I can understand when investors are bearish on the stock market and the U.S. economy. After all, there are always two sides to the coin, forget about all the ridges along the outer perimeter. Official unemployment is near 10%. The housing market is only gradually improving, and there’s record government debt here in the U.S. and in many other countries. 

But the bears need to take another look before they add high stock valuations to the laundry list of downside catalysts. Because the numbers say stocks are as cheap as they’ve been since 1990. I think the market needs to pull back a bit in order to hold onto the gains it has made in 2010 – but ultimately I believe many stocks should be trading higher than they currently are.  

Sure, it’s easy to look at the 80% move by the S&P 500 and think stocks must be expensive. Same goes for the Russell 2000 which has moved over 100% higher since the March 2009 lows.  

This weekend marks one of the biggest investor events of the year – Warren Buffet’s annual shareholder meeting for Berkshire Hathaway (NYSE: BRK-A). There could be as many as 50,000 people in Omaha, Nebraska looking to glean investment advice from Buffet and Vice Chairman Charlie Munger.

But you won’t hear Buffett talk about small cap stocks. The investing icon is more likely to discuss the future of derivatives and how potential changes in collateral requirements for derivatives could impact Berkshire in the future.

In fact, small cap stocks are essentially off limits for investors with the massive sums of money that Buffett manages because the reality is it would be easier for him to simply buy the company. He invests billions of dollars at a time…

For me the strongest fibonacci retracement level is the 50% levels. It’s kinda of like no-man’s land. When markets rise and fall back to that level and it holds – I see things as “half full” in a sense. So today, since pre-market futures are higher, the markets will be testing the 50% retracement level on the intra-day chart. I’d look for stocks to fail after it reaches this area below. Enjoy the trading day all!

Well, it’s winter again here in Vermont. Believe it or not I awoke this morning to nearly a foot of the white stuff. And this isn’t the light and fluffy kind of snow – it’s the heavy, wet and destructive kind. Power is out in many areas, cars are off the road, and it looks like December. In short, winter isn’t going quietly.  

The fact that I had to turn my heat back on yesterday reminded me that the Energy Information Agency (EIA) is releasing a new report on natural gas supply in the United States.  Natural gas is cheap, plentiful, and cleaner burning than heating oil, coal, and gasoline. Regardless of whether it is used for heat, vehicle propulsion, or to generate electricity, natural gas will have a place in the worlds energy mix in the future. 

Yesterday I was speaking with Kevin McElroy, editor of the Resource Prospector Resource Prospector. We don’t always agree, but we are both bullish on natural gas for a few reasons – it’s cheap, plentiful and as green as fossil fuels get..

One of the fastest moving sectors in the small-cap universe has been regional bank stocks. This week alone stocks like Frontier Financial (NASDAQ: FTBK), Hampton Roads Bankshares (NASDAQ: HMPR), and Bank of Granite (NASDAQ: GRAN) are moving sharply higher on high volume as traders and investors alike begin to see stabilization in the sector. Many small-cap bank stocks were priced for failure, and when the probability of bankruptcy declines, the surge in share price can be enormous.

If you dip a toe and start buying shares in stocks in this sector, be sure you do some due diligence and research the stock first. Financial stocks require their own type of analysis such as looking at reserves for loan losses, capital levels, and non-performing loans. But now is a good time to begin assembling a watch list. There will still be plenty of time to get into the best banks and those that survive are likely to see their share prices trend higher as they get back to full health.

Long term stock market analysis is always great when you are getting unclear about short term directions and trading opportunities. Take a look as we compare and contrast the 2003-04 market bottom to the current market bottom for all the major indexes.

This past weekend my wife Carrie and I were fortunate enough to sneak away from Vermont and travel to the west coast to spend a few days with family members. The trip was great, and a few days in Washington State’s wine country was just what the doctor ordered. One of the more exciting parts of the trip didn’t happen at a winery however, it came when we visited a Starbucks (NASDAQ: SBUX) in Seattle.

Carrie and I were just discussing the history of Starbucks when none other than Starbucks CEO and Chairman Howard Shultz strolled by. Now Mr. Shultz is an intriguing guy for several reasons, beyond just the fact that his leadership has grown Starbucks from a small coffee chain to an international status symbol. His rise to become CEO of Starbucks is in many ways an example of the American dream – of growing from rags to riches. Despite his inflammatory remarks which at times earn him the criticism of the media, there is no doubt the man has been successful…

The stock market is in one of those phases where it goes up regardless of what happens. Yesterday morning futures were down over 1%, commodities were getting slammed and European indices were collapsing. All in all, the morning looked ugly. Of course, in the land of free money where we currently live it appears real earnings and economic data do not matter. So despite the pessimism going into yesterday’s session the market still closed higher. 

I was joking around with Trademaster’s Jason Cimpl this morning and we came up with a proprietary trading strategy that is virtually guaranteed to work in this environment. I’d like to share it with you. Here it is:

 When great news comes out: buy stocks
 When good news comes out: buy stocks
 When bad news comes out: buy stocks
Using this highly sophisticated trading system of ours we don’t need to figure out if the market will go up, we just need to calculate by how much. That seems easy enough.

Now, obviously I’m joking. But the reality is this strategy would have worked lately. But at some point this strategy won’t work, and it will be much more important to actually time your buy and sell points, especially with small-cap stocks – an equity class that tends to be more volatile than large-caps…

The case for a market decline is compelling. Stocks in the S&P 500 are trading near the top of their historical PE range during an upward cycle, with an average PE of just about 23.4. Yields on the index are getting increasing low, now just below 2% on average – well below the 3% historical dividend yield. This means investors are paying more for a stock that generates lower dividend payments than they have historically been willing to pay during an upward moving market.  

But there are still tons of bulls out there. Investors Intelligence has reported that just over 50% of stock market advisors are bullish, and that the average mutual fund cash level is a mere 3.5 percent. That tells me that institutional money has been supporting this rally for some time now, and it’s not likely to flee all at once. 

So my advice for individual investor right now is to be cautiously optimistic. Don’t sell all your winning stocks in anticipation of a pull-back, but also don’t put all of your available money to work buying stocks with high valuations…

Greece and Ireland – it looks like a terrible situation just got a whole lot worse. Both Greece and Ireland had much larger budget deficits last year than expected and the Greek data may be revised further due to its unreliability, the European Union’s statistics office said, sending the Euro lower earlier this morning. A possible continued short on the FXE is a great idea short term.

The Greek government has said it wants to bring the deficit down to 5.6 percent of GDP in 2011, 2.8 percent of GDP in 2012 and 2 percent by 2013 from 8.7 percent of GDP in 2010. This is EXTREMELY hard to do when the Gov’t debt makes up over 95% of GDP. So if they reduce GDP then how are they going to pay for the increasing debt structure? You tell me? Doesn’t add up and you all KNOW that other countries are going to get sucked in!

How do you beat the Street? 

It’s an old question to be sure, and one that every fund manager, stock picker, and independent investor out there wants to find an answer to.

Sure, you can pick up Peter Lynch’s 1993 best selling book ‘Beating the Street’ – the main message in that book is to "buy what you know". It’s a great read, and I recommend every independent investor take Lynch’s message to heart and invest in companies with business models that they understand.

These don’t have to be complicated. In fact another investing icon, Warren Buffet once quipped, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." I appreciate Buffet’s candid and balanced approach, and the fact that at a certain level he tries to keep it simple.

We all hear stories about derivative masters, dark pool investing, and algorithm based trading strategies. But if you work a normal job, like most people, these complex investing strategies are unduly complicated – not too mention time consuming. Invest in what you know, and keep it simple, and you’re likely to have much more success.

I conducted an informal poll at the office this morning. My employees "bought what they knew" and are invested in well known large-caps like Apple (Nasdaq: AAPL) with a current P/E of 24, IBM (NYSE: IBM), with a current P/E of 13 and McDonalds (NYSE: MCD) with a current P/E of 17…

Figured I’d start the morning off different with the iShares FXI China Index EFT instead of the SPX. This is actually a great example of a security following the broken trendline – and also retracing back up to the underside of the breakout. Notice how obedient it has been over the last 9 months. A small bounce may be in store soon but nothing too dramatic here traders.