi-year highs to one-year lows as "homeowners remain slow to make the decision to move ahead with higher-priced projects."...



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Phil's Favorites

Cost Of "Breakfast In America" Soars To Highest In Over 2 Years

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Another day, another indication that 'real' inflation - the kind that reduces standards of living and leeches away purchasing power for 'real' people - is anything but under control... and anything but stable.

With the Oz-ians in the Eccles Building pulling levers to run the world based on their "inflation" measures, it seems that if the price of 'things that matter' soars but the Fed doesn't see them, there is no need to tighten. Last week we discussed the surge in the price of beef, ...



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Chart School

Dead-Cat Bounce Over for the Housing Market?

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

I have been saying this for a while: You can't have a housing recovery unless actual home buyers are involved.

We are very far away from seeing the housing market reach its 2005 highs ... and as time passes, it becomes clearer that this generation may never see them again.

How can I say that?

What we have seen in the housing market since then, but mostly since 2012, in my opinion, is nothing more than a dead-cat bounce scenario -- an increase in prices after a massive decline. The chart below shows how far off we are from the housing prices of 2005.


Chart courtesy of www.StockCharts.com

One of the key indicators I follow in ...



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Insider Scoop

GM Said It Has Shipped Thousands of Replacement Ignition Switches

Courtesy of Benzinga.

General Motors on Wednesday said it has shipped "thousands" of kits needed to repair the defective ignition switches linked to at least 13 deaths.

Partner content partner content url:  http://www.foxbusiness.com/industries/2014/04/23/gm-said-it-has-shipped-thousands-replacement-ignition-switches/?cmpid=prn_benz

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

...

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Market Shadows

Soy Numero Uno

Soy Numero Uno

By Paul Price of Market Shadows

Bunge Limited (BG) is the world’s largest processor of soybeans. It is also a major producer of vegetable oils, fertilizer, sugar and bioenergy.

When commodities got hot in 2007-08, Bunge’s EPS shot up and the stock followed, rising 185% in 19 months.

The Great Recession took its toll on operations, dropping EPS to a low of $2.22 in 2009.  Since then profits have recovered.  They ranged from $4.62 - $5.90 in the latest three years. 2014 appears poised for a large increase. Consensus views from multiple sources see BG earning $7.04 - $7.10 this year and then $7.83 - $7.94 in 2015.

...



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Option Review

Casino Stocks LVS, WYNN On The Run Ahead of Earnings

Shares in Las Vegas Sands Corp. (Ticker: LVS) are up sharply today, gaining as much as 5.7% to touch $80.12 and the highest level since April 4th, mirroring gains in shares of resort casino operator Wynn Resorts Ltd. (Ticker: WYNN). The move in Wynn shares appears, at least in part, to follow a big increase in target price from analysts at CLSA who upped their target on the ‘buy’ rated stock to $350 from $250 a share. CLSA also has a ‘buy’ rating on Las Vegas Sands with a $100 price target according to a note from reporter, Janet Freund, on Bloomberg. Both companies are scheduled to report first-quarter earnings after the closing bell on Thursday.

...

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Sabrient

What the Market Wants: Market Poised to Head Higher: 3 Stocks to Consider

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Yesterday, the market continued its winning ways for the fifth consecutive day.  The S&P 500 closed within 1% of its all-time high, and the DJI was even closer to its all-time high.  Healthcare, Energy and Technology led the sectors while Financials, Telecom, and Utilities finished slightly in the red.  All three sectors in the red are typically flight-to-safety stocks, so despite lower than average volume, the market appears poised to make new highs.

Mid-cap Growth led the style/caps last week, up 2.87%, and Small-cap Growth trailed, up 2.22%. This week will bring well over 100 S&P 500 stocks reporting their March quarter earn...



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OpTrader

Swing trading portfolio - Week of April 21st, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly. Click here and sign in with your PSW user name and password, or sign up for a free trial.

...

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Digital Currencies

Facebook Takes Life Seriously and Moves To Create Its Own Virtual Currency, Increases UltraCoin Valuation Significantly

Courtesy of ZeroHedge. View original post here.

Submitted by Reggie Middleton.

The Financial Times reports:

[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. 

The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...



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Promotions

See Live Demo Of This Google-Like Trade Algorithm

I just wanted to be sure you saw this.  There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.

If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.

Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.

Follow this link to register for their training webinar where they’ll demonstrate the tested and proven Algorithm powered by the same technological principles that have made GOOGLE the #1 search engine on the planet!

And get this…had you done nothing b...



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Pharmboy

Here We Go Again - Pharma & Biotechs 2014

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.

And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference.  Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014?  The Biotech ETF beat the S&P by better than 3 points.

As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...



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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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