Interestingly the types of answers you get would vary widely, from a great news release to more buying than selling. Although there are those who will debate the issue, for the most part a stock moves higher when buying volume exceeds selling volume.

The old law of supply and demand comes into play. Basically, if you own a stock and don't really want to sell it, what would get it out of your hands? A higher selling price, right? Right. So, if we exclude market maker games and dirty tricks, the bottom line is that a stock will gain in price when more people want the stock, than want to sell it.

But you will find the "overall market tone" is a much more accurate measure of whether a stock will go up or down on any particular day. For instance, take a look at a stock with a really great chart. Starting from the bottom left side of the chart, the stock moves up and to the right corner at a 45 degree angle right? Right, but it isn't a perfectly straight line is it? No, along the way, daily pull backs, stall outs, and one day dips are seen all over the place. So, here we have a stock that for lack of a better term is "in demand", and yet there were definitely days when profit taking hit, volume sagged, or it simply dipped on the day.

So, what is the point, you may be wondering? My point is this, "overall market tone" (feeling positive or negative) and individual sector strength is what will determine daily movements even though the overall movement for the long term is to the upside. With that thinking in mind try this one on and see how it fits: The ACME company is making money, it's growing earnings and they have made good statements about the future. A couple analysts have upgraded it and it looks good for a nice steady move higher. Well, chances are that indeed the stock is going to move higher and over the course of a number of months, it could even double its share price. But what will happen to that stock tomorrow if we wake up and the futures are down 85 points and when the opening bell rings, the market is in the toilet? We suggest ACME is going to take a hit for the day! Likewise if ACME is a "chip company" and the chip sector is down on news that DRAM prices have sagged, it probably doesn't matter that the entire market is in rally mode, ACME will probably be falling with its brothers in the chip sector.

So, when you are looking at a stock with an impressive chart and you want to get some of that stock, chances are a poor market day, or an "out of favor" sector day will give you the chance to pick up that stock a few dollars cheaper. The whole reason we are mentioning this is because "sector rotation" happens in a matter of days now. Years ago if the computer sector was in the dumps, it would be there for 3 months. Now, HWP, DELL, CPQ, can be out of favor one day and upgraded the next.

That goes for chips, networkers, Internets, etc. Same with the overall market. So, buying into it on the poor market days and/or poor sector days is generally a good bet.

One of the hardest things to do is to buy a stock just minutes before the closing bell, after it has fallen a gazillion points on the day. In your mind you are thinking, "wow, this thing lost 15 points today, it may lose 15 more tomorrow", and you "could" be right. But if the stock has been moving up nicely and it dropped 15 points because the NASDAQ dropped 150 on the day, was it your stock's fault or the overall market's fault? Right, it was probably down simply because the market was down. Buying it at that depressed price was probably a good idea. When isn't it a good idea? If during a big one day fall like that the stock falls through some key support levels, or it released some type of horrible news. Either of those instances could see it fall a bunch more.

As the Dow flirts with a new high (and the financial media tests everyone's patience), it's worth remembering how far the average investor has fallen and why. In this article, I discuss how far the fall has been.

As for why: investing is about the price paid and the value received. If valuation seems a dry topic in the abstract, it's worth remembering the real world cost of ignorance.

Not surprisingly, I quote from Graham: (I've bolded two phrases of immeasurable importance):

“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

The view of the market to the average investor isn't really comparable to the view of the market to the average dollar. Individuals don't have their assets distributed evenly across the equity issues available in the major public markets. A lot of individuals who have held every share they had six year ago are nowhere near where the Dow is today, because they own the wrong Dow stocks and they own very poor performing non-Dow stocks.

Now that we understand the types of funds that are available (from Understanding Mutual Funds Part I) it's time to look under the hood and understand one of the most integral parts of a fund: the expense ratio. Most people do not understand what expenses are related to the funds they've invested in and how it impacts their investment dollars. The main point to keep in mind is that expenses are rarely made apparent in a statement. A mutual fund is required to give all investors an up-to-date prospectus that describes all related fees. However, it's often difficult to understand the terminology and wording used in a prospectus.

So what is an expense ratio? First off, understand that the expense ratio for each and every publicly traded mutual fund can be found at numerous web sites. Try searching online to identify the expense ratios of any mutual fund you own, or are thinking of owning. They usually are made up of the following: the management fee, 12-b1 fees and load.

The investment advisory fee or management fee is the money used to pay the manager(s) of the mutual fund. On average, this fee is about 0.5% to 1.0% annually of the fund's assets. This can also include the administrative costs of recordkeeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The next portion of the fee is the 12b-1 distribution fee. This fee ranges from 0.25% of a fund's assets up to 1.0% of the assets. Simply put, this is for marketing, advertising and distribution services related to the fund.

Finally, one of the more prominent expenses: the load. One type of load is called a front-end load or "A" share. These loads are typically a one-time charge of 5% of the investment amount. This type of fee charges all loads up front and allows the investor to leave the fund without penalties. Then there is a deferred load most commonly known as "B" class shares. These funds defer the load in smaller percentages over time charging a surrender penalty should you leave the fund prematurely. Once the surrender period is over, the shares become "A" shares with no further loads being assessed. Finally, there are level load funds, or "C" shares. These charge small front loads, and level loads every year thereafter. Although "C" class shares might look like they aren't so bad to buy initially they can end up being expensive to hold. Finally, there are also "no-load" funds that do not charge a typical sales load. Although generally these can look more appealing these types of funds sometimes will charge higher 12b-1 fees since they may not be actively sold through advisors or other financial professionals. Sometimes the key is the rate of return vs. the expense ratio. If a no-load fund is getting a 7% rate of return with no load and a loaded fund is averaging 12% rate of return it might make sense to invest in the fund with the load.

Some other concepts rather unique to a mutual fund are its turnover rate and tax implications. A fund's turnover rate basically represents the percentage of a fund's holdings that it changes every year (through the fund's sale and acquisition of equities). A managed mutual fund's turnover rate varies on the type of fund it is. For example: a small-cap growth fund will generally have a higher turnover rate than an index fund. Because buying and selling stocks costs money through commissions and spreads, a high turnover rate indicates higher costs for the fund. Also, funds that have large turnover ratios can end up distributing yearly capital gains to their shareholders and thus they have to pay taxes on these gains.

Armed with this knowledge the main thing to remember is that the returns that show for a mutual fund already take into account these expenses and show the "net return" for the fund. Knowing how much a fund charges in expenses will then allow you to make a true comparison of investments when picking between similar types.

Please note: this article does not take the place of a prospectus or investment advice from a licensed professional. Always research any particular investment before buying.

If you read my previous article a few weeks ago, you would understand the pessimistic feelings that I have for Microsoft shareholders. Granted, the stock is up 17% year to day but such an anomaly happens rarely, and if history provides a correct database in terms of trends, I see Microsoft going back a bit in the next few months.

How does this relate to Apple (AAPL)? Well as a major competitor in terms of software and other accessories, Apple has seemed to gain considerable ground on the once monopolized company, as the branding of not only its IPODS but other products such as the IBOOK and ISHUFFLE have made Apple sore in terms of its stock value the last few years. Some investors may argue that Apple has had its fifteen minutes of fame with its famous MP3 player and especially now with the options and result filing controversies, it may not be favorable to purchase any shares at such a high price. Despite all the negativity in the background sending foreboding messages to pessimistic investors, Apple has only dropped relatively as it still remains only 10 points away from its all time high that was set earlier this year. In fact, since July when this controversy occurred, Apple has surprised investors by jumping 60% in about two months which is phenomenal for a large capitalization stock. Such technical analysis leads me to believe that Apple is destined to reach the 100 point mark in the immediate future, and regardless of what obstacles, no matter how serious such as the current delinquency problem, Apple will continue to rise even further, propelled by its incredibly recognizable products.

With such products, whether they are favorable to consumers relative to their substitutes or not have created a tremendous impact in terms of fundamentals for this company. Supporting margins in terms of profit or revenue, Apple seems proponent to the notion that its margins have doubled year to year with strong intermediate gains during each quarter as well. A large part of why Apple did not fall even further when pressed for its controversial dilemmas this past summer can be easily attributed to its fantastic earnings, 23% above expectations. With Apple reporting earnings later this October, and with the arrival of the holiday season when these products will fly at enormous rates, there is no reason to believe that Apple will beat expectations once again, potentially reaching its all time high once more. Given the fact that Apple is a technological corporation and the technology sector tends to under perform during potential times of recession, you may be hesitant to purchase Apple. However, with the conspicuous consumption attire of consumers wanting to purchase an IPOD regardless of the overly inflated price, an economic downturn will not do as much damage to this company as originally thought. Especially with the news of a new IPOD and other products which will be readily available in the nearby future, Apple once again looks to propel to break new records in the coming months.

Thus, with incredible fundamentals, a tremendous determination to grow and break new records, along with a conspicuous product base, there should be no reason to avoid such a bolstering company. Yes, you can argue about the filing regulation problems and other controversies, but to be honest, situations like these have close to little effect in the long run. Look at Hewlett-Packard or Brocade as examples where both are near 52 week highs. Therefore, if you want to make excellent gains in a large cap stock, which should be breaking its record any week now, jump into Apple before their earnings results this October and prepare to make a nice sum for you.

The stock market is either a physical or virtual location where buyers and sellers can meet and exchange or trade company shares. If you buy a stock then you become a partial owner of the company. If the company is doing well and makes money, then you make money as well. The stock price will increase. If the company isn't successful then the stock price will go down and you loose money.

Investing in stocks is a very convenient way to become an entrepreneur. In exchange to your purchase price you get a portion of a company and its profits and dividends. You have a voting right which you can use in the stockholder's meeting. The advantage for the company is receiving the money from the stock sales. This is one of the best ways for a company to raise money for its business.

In the United States there are several different stock exchanges. The best known one is the so called “Wall Street” or New York Stock Exchange (NYSE). The NYSE is a physical marketplace. That means that all orders to buy or sell stocks are directed to a person who then matches these orders for an execution. These persons are called specialists and each specialist is responsible for a specific stock or company.

The second best known stock exchange is the NASDAQ. The NASDAQ is a virtual market place, that means there are no specialists but only market makers and electronic communication networks. All orders are matched 100% electronically. The NASDAQ is the playing field of the so called day traders who sometimes make hundreds of buys and sells during the day. Because all executions are electronic and therefore extremely quick, it's possible to buy and sell stocks within seconds.

It's this technology which has allowed the stock market to grow tremendously the last years. Today everyone with a simple computer and an Internet connection can trade stocks or other instruments like futures or options online with low transaction costs. In earlier days trading stocks was the privilege of a few people only because it was very expensive. The stock market was in the hands of banks, investment funds, insurance companies and wealthy private investors only.

Today you still can't purchase or sell stocks directly at the exchange yourself but you won't want to do it anyway. You always have to go through a registered broker who takes your orders and transmits them to the exchange for execution. The broker takes all the hassles away so that you can trade stocks without having to think how your order gets executed properly. Full service brokers offer a wide range of services. You can get investment advice, research data, news and quotes and personal assistance. This includes a higher transaction cost. Experience traders who don't want or need these services and do their own research can use discount brokers who just execute your orders for a lower fee.

You can make much money with stocks when you have chosen to invest into the right company at the right moment. The timing is very important and can make the difference between profit and loss. Be aware that the stock prices are always in fluctuation because supply and demand determines the current stock quote.

Stock options are an excellent way to reduce risk in trading or to leverage your capital. While advanced stock option strategies are for experienced investors only, the basic option strategies can also be used by novice traders.

Basically an stock option is nothing complicated. There are just a few things to consider. There are two basic option types which are the call option and the put option.

The call (put) option gives you the right to buy (sell) a stock at a fixed price before a certain date, the expiration date. The option expires at this date and does no longer trade. Until this date your strategy should have worked out, otherwise your stock option expires worthless.

Buying the stock option is nothing else then buying the stock itself. Just that you need much less money to buy the option instead of the shares and that the option expires one day. But the rest is almost the same. When the stock moves, the option moves as well.

The difference and the big advantage of options is the leverage involved. To buy the option you need about 10% of the capital which would have been needed to buy the shares directly but with the same profit potential. There lies the risk as well.

One option contract equals 100 shares. If you want to own 1000 shares of Microsoft then you either can buy the 1000 shares at the stock exchange or you buy 10 Microsoft option contracts at the options exchange. You will figure out that there are many options for one stock. The reason is that options have different expiration dates and strike prices. The strike price is the price where you could buy the stock if you want.

In the praxis you don't want to buy the shares through the options so this remains a theory. Most options are not exercised but sold before expiration with a profit or expire worthless otherwise. So the option is just a bet with limited investment. You can never loose more than your option purchase price with the basic option strategies.

There are various combinations of covered and uncovered call and put options. Different strike prices and expiration dates have different option prices, leverage and risks. To learn the basic option trading strategies you must first explore the possibilities of simple call and put options.

Instead of a short sale you could buy a put option. Instead of going long in shares you buy a number of call contracts. Following the option prices for several days will show you that the option price decreases slowly although the stock price hasn't changed at all. This is the price you pay for the leverage.

When it comes to giving people the hope of becoming a millionaire overnight, the stock market excels. Every day we see evidence of stocks that have flown upwards as if they had wings, providing investors with a windfall of profits. It's inevitable that catching one of those stocks just before it takes off is an exciting possibility, inspiring the beginning trader to take the plunge. When you trade options, the stakes are raised, making those massive profits even more attainable, but the basics that underlie successful trading in the stock market are the same as those for trading options.

Once you start to look at trading stocks, you find yourself plunged into a confusing nightmare where hundreds if not thousands of people are pushing "their" system that is supposedly infallible. For a beginner, it's easy to get drawn into the complex net, believing that there must be a simple solution that will hand you the keys to stock market success. These keys will see you finding winner after winner, and making your fortune.

The reality, however, is that there are no keys that will find a winner every time. After all, if that was possible, how could anyone ever lose any money in the market? And if nobody loses, then how can someone else gain? The whole stock market would collapse.

Having said that, there are a number of very successful trading systems that work well over the long term. It's important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. Once you learn to look at the bigger picture, rather than focusing on the individual trades, you'll be a lot more successful in the market.

There are a couple of approaches to the market that are popular across many systems. One is to take small losses when they happen, and let your winners run. So you might take six little losses, which are more than compensated for by one huge gain. This type of approach takes a lot of confidence and self-discipline, as it's very easy to give up if those six little losses all happen in a row, without a winner in sight.

Another approach is to take your profits after a certain percentage of gain, and occasionally put up with a medium sized loss. This system is nice if you like to see profits, because you don't run the risk of a stock that's risen suddenly dropping again and wiping out your profit - you took your profit early. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. This system can be risky, because you need a number of small profitable trades to cover one of the losses.

If you can't make up your mind which approach suits you, why not try more than one? You can always split your capital over a couple of portfolios, and use a different strategy for each portfolio. This can be time consuming, but at least you can then make a logical comparison of the choices and decide which one has worked best for you.

It's also important not to abandon your system the second you see a trade making a loss. Far too many traders think that they're only successful if every trade is a winner, which is ridiculous. Then the trader switches to another system, messes around with that for a while, sees a loss, and switches again. You need to find a system that gives you a good overall return, and stick to it. The more you chop and change, the higher your chances of losing more.

Most of the success that comes with trading comes from one source - and it's not the perfect trading system. It's all about you. Trading is more about psychology than watching the charts. You need to have the right character to be a successful trader. Self discipline, confidence, the ability to see the bigger picture, accepting losses as part of the game, controlling your fear and greed - all of these elements work together to make you a successful trader.

Discount stock brokers are the most common type of brokers but there are other brokers like full service brokers and money managers.

Just about thirty years ago there were only full service stock brokers, offering order execution and investment advice at extremely high costs. Then the first discount brokers came in with low fees just for trade execution. They gained market share pretty quickly because many investors were making their own investment decisions and were just looking for cheap order execution at the stock exchange.

The trend continued with the help of the computer technology and the invention if the Internet. Today online discount brokers are huge companies in a multi billion dollar industry. Order execution by phone got rare. Now self-educated investors and traders get highly sophisticated trading platforms from their stock brokers at no additional costs.

These software trading platforms offer everything from instant order execution at all US stock exchanges to real time quotes, news and charts. Even advanced technical analysis is available today at minimal costs. Transaction costs came down so much that they are not really an issue anymore. Only day traders who do sometimes up to several hundred trades a day have to watch their trading costs.

The full service broker is still an option for many. If you don't have the time to watch quotes and read the news all time then you may want to have somebody who does this for you. This is where the full service broker comes into play. He offers personal service and attention, takes care of your financial planning, gives you investment advice, discusses all trading decisions with you and executes the trades for you. All these at a higher price of course.

If you don't even want to bother which stocks to buy and why, then the money manager is your choice. He makes all the decisions for you and just reports to you what has happened.

The online discount brokers can also be divided into three groups. The first one is the classic discount broker which offers extremely cheap order execution through a simple and easy to use software platform. The second type of discount broker offers additional services upon request, for instance phone orders at extra costs or access to research information.

The third type of online discount broker targets professional private or institutional traders who need advanced order execution and direct access to different markets and order routing ways. They give you the option to choose between dozens of order routing ways and order types to improve the order execution speed or quantity.

With the recent announcement that Sony (SNE) will delay its PS3 launch in Europe, a similar reaction should be based in your mind of whether to buy or sell your shares of this company. With such a shaky corporation in terms of announcing favorable information, the confidence in buying shares of Sony has dropped as shown by its stock the past few months. With the added problems of having the major laptop producers having to recall the specific Sony brand batteries, such a situation does not pose well for this corporation and its shareholders.

Speaking in terms of fundamentals, Sony has done terrible the past few years. Supposedly to be represented as a strong player in the technology sector, margins have proven to provide counterarguments. Having negative margins the past three years does not ease any shareholder’s concerns. While some investors may argue that many companies still post negative margins and receive a favorable capital gain, with the added problem of having these negative fundamentals during a time when technology is supposed to sell more rapidly from one year to the next, such numbers are embarrassing for a company of Sony’s nature. While some analysts have noticed such a trend and reduced their EPS estimates, Sony does seem to surprise investors and beat most of them but with the negative effect of not showing such resiliency in its cash flows or balance sheet. Along with negative operating margins and poor profit growth, I would be wary for both long and short term investors wanting to get into this stock.

In terms of technical analysis, Sony is as volatile as it gets. It’s true there are bursts of growths and sparks over the past few years, but the overall trend has been downward after its terribly overbought status during the early parts of the millennium. From 140 to 40 points is a large margin, even for the technology sector, but is equally represented by its poor fundamentals. With the added problems of a delay in its PS3 launch and the batteries having to be recalled, don’t look for consumer or institutional confidence to increase in relation to buying more shares.

Some investors may argue that it is possible that Sony is in trouble currently but, in the future when the PS3 launches and the battery problem is fixed, Sony should be a very low price and ready for a rally. While there might be truth in such a sentiment, think about when the PS2 launched about six years ago. Sony was at its peak then and Sony shares have only gone down from that point regardless of the fact that Sony won the console war against Nintendo and Microsoft. With the PS3 launching during a time when a recession is inevitable and consumers should spend left, don’t look for Sony to provide any capital gains in the near future.

The first chart shows SPX broke above the W-pattern at 1,280 and prior resistance at 1,290, which are now major support levels. Over the past three weeks, SPX generally traded around the daily upper Bollinger Band, except for a two-day pullback to the daily middle Bollinger Band. Consequently, a pullback and consolidation should take place soon. Major resistance levels are the weekly upper Bollinger Band, currently 1,335, and monthly upper Bollinger Band, currently 1,342 (the high last week was slightly above 1,340). Short-term support levels are the 10-day MA, currently 1,327, which held previously over the current uptrend, and the 20-day MA (which is also the daily middle Bollinger Band), currently 1,318.

The second chart covers the entire cyclical bull market. There have been intermediate-term uptrends and downtrends within the cyclical bull market. The NYMO 50-day MA and daily NYSI (both below price chart) reached intermediate-term peaks. Also, NYSI made a lower high, while SPX made a higher high, which has been consistent over the entire cyclical bull market. The CPC 50-day MA and VIX 50-day MA (both above price chart) indicate negative sentiment and complacency. However, the contradiction suggests there's really not that much complacency, since investors are well hedged.

The price chart shows SPX (black line and right scale) and TLT (long-bond ETF; gray line and left scale). Both the stock and bond markets rallied strongly off their lows. However, currently, institutions cash positions are low. So, there has been rotation between the stock and bond markets recently. The July to September quarter turned out to be a strong quarter. Consequently, institutions became fully invested for "window dressing."

The new month and quarter begins Monday. New money typically flows into the market over the first few days of a month. However, given the market is fully invested, upside is limited. Consequently, if SPX rises to around 1,350 within the next two weeks, that may complete the intermediate-term uptrend. So, the risk of a substantial market decline is high, within the next three months, until the intermediate-term downtrend is completed.

With the big aluminum giant ready to report earnings on the 10th of October, Alcoa (AA) hopes to bring favorable numbers to a company that should indicate how the Dow Jones should be behaving and whether the recent rally is true or not. The problem concerning Alcoa however is how the futures market has been reacting over the previous month or so. Possibly, the commodity of aluminum is not affected as other future trading products such as oil or natural gas, but nonetheless aluminum over the past six months has been falling relative to its high prices a few months ago.

The theory I propose of the equity market in relation to the commodity market can be attributed to how the prices of certain commodities affect the economy. When prices of commodities such as zinc, copper, nickel, or aluminum go down, there becomes a serious issue of the simple theory of supply and demand. When corporations do no longer desire to purchase certain commodities, the quantity of demand falls which results in lower prices. The reason for this drop should be attributed to the availability of products remaining in the market centered on that commodity. When you are given times when unemployment seems to have reached its lowest point and layoffs are inevitable coupled with the fact that demand side inflation has pressured prices to extreme levels resulting in unfavorable desires to purchase such products trouble seems to bloom. It’s true that decrease in the price of oil may negate some of this negative consumerism, but once oil prices are restored back to its original prices due to inventory cuts or a cold winter season, there should be a tremendous affect upon production, prices, and eventually earning reports for commodity based companies.

Some investors may read such a sentiment and argue that when commodity prices fall, there should be a positive relationship for producers who incorporate such commodities. While such an argument is favorable, I see a different kind of relationship between the two variables where commodity prices are dependent upon companies rather the opposite way. My evidence for such a sentiment can be attributed to the recent recession the United States had a few years ago. During this time shares of Alcoa fell nearly 50% when aluminum prices where not at their best marks. However following the recession, Alcoa regained that 50% loss into a 100% gain following strong economic growth and higher prices. Higher prices not only were attributed to marketers of the corporation but higher prices of aluminum as well. As more consumers obtaine jobs and desire more products designated around aluminum, commodity prices of such a natural resource rose almost a proportional 100% signaling the economy was strong do to higher demand for commodities.

Such a correlation looks to extend today with prices of aluminum trending towards the downside. With a sideways movement of Alcoa over the past few months due to poor fundamentals and unfavorable economic data recently, look for a trend to appear with Alcoa shares looking at the downside. The results may not be apparent in Alcoa’s results this quarter due to a lag factor, but in the next coming months look for Alcoa shares to drop because of a decrease in the desire for commodities which should have a negative affect for shareholders of this Dow component.

If you've been looking at different ways of making money from the stock market, than at some point you'll come across the idea of options. Many people trade options successfully, and it can be a great way to increase your returns once you have some experience in the stock market. But let's look a little more closely at why people find trading options so profitable.

Firstly, trading options means you access the power of leverage. With a minimal outlay of capital, you can make excellent returns. It's important to remember, however, that leverage can be a double-edged sword. Although leverage ensures that when you get it right you win a big way, it's also true that when you get it wrong, you can lose in a big way too. Leverage works against you in that situation.

Another good thing about trading options is that you can make money no matter what the market is doing, once you become familiar with a variety of option strategies. It doesn't matter whether you feel the market is bullish, bearish or even drifting sideways; there are opportunities to make money with options trading. If you’ve developed your charting skills to the point where you can be reasonably confident about the direction a stock is trending, then there will be an options strategy you can use to cash in on that trend.

Trading options is a great way to generate income even in a flat market. If you're trading stocks, and the market goes flat, there's not a lot you can do except hold on and hope things improve. But with the right option strategy, you can make money from a stock that's going nowhere. Although you can short sell the market with stocks, if you know how, you can also make money with options in a falling market, putting a lot less capital at risk. Options also allow you to make money consistently from the market, rather than having to wait months or even years for a stock to move and generate a profit.

Finally, it's not necessary for an options trader to be familiar with the whole market, which is a massive undertaking. Instead, the trader can focus on a few favorite stocks, become very familiar with that stock's movements and patterns, and plan an options strategy to earn money from those patterns.

Over the past several months, there has been rotation from cyclical to non-cyclical stocks, which suggests the cyclical bull market is in a late stage. However, there has also been a general rotation between bonds, stocks, and commodities, given financial institution's asset allocations.

The seven-month chart below shows SPX (blue line), TLT (gray line), OIH (black dashed line), and GLD (gold dashed line). In May, SPX OIH and GLD were at high levels, while TLT was at a low level. Over the subsequent two months, SPX OIH and GLD fell sharply, while TLT rose. Most recently, SPX and TLT rose, while OIH and GLD continued the downtrend.

Oil and gold are in structural bull markets, while SPX is in a structural bear market. The relatively high price of TLT reflects expectations of slower economic growth or recession (i.e. the inverted yield curve; where long-bond yields are below short-term rates). Normally, oil and gold decline in periods of slow growth or recession. However, many oil stocks have P/Es below 10, while gold is also a hedge for inflation. Also, markets tend to discount prices. So, if oil holds $50 a barrel and gold holds $500 an ounce, for example, oil and gold stocks may stabilize at current prices. Consequently, if oil and gold stabilize at current prices, oil and gold stocks may rise, while SPX falls.

Normally, financial institutions are fully invested in ratios of bonds, stocks, and cash. Currently, it seems, institutions are keeping a relatively small ratio in cash, given the FOMC has drained liquidity from the (commercial banking) system, over the past two years, and the uncertainty of an easing cycle (given inflation remains elevated). So, perhaps, cash allocations will increase, which may lower bond and stock prices.

Free chart available at PeakTrader.com Forum Index Market Forecast category.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

With the primary purpose of selling products dedicated to mining or digging, Caterpillar (CAT) might not be too favorable to investors with the decrease in price of commodities. However, such a situation may not be that unfavorable to this company.

With a recession looming illustrated by corporations stopping some of their production to accommodate the eventual decreasing demand as represented by the waning job offerings, commodity prices will reflect such a change by having significant decreases in terms of price. When prices of commodities such as zinc, copper, nickel, or aluminum go down, there becomes a serious issue of the simple theory of supply and demand. The reason for this drop should be attributed to the availability of products remaining in the market centered on that commodity. When you are given times when unemployment seems to have reached its lowest point and layoffs are inevitable coupled with the fact that demand side inflation has pressured prices to extreme levels resulting in unfavorable desires to purchase such products, trouble seems to bloom. It’s true that decreases in the price of oil may negate some of this negative consumerism, but once oil prices are restored back to its original prices due to inventory cuts or a cold winter season, there should be a tremendous effect upon production, prices, and eventually earning reports for commodity based companies.

How does such a theory relate to Caterpillar? Simply put, corporations like Caterpillar, since their nature is cyclical, and inventory restrictions may deprive them of future sales, should have shares fall during times of recession or when commodity prices decrease. However, when analyzing this company relative to technical factors, during recent recession points, Caterpillar has not faired that terribly. Since the early 1990s, shares of Caterpillar have steady increased about 700%. During times of strong economic growth and prosperity, Caterpillar shares tend to skyrocket with accommodating high commodity prices. However, during times of recession, shares tend not to fall too dramatically but move in a sideways pattern which represents the resiliency of such a strong Dow component. Such assurance should be expected for a corporation notable for posting excellent fundamentals. Revenue has been growing each year creating wonderful margins. Profit along with assets compared to liabilities have also been a positive for this company which again reiterates the tenacious ability for shareholders to rest assured without worrying about garnering capital losses.

Thus, while the economic situation may look unfavorable in relation to the purchase of Caterpillar shares, with a strong technical background, and excellent fundamentals, Caterpillar may not be a strong buy for short term speculators but is absolutely a strong long term buy for more patient investors. The one thing I would recommend however is to purchase shares if possible below 70 points to achieve the most of your capital gains when this stock reaches a new high in three to four years.