In 1980, total credit market debt was 158% of gross domestic product (GDP). By 2008, total debt was 359% of GDP. In 1990, no state had greater than 15% of its population afflicted by obesity. By 2007, only one state had a prevalence of obesity below 20%, 30 states were greater than 25%, and three states had a prevalence of obesity equal to or greater than 30%. By spending more than we had and indulging in unhealthy lifestyles, Americans, both individuals and corporations, traveled down a road of excess with the false promise of perpetual prosperity.

Over the past 18 months, that myth has been shattered and we are left with a much different perception of the world. During 2008, Federal Reserve data shows that households lost $11.2 trillion of wealth. With housing and equity markets remaining under stress, the 2009 results will show additional declines.

Having clearly traveled down the road to excess, we must now ask what wisdom has been gained. After all, the only positive of the current deep recession is the awakening that our prior path was both unwise and unsustainable. While I cannot speak for everyone, most corporations and individuals should have learned these three lessons:

1. Credit does not equal liquidity – Everyone knows the wisdom of saving for a rainy day. Most financial planners say individuals should have three to six months of living expenses on hand. Corporate managers know the importance of not relying on fickle credit markets to fund their daily operations. However, in the past many mistakenly viewed credit as liquidity. Corporate treasurers felt they could tap the commercial paper market and homeowners looked to credit cards and home equity lines for quick cash. Over the last six months, many of those credit options have disappeared and entities who thought they were financially secure have been ruined. Credit does not equal cash. We should all remember that fact.

2. Prudence pays – Inherently we know we should live within our means and not spend more than we earn. In reality, few follow this advice. The personal savings rate has hovered near 2% since 2000. Banks have leveraged themselves to obscene levels. Asset appreciation was interpreted as savings and increasing stock and housing prices encouraged people to spend more and save less. The consequences were predictable. When using borrowed money, things implode at the worst possible time. Borrowers never get asked to meet margin calls when their wealth is increasing. Only when markets have fallen are you forced from positions. Going forward, a prudent approach to debt and savings will avoid these mistakes from recurring.

3. Crisis creates the unknown – Many of the actions taken over the past few years seemed reasonable at the time. Investors diversified their assets. Investment banks used sophisticated models to manage risk. However, when crisis strikes, all assumptions are rendered mute. As correlations move to one, all asset classes suffer and the unimaginable occurs. Witness the collapse of investment banks that had survived the Great Depression and the inherent nationalization of the world’s largest insurance company. In times of crisis, we should never be surprised by the depths to which markets may plunge.

We have traveled down a difficult period in history. Whether markets have bottomed and the recession is ending remains to be seen. All we know for certain is the pain has been widespread and the consequences severe. Going forward, I hope the lessons learned will have a profound impact on behavior. If we conduct ourselves in a more reasoned manner and abandon the need to acquire lifestyles beyond our reach, some good will have come from the past 18 months.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

Reviewing the prior 18 months, FSLR moved higher in a fan pattern (A, B, and C), cascaded to a low that surrendered the entire bull market gain, and then rebounded. In moving higher from a classic triangle pattern (green arrow), FSLR showed signs of approaching the 200-day moving average (MA).

A month later we show a small profit on our position. Although I always enjoy profits, I am becoming concerned with this position. Over the past month, uneven movement in the stock has resulted in another triangle pattern forming. This time, instead of a decisive move from the tip of the triangle (back arrow), we see sideways action. I am impressed that the shares have consistently found support at the 50-day MA, but I question whether that support can last. In a bear market, once resistance is broken, prices plummet.

With FSLR, each time we see the share price drop toward the 50-day MA, we wonder whether this is the time the level will fail to hold and prices will break materially lower. I am convinced that time will come and have no desire to stay in the shares to watch it happen. We always want all of our trades to show large profits, but in the markets, walking away when uncomfortable is often the best decision. For that reason, I recommend closing our long position in FSLR as this week’s technical trade.

Blain here: Another to analyze First Solar’s stock chart is to apply simple support and resistance and zoom in on the last 7 months of price action. Note the 50 day moving average support Sean speaks of.

As stated on the chart for FSLR to regain its bullish outlook the stock needs to move back above $160 and stop testing its 50 day moving average.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

As of this issue Sean’s portfolio is up an impressive -0.2% vs the S&P 500’s -14.6% over the same period.

Sean’s free weekly newsletter is broken down into six main sections:

1. The Week Ahead – Identify key economic reports, earnings releases, and other events that could lead to swings in stock prices.
2. Technical Trades – Trade ideas via technical analysis.
3. Fundamental Trades - Trade ideas via fundamental analysis.
4. Option Trades – Trade ideas through options.
5. General Comments – Sean and his team share their general market thoughts.
6. Current Recommendations – Track Sean’s recommendations to see how they would perform each week in a live portfolio.

Sean designed the newsletter to be beneficial for all investors. It is a fantastic read and should become a Sunday night routine for any investor wanting to stay on top of the market.

View/Download EPIC Insights Weekly, 16th Issue in PDF Format ***Link now available***

IMPORTANT NOTICE: To receive this Newsletter’s stock picks on Sunday you must be subscribed to the free StockTradingToGo Newsletter. Otherwise we will post the direct link to the pdf on Tuesday for those not subscribed.

***CLICK TO READ PREVIOUS ISSUES***

Understanding the nature of the futures market is essential to properly utilizing USO. As with other commodities, oil trades for delivery at many different dates. If the price of oil today is higher than the price one month from now, the markets are in backwardation. If the opposite occurs and oil is more expensive in future months, the markets are in contango.

Since USO purchases futures contracts at various points along the curve, the term structure has a material effect on performance. Consider a market where the current-month future contract is $30 and the one-month forward contract is $27. As the current-month contract approaches expiration, USO will sell it for $30 and purchase the next month for $27. Doing so earns a positive roll of $3 and increases performance. This would cause USO to outperform when the market is in backwardation and lag when the market is in contango.

To test this theory, I examined the relative performance of USO and spot oil over various time periods. The results are as follows:

The relative performance of USO in various term-structure environments is essential to understand. Generally, markets in backwardation are bullish, while those in contango are bearish.

Knowing that a shift in term structure affects performance, investors buying and selling USO are not only expressing their view of the direction of the markets, but the term structure as well. This nuance serves as a source of leverage that will allow you to maximize gains in losses.

If you are bullish on oil, today’s market is ideal. If oil rallies, we should see the substantial contango switch to backwardation and deliver strong performance to those owning USO. If you believe the contango will continue to widen as oil prices decline, a short position will offer extra return. This nuance is key to using USO as an effective portfolio tool.

Innovation opens this market to the masses, but we must remain informed to ensure that we are using the products correctly.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly, the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

The Fed indicated it will keep the size of its balance sheet at high levels, will continue purchasing large amounts of agency debt and mortgage-backed securities (MBS), and is prepared to purchase long-term Treasury securities. This translates to a Fed that will target various points on the interest rate curve, keep rates artificially low for a sustained period, and not stop until deflation ends and inflation returns.

Right now, the Fed is all-in and will keep placing bets until it achieves its goals.

That excess money at artificially low rates will lead to inflation is not a question of if, but when. The transition could occur as late as 2010, but it will occur, and investors should ask themselves how to prepare for the change.

Modern portfolio theory teaches us that the risk of individual assets does not matter as much as the risks between assets in a diversified portfolio. With inflation coming, we should look for assets that will benefit from higher interest rates while offering low correlations with our existing portfolio.

During inflationary times, precious metals and other commodities offer the best returns. With the advent of various ETFs, individual investors can easily craft commodity-based strategies. However, I will not be going in that direction. Pure commodity exposure offers limited income and wild volatility. Instead, I recommend diversified investments with strong income potential that offer commodity exposure and risk reduction-index funds of commodity-producing nations.

Believing that commodities will outperform in an inflationary environment, we should expect the stock exchanges of commodity-producing countries to outperform as well. Three of the bigger commodity producers are Australia, Brazil, and Canada. By buying ETFs that track their markets, we will diversify our portfolio, earn an average dividend yield of 5.5%, and be positioned to benefit from an eventual return of inflation. Such a combination offers an excellent opportunity to effectively deploy capital in a challenging market.

For these investments, I will be using the following ETFs: iShares MSCI Australia Index (EWA), iShares MSCI Brazil Index (EWZ), and iShares MSCI Canada Index (EWC). I recommend a position in each of these funds as EPIC Insights fundamental trade of the week.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

As of this issue Sean’s portfolio is up an impressive 1.8% vs the S&P 500’s -14.1% over the same period.

Sean’s free weekly newsletter is broken down into six main sections:

1. The Week Ahead – Identify key economic reports, earnings releases, and other events that could lead to swings in stock prices.
2. Technical Trades – Trade ideas via technical analysis.
3. Fundamental Trades - Trade ideas via fundamental analysis.
4. Option Trades – Trade ideas through options.
5. General Comments – Sean and his team share their general market thoughts.
6. Current Recommendations – Track Sean’s recommendations to see how they would perform each week in a live portfolio.

Sean designed the newsletter to be beneficial for all investors. It is a fantastic read and should become a Sunday night routine for any investor wanting to stay on top of the market.

View/Download EPIC Insights Weekly, 13th Issue in PDF Format ***Link now available***

IMPORTANT NOTICE: To receive this Newsletter’s stock picks on Sunday you must be subscribed to the free StockTradingToGo Newsletter. Otherwise we will post the direct link to the pdf on Tuesday for those not subscribed.

I have often discussed in my Weekly Newsletter EPIC Insights that we must trade within the primary trend.  If the primary trend is bearish, prices are destined to fall. Granted, there can be powerful bull market moves within a bear market. However, more money is lost chasing bear market rallies so we must remain skeptical of any bull move that occurs within a primary bear market.

Knowing this, we must assess the primary trend and only become more aggressive buyers when the trend has changed. With that goal, this table holds the key to the future:

When US and European markets hit new lows in November 2008, all the lows were synchronized. This created a bearish confirmation as each market reinforced the themes of the other.

Currently, we see many of these markets speeding toward recent lows in the same synchronized manner. However, only the Dow Transports and CAC 40 have violated the prior bear market lows. This sets the stage for a potential bullish non-confirmation. If most markets refuse to confirm the breakdowns of the Transports and CAC, and begin moving higher, the stage could be set for a reversal of the primary trend.

Whether the market can act in such a manner remains to be seen. However, there is one thing we know for certain. Over the next two weeks we will see either all markets breaking to new lows (would confirm the bearish primary trend) or certain markets holding strong and pushing above their January peaks (indicates the primary trend has turned bullish).

The outcomes are of immense importance as a bearish breakdown raises the prospects of a dramatic collapse in stock prices and economic activity while a move higher indicates higher stock prices and economic recovery.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

As a value investor, I believe that any asset has value at the right price. Whether we are discussing a pile of broken furniture or stock certificates, buy at the right level and gains will come your way. This strategy serves as a trusty tool in determining when I should allocate capital.

The difficult part of using this strategy is determining when a value stock morphs into a value trap. Anyone who owned shares of Lehman Brothers or Circuit City now knows that stocks can go to zero. While these investors thought they were buying shares of large companies at cheap levels, the share price only became cheaper as bankruptcy beckoned. For most, the fine line between a value stock and a value trap is only visible in hindsight. Buying stocks entails risks, and you should only allocate capital if you are comfortable with the risks being taken.

Each week my free newsletter EPIC Insights scans for value and recommends areas where patient investors can allocate capital and earn strong returns. For this week’s fundamental trade, I recommend small positions in a sector that involves tremendous risk, but may offer even greater rewards – the banking industry.

I could cover thousands of pages discussing why an investment in the large banks is both risky and necessary. We know our economy will eventually recover, housing will eventually bottom, and markets will eventually function normally. When this occurs, banks will be at the center of the turnaround. However, we also know that banks do not fully understand the depths of their credit risk, more problems will eventually occur, and an intrusive federal government will make the environment more difficult.

Some banks are nearly 90% from their all-time highs and so low in price that they offer a perpetual option on the recovery of the U.S. financial system. Given the upside potential, I believe a stake in the large banks is warranted.

When dealing with such a risky trade, we must consider how to protect our capital. As Monday showed, banks stocks remain very volatile as fears of mounting losses and creeping nationalization increase uncertainty and lead to lower prices. For my part, I will use the same rules I apply when trading options-keep positions small, and only invest what you are willing to lose.

With that mandate in mind I recommend a 0.75% position in JPMorgan (JPM) Bank America (BAC), Wells Fargo (WFC), Citigroup (C), Sun Trust (STI), Goldman Sachs (GS), and Morgan Stanley (MS) as this week’s fundamental trade. With total exposure to the banking sector totaling 5.25% of the portfolio, we will do well when the sector recovers yet will not have a further weakening in share prices devastate our portfolio.

Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.