The Sidelines Exist In Order To Preserve Capital.

Friday's strong weekly closing, it was made clear that bearish patterns weren't just going to roll right over, once again throwing a wrench into a traditional technical-analysis (TA) approach.

Let me explain a bit further.

Assuming you've become fed up with fundamental investing - which still has you long some loser of a stock that someone else is calling "cheap" - you venture out into the unknown, curious to see who's actually weathered the recent storm. You stumble upon technical analysis, and - once you get past the fact that it isn't some voodoo investing plan, complete with lot-casting or Tarot cards - you start to understand what makes certain patterns work and why.

You realize that it isn't about predicting the future, but rather about seeing investor psychology in terms of a picture. You start learning and understanding basics such as pennants, wedges, the Holy Grail, and cup-and-handle. You back-test your newfound knowledge, beginning to judge whether these patterns would have actually helped you out.

Pretty soon, you're sold, and ready to start putting capital to work with TA as your guide. You notice that many patterns are setting up in bearish wedges, meaning that -- after a thrust lower - stocks/indexes are consolidating around those lows, implying that another move lower is on its way.

Daydreaming about the Maseratti you'll buy with your TA riches, you begin to lay out a line, taking in some attractive shorts in anticipation of a certain drop.

Then it happens: Rather than a continuation lower, you meet with a doozy of a snapper that not only gobbles up your stocks, it also runs your stops and leaves you with a ding in your portfolio that wasn't there 24 hours before.

It's at this point when new TA traders typically throw in the towel, and when seasoned vets start wondering whether so many are now following TA that it might just not work any more. In my experience, this is precisely when you shouldn't abandon it -- it's a strategy that's remained true for centuries. Instead, you should understand that the sidelines exist in order to preserve both financial and emotional capital.

There's nothing that says traders have to trade each and every day, and, in fact, many of the greatest traders in history stepped away at those points when the picture wasn't clear.

Today, I find myself thinking the same as I review my existing positions and stops, and choose to be patient as we head into the weekend.

Rest up this weekend. Enjoy the time off, and I'll see you back here bright and early on Monday morning.

Try Competing With This Economic Juggernaut.

The United States began its long trek to becoming a worldwide economic powerhouse during the nineteenth century, and became the dominant economic force in the twentieth century. In 1970, US GDP was $1 trillion; it’s risen to $14 trillion today.

In 1970, China’s GDP was $92 billion. Today, it’s $4.2 trillion - a 4,450% increase in 28 years. They now have the third largest economy in the world, and will surpass Japan as the second largest economy on the planet within the next 5 years. Sometime between 2030 and 2050, China will overtake the United States as the largest economy in the world.

This tremendous growth is being driven by the migration of millions of people from farms to the cities. By 2007, 594 million Chinese lived in urban areas, and the United Nations has forecast that China will have an equal rural and urban population distribution by 2015. In the long term, nearly 70% of the population will live in urban areas by 2035. According to Professor Lu Dadao, president of the Geographical Society of China, China’s urbanization took 22 years to increase to 39.1% from 17.9%. It took Britain 120 years, the US 80 years, and Japan more than 30 years to accomplish this.

This rapid urbanization will create huge infrastructure growth, since more roads, sewers, houses, manufacturing plants, power plants, public transportation, and office buildings will need to be built. This trend is identical to the trend seen in the US in the 1800s, with urbanization causing crises in pollution, congestion, and public health. The efforts to solve these problems will create even more growth. The manufacturing of goods for export will slowly be replaced by production for China’s own internal demand. Eventually, China won’t be as dependent on the US for its economic existence.

The population of China is currently 1.3 billion, more than 4 times the size of the US. China’s population isn’t expected to grow much, if at all, between now and 2050. This is a dramatic difference from the US in the 1800s, as immigration and high birthrates increased population exponentially. The Chinese birthrate, which now stands at 1.7 children per family, isn’t high enough to even maintain its current population over the long term.

Most of the arguments that I hear regarding why China won’t surpass the US relate to its aging population. After examining the current age distribution and the projected distribution between now and 2050, there’s very little difference between the US and China on a percentage basis. It’s clear that young populations lead to more vitality, growth, and invention. 20.1% of the Chinese population is under the age of 15. In the US, 21.4% of the population is under the age of 15.

But here’s where the rubber meets the road: Because China’s total population is 1.3 billion, 20.1% under 15 years old equals 267 million people, versus 60 million in the US. China’s youthful population is therefore almost equal to the entire US population.

In 1860, the median age of the US population was 19.4 years old. With 50% of the US population under the age of 20 from 1860 through 1880, there was an unlimited supply of labor to supercharge the engine of growth. America’s youthfulness led to a tremendous sense of vitality and optimism about the future, and young Americans changed the world. In a youthful society, failures are dismissed, and youthful recklessness leads to discoveries, inventions, and new ideas.

But the older a society gets, the more cautious and set in its ways it becomes. In 1860, over 50% of the US population was under 20 years old. By 2040, less than 26% of the population will be under 20 years old. With 20% of the population expected to be over 64, the passion, reckless adventurism, and vitality will be in limited supply. Just the cost to support 80 million old folks will be crushing. Developing countries with young populations will be gaining on the U.S.

By 2050, the US demographic picture will only be slightly better than China’s on a percentage basis. China, however, will benefit greatly from the shift from a rural society to an urban one. The US already has 80% of its population living in non-rural areas. By 2050, China will likely reach a similar percentage. This means that approximately 600 million people -- many of them quite young -- will move from rural areas to urban areas in the next 40 years. This figure is mind-boggling. The youthful urban population will drive progress and advancement.

The piece of the pie that’s overlooked by many is the rapid education of China’s youth. In 1978, there were virtually no Chinese students enrolled in postgraduate programs or studying abroad. Today, there are close to 1 million Chinese students in postgraduate programs and in excess of 100,000 students studying abroad. One-third of all the graduate students in US science and engineering programs aren’t US citizens. With 267 million children under the age of 15, combined with rapid urbanization and the desire for advanced education, China is an economic juggernaut. There will be no denying it the economic crown by the middle of this century. It’s inevitable.

China’s ascendancy doesn’t necessarily mean that the United States will fall. The UK entered the 1800s with a tremendous amount of public debt. Through economic growth, fewer military conflicts, and controlled spending, they were able to reduce their debt from 250% of GDP to 50% of GDP by 1900.

The current US economic position appears to be more dire than that of the UK in 1800. With total debt exceeding 350% of GDP, troops stationed in 120 countries, 2 ongoing wars, a national debt that will reach $14 trillion over the next 2 years, $56 trillion in unfunded future liabilities, and a rapidly aging populace, the US ability for rapid economic growth is compromised. The Americans have lived beyond their means for decades - and now the US is broke.

But Americans have a lot of fight left in them. If they successfully kick their addictions to debt and spending, they can still save themselves. If they continue on their current path of fiscal recklessness, the Chinese -- among others -- will surpass the US before the middle of the century. The choice is on the US.