Potash Corp...$188 million dollar mistake?

I have been studying the chart for POT.TO (Potash Corp) lately looking for confirmation about what may lie ahead for the TSX Composite Index. Potash Corp is definitely one of the stocks contributing to the January rally on the TSX. The wedge shaped rally is more pronounced with POT than it is for the Comp Index.

Today was not one of the larger volume trading days, but about $188 million changed hands today for shares of this one stock. $500 million per day is closer to the longer term average daily trading.

I see a high probability that this stock is ready for a good price tumble. If true, all those buyers today will soon be surprised and disappointed.

A few facts.

$160 per share and a P/E ratio of 48. This P/E level is way too high and not sustainable.
Price has accelerated from $75 to $160 over the last 8 months (0.67 years).
A doubling of the price in 8 months. This is in excess of a 100 % increase per year.
The larger and larger price oscillations in recent months are an indication of a nervous and uncertain market. It is a sign of financial instability.
The chart looks more like a chart for a 5o cent penny gold mining stock than a blue chip stock.

It looks like a text-book example of classic irrational exuberance.

It will be interesting to follow this one.

TSX Fooled Me Again

The rally that I suspected was over is still in play and it rose above the 13,570 mark. This has eliminated one of the possible options to solve the current puzzle.

I still see 2 or 3 scenarios for a continued bear market. One is a triangle shaped rally. So far it looks like this is a possibility. If so, this rally still has some more headroom with a couple of more small legs to go. If it turns out to be a triangle... then once the triangle is complete the drop following it will be downward and relatively fast.

TSX Composite Index Forecast Feb. 19, 2008

I was wrong about the TSX Composite Index rally having ended. This made me ask...What am I missing here? I took another look and noticed a detail in the chart that I had overlooked earlier. It always makes sense in hindsight and the market never breaks its own rules.

I now see another possible outcome. The ultimate limit to the current rally could be the low of 13,570 made near January 7th. As always there are other possibilities but this one appears the most likely maximum value before the index makes the next important turn and continutes its zig zag decent toward lower levels. I'm still expecting a final bear market low somewhere below 12,000.

The rally is still rising today....so far it has hit an intraday high of 13,452. With this short-term scenario it can only rise a maximum of another 118 points (13,570-13,452).

Apple Computer still on a downhill run

I took a look at Apple Computer today. It is currently at ~$125 per share with a P/E ratio of 27. The price run up from about $10 to $212 over the last three years was an excellent example of "building castles in the air". I guess there was still some life left in the dot.com mania.

The evidence points to a high probability it will be going down to $100 or lower. It could go significantly lower than $100 before this bear has run its course.

Still waiting to see if that TSX Comp rally has finished or not. I'm guessing it has but time will tell.

TSX Index January 31, 2008

The S&P/TSX Composite Index is still moving more or less sideways just below the peak of 13, 171 (13,158 error corrected). The Bears and Bulls are evenly matched so far and it still could go either way in the short term. Similar patterns exist for RIM and POT as well as for the US S&P 500 Index.

TSX Going Lower now?

I'm seeing a number of signs that the market rally that started on Tuesday near 12,000 may have run its course. This is a very short-term prediction.

The TSX Comp index hit a high this am of 13,171. Now its always possible that a lot of new money may enter the market and keep this rally going for a while yet. The market always has incredible flexibility.

If this was the complete end of the relatively small bear rally and not just the first leg of a longer term rally...then the market is free to resume its fall below the low of 12,000. So far - this rally has taken on the shape of an upward pointing wedge. This shape is a common pattern that forms during bear markets. This pattern is more pronounced in RIM where the required decreasing volume pattern matches very well.

To put all of this in perspective...I firmly believe that the TSX Index will eventually bottom and then recover all of the lost ground, eventually making new all time highs.

Early Warning Signs

Anyone who follows the stock markets is currently wondering... What will the stock market do over the next few months or years? Fortunately, there is a relatively simple way to get a feel for what is likely to come next. This method does not require one to guess anything about profits, dividends, interest rates, government intervention and so on.

Here's how it works.

Over long periods of time stock markets move in trends. After a number of years the long-term trend changes. A simple way to detect if the trend may be changing is to use a simple trend line. For a Bull Market the trend line moves upward. It is a line connecting all of the major low points. For a Bear Market the trend line moves downward. For the Bear Market it is a line connecting all the highs. The trend line works for market indexes and for many stocks.

We can think of the trend line and the market action relative to the line as a "trip wire" or early warning system. The market cannot change from one long-term trend to the opposite long-term trend without breaking through the trend line that has been "in force" for a number of years. This is a simple undeniable fact. This analysis is scientific because it can be repeated and verified by others. For longer time periods there is always only one long-term trend line. Any market history chart will show this to be true.

At this point in time we wonder.. Are the stock markets just in a relatively short-lived and shallow correction, or have the stock markets begun a much deeper longer-term Bear Market? Before the next large Bear Market can begin, the Bull Market trend must be penetrated on the downside. The long-term trend must start to change.

These two graphs show that the US and Canadian Stock Markets have both broken below the long-term Bull Market trend lines. These trend lines have not been violated for the last 5 years. In general, longer time period trend lines are more important that shorter time period trend lines.

At the very least, the recent breaks through the 5 year Bull Market trend lines should be viewed as an early warning of a larger (deeper) Bear Market starting. If so, it is only in the early stages.