Monday, October 31, 2005

Tuesday Brings Another Rate Hike

Apparently the market didn’t share our thought that today would be a rather subdued day going into the rate news on Tuesday.  Instead, it was a party most of the day.  The traders liked the idea that the October lows are in and now we can have our year end rally.  Well, as most of you know, we don’t share that sentiment.  We haven’t faired too well the last few days due to the market lows being set in mid-October and since then just a lot of volatility with the last two days being up.  We did say that any rally should be sold and today was no exception.

After the bell tonight, DELL announced some sobering news on the PC front and their stock dropped about 5 % after the news.  The rest of the market didn’t like that too much either as the futures for both the SP500 and the NASDAQ 100 dropped along with DELL.  Of course, the drops are not very deep at all.  DELL must cause bulls to scratch their heads a little.  

Then there is the Fed raising rates another 25 bps on Tuesday.  We don’t know if this would cause anything by itself due to the well orchestrated expectation for the move.  What everybody is expecting is that Greenspan is going to have to turn over the wheel to someone new soon so he might as well start letting go now.  So, with the new possible chief in place in Ben Bernanke, the market can not worry about Tuesday’s rate increase but instead focus on the wonderful new world of Bernanke.  

With October now behind us, we thought is important to recap the month.  The Dow Industrials were down 128 points after the 210 points we had in the last two days.  The SP 500 is down 21 points to 1207 and the NASDAQ Comp is down about 31 to 2120.  The HUI dropped 23 points to 222 for nearly a ten percent drop-glad we’re out of that for the time being.

So, October wasn’t too bad for stocks but we have said that November may give us a tradable low point, not October.  You may not remember but the last few days of a down move are generally the strongest.  You may not remember because you haven’t seen such a thing for about two or three years and you can forget these things.  

The market is a dangerous place right now and days like Friday and Monday are just strong enough to give you the confidence to stay the course.  Just be careful.  Protect the assets you have.  

We’ve be back tomorrow for a recap of the aftermath of DELL and the aftermath of the Fed move.  The market should be tired by the end of the week and will be ready to go down into the end of the month.  Sell these beautiful prices.  The broader market has not come back as far as the Dow so you may not believe these prices are beautiful.  Just remember our analysis that shows relative performance of your stocks against the broader market.  If they are weaker than the market, please consider selling them.

Dow Industrials:   10,440.07  +37.30  (trying to get back to 10,500???)
RYVNX:    21.28
TLT:     89.78

Sunday, October 30, 2005

Busy Week Ahead

Just a quick note this evening:  Here we are, facing a week full of news and the end of the month.  Tuesday we get the latest in a series of interest rate increases by the Fed.  Friday we get the October jobs report.  Monday gives us the Chicago Purchasing Managers Index and Tuesday the October ISM Manufacturing Business Index.  Thursday gives us the October ISM Non-Manufacturing Business Index.  

Last week was the only up week the market was able to manage in October.  We are not exactly satisfied with the down turn in October but there is still some time here in November to see more.  The way the market deals with all of the news this week will give us all a better understanding of what the near term holds.  Normally, we see some strength around the beginning of the month and that happened a bit late last week.  And, it is possible that we might see another up week but there are enough land mines in the news this week to make that less than a sure bet.  

We would look to sell into any more rallies this coming week.  The market looks weak on the surface and underneath the surface.  Even with the strength we have seen, the market can’t seem to get any positive momentum going.  The market can do whatever it likes but right now it doesn’t really like going up and we see that massive overhead supply that’s built up over the past two years.  

Let’s see how Monday trades.  We expect some steady trading into the Fed’s announcement on Tuesday afternoon.  You can’t ever be sure.

Dow Industrials:   10,402.77   +172.82  (more than making up for Thursday’s 115 drop)
RYVNX:  21.89
TLT:  89.61

Thursday, October 27, 2005

Connect the Dot Day?

Just as we were putting last night’s post to bed, we checked the over night futures contracts and they had plunged.  I looked at the news and found that GM had just been subpoenaed by the SEC and thought maybe the two were correlated.  Well, I don’t know if they were but GM got hit hard again today on the news dropping nearly 7%.  Looking at trading today, it is difficult to tell whether GM really was the catalyst to the big sell off late in the day.

Yes, there was a bit of a sell off in the stock market today with the Dow Industrials at 10,229, off about 115 points just over 1%.  That puts the Industrials back near the closing lows of the past several weeks, with three closes right near 10,215.  We are not sure that the market has the ability to hold that 10,215 low or not but we will know soon.  We are heavily short and are looking for a break that takes us down through those support levels.

The bond market wasn’t down today for a change but it didn’t have much energy in it.  We are still long the bonds and will assume that money coming out of the stock market will find its way into the bond market temporarily.

In other news today, the durable goods orders dropped more than expected, 2.1% drop versus an expected 1.0%.  This follows last month’s big 3.8% gain.

The big news that caught our eye was the New Home Sales figures.  First of all, the rate of new home sales was up 2.1% from August but that was aided by the downward adjustment in August sales.  Second, the median price fell 5.7% from August but still managed a whopping 1.9% increase in the median price from September 2004.  Last, the supply of homes on the market rose 3.1% which represents 4.9 months of supply at the current rate of sales, this number was up 20% over September 2004.  You probably can understand why we are watching these numbers.  The rollover in real estate has probably started.  Of course, credit expansions have a way of feeding on themselves so we may not have seen the end, but we are very close.

After the close this evening MSFT reported earnings.  They did have an increase over last year but the stock got sold in the after hours trading.  The over night market is not being affected too much by the MSFT news but with a big sell off like today, the market participants are thinking rally.  We may not get one.  

Maybe the market is connecting the dots that we have seen with today being big dots like the GM news (as GM goes, so goes the market), the durable goods orders, the new home sales details, and the possibility of higher interest rates.  We do think that the market is very vulnerable to breaking the lows from the last couple of weeks.  

One thing is for sure, the market will not be as dull as it’s been for the past 22 months.  We are in for some changes in prices and before they decide to settle somewhere there should be some volatility.  Hopefully you are prepared.  Be careful.

Dow Industrials:  10,229.95  -115.03
RYVNX:  22.25
TLT:   89.60

Wednesday, October 26, 2005

Are PE Ratios Too High?

Tonight we see the end of the month of October is just past the weekend so there are only three trading days left.  As heavy as the market is trading right now, I will be surprised to see much in the way of upside in the next three days.  (famous last words probably)

The bond market is certainly showing signs of fatigue after the Bernanke announcement and there is now some speculation that he is going to have to come out with guns blazing in order to calm the fixed income market.  His easy money policies will not cut it there; and, to the extent higher rates will naturally cause less borrowing from home owners, the tough talk will need to be backed up by firm actions.

Thanks to Erick who points out a “connect the dots” article from JPM on one of the effects of the higher short term interest rates, that being lower stock valuations.  To see his comments go back to the comment section in yesterday’s post.  The gist of the article is that higher savings rates will be strong competition for stocks that have not performed very well with dividend yields that are very low too.  Thanks for the info, Erick.

My take on the situation goes back to the conversations about the market being in a new PE ratio environment.  The argument has been for many years, including the period surrounding the highs in the market in early 2000, that lower interest rates allow stocks to carry higher PE ratios.  Put a little differently, lower interest rates mean that stocks can trade at higher prices all other things being equal.  We’re finally seeing commentary that will lead us back to a normal PE ratio in the market.  In fact I firmly believe that we will see very low PE’s in the market as we proceed down the bear market path.  The market just needs to figure out how to start selling and when it does, it will go down much easier.

Today’s market was fairly dull but there was some interesting action early in the day.  The Dow Industrials pushed up to challenge last week’s highs just over 10,400 but fell back by the end of the day to close well under 10,400 at 10,344.  We remind you that there is a significant resistance point right over head for the Industrials, you recall the days and months that we have traded near 10,500.    

To be fair, the NASDAQ averages and the SPX have run above their highs from last week, but the early October highs are still in place not to mention the September highs and the August highs which are also in place.  All of these marks represent overhead resistance and we remain bearish against them.  

The article in the Wall Street Journal tomorrow, October 27, page A3 tells of Anheuser-Busch’s 24% drop in third quarter net income and how they have lowered guidance on 2005 earnings for the fourth time.  The beer business may suffer more if average Joe’s need to spend their money on heating their homes this winter or filling their SUV’s with gas.  Usually beer sales hold up in a recession, maybe not this time, we’ll see.  Anyway, just thought you’d like to know.  And, I see the Chicago White Sox just won the World Series (you have to go back a long time to find a Chicago team that has won the World Series) so there will be three less games to bolster those beer sales.  

The other news is in the political arena which we normally don’t report due to its lack of market impact but with the VP’s office being scrutinized there are possible reverberations in the stock market.  We don’t know what will cause the market to drop but so far the market has not been too strong through October and that should continue for several more weeks.  The market has too much bullish enthusiasm without any reason for it.  The news is normally sold whether it’s good or bad, with the possible exception of GOOG.  Be careful out there.  

Dow Industrials:  10,344.98  -32.89
RYVNX:   21.39
TLT:  89.28   (this hurts even though it’s only 1%)

Tuesday, October 25, 2005

Another Bernanke Day?

The stock market tried to keep it together today but couldn’t manage another up day.  The bond market has just collapsed the last two days after the announcement by the President to recommend Bernanke as Fed Chairman.  The bond market almost seems spooked by the possibility.  The gold market is confirming the bond market’s Halloween spook by running up the last two days.  The times are very strange indeed as we head into the end of the month.

News items of note today:

  1. Existing home sales being about as much as last month

  2. Followed by a report on possible changes to the tax code that could reduce the home mortgage deduction (read CNN’s story on Mortgage Math)

  3. Consumer confidence falls on hurricanes and higher gas prices (in September)

  4. Bond prices fall despite fall in confidence

  5. Natural gas prices spiking ten percent today on the first hint of cold weather

  6. AMZN’s profit falling 44% in the Q3 and muted holiday sales forecast, with the stock off over seven percent after the news

Much can be said about the news items above but we take particular note of the ones related to housing.  Those would be all but number six.  We think that housing is about ready to show signs of fatigue both in pricing and in sales.  As rates have moved up in the last two days, trying to test the recent upper range, we have considered the major possibility of the bond market making a stand here to stop the credit expansion now.  We didn’t think that was possible just a few days ago but that outcome is on the radar screen tonight.  

As we have mentioned in the past few weeks, this market is treacherous and you should be very careful with your assets.  

One good thing for the Update was that RIMM decided to finally break under 60 today and with a vengeance.  We shorted this stock at 69 and are sitting pretty with a close at 57.40 tonight.  Yes, we know, GOOG has gone against us a little bit, ouch, along with the bond market and the stock market.  The gold complex has rallied fairly nicely here, without us, and we expected some of that with another drop to take out last week’s lows.  We are thinking of a tradable low occurring in that market in the next month.  We do think that the market reaction to the Bernanke selection is a flash in the pan but we need to be careful.  The market needed a little push and maybe this was it.  Stay tuned.

Dow Industrials:  10,377.87  -7.13  (Far from 10,500, with much bullishness?)
RYVNX:  21.09
TLT:  89.94  (ouch, this hurts)

Monday, October 24, 2005

Bernanke Day

The Maestro is dead, long live the Maestro.  Well, he’s not dead, just retiring but today the President picked Ben Bernanke to succeed Greenspan as the Federal Reserve Chairman.  We have mentioned Bernanke on several occasions in these pages.  We think he is cut from a similar cloth that Greenspan came from.  His actual policies when he actually takes the office may be a little different than the ones he has espoused over the past few years that he’s been in the spotlight but for now we can only judge him on what he has said recently.  So, we can’t say that we’re surprised at the President’s choice but we are disappointed that there hasn’t been another good choice out there.

The markets reacted much like a Bernanke nomination might cause, stocks up and bonds down.  Of course, he hasn’t even been approved by the Senate and will not take office for several months but the markets seemed to agree with us, bad for inflation and bonds, good for the stock market in terms of excess liquidity.  I repeat, we are a long ways off from his hand being felt at the helm of the Fed but the markets seem to think they know what he’s all about.

Of course, for us, today was not a very good day given the ramp job in stocks and the sell off in bonds, not to mention the little lift the precious metals took today with the anticipation of inflation.  So, here we are after two giant rally days, not back to back, but two big rally days none the less and what is the net of it all?  The Dow Industrials is still below last week’s high above 10,400.  Today’s volume was not as strong as it’s been recently.  The market is slowly working out the oversold condition with a modest increase in prices.

We don’t know exactly what to say here but the market is not done with its down move and should continue in that direction over the course of the next six weeks or so.  Yes, we will have these up days every once in a while to scare the bears and excite the bulls but we have try to figure out the intermediate term trend and trade it.  We are currently in a rally phase that is relieving the oversold condition and a reassertion of the down trend is waiting in the wings.  

Dow Industrials:  10,385.00   +169.78
RYVNX:  20.96  (sad)
TLT:  90.72  (also sad)    

Sunday, October 23, 2005

A Big Week for Earnings

Monday starts a new week in the market and there is a lot of optimism about the future course of the market. Many have suggested that the lows are now in and that we can get our traditional year end rally starting any day now. Monday’s are good days to be bullish the stock market due to the fresh start approach. People take a look at the information on the weekends and on Monday decide were to put their money to work.

Here at the Wednesday Update, we think that any rally should be sold. We have had an oversold market and now we have a low point that may provide some support in the Dow. We do not think any near term rally will develop into something serious on the upside but we will reserve judgment. We do not want to be too stubborn if the market does decide it wants to rally a little.

In fact, we believe that if a rally doesn’t come soon, there will be acceleration to the downside especially in technology shares, which we follow carefully. We think any rally in these shares is a good selling opportunity. GOOG now sports near a $100 billion market value. That is a big number and we continue to recommend selling this stock.

On Friday, GOOG led the NASDAQ to a good sized gain while CATerpillar, a leader in this market over the past three years. CAT traded around 17 in late 2002 and just last week traded near 60, a mere quadruple during that time. Friday it disappointed on earnings and dropped ten percent to under 48.92. As these leaders keep silently dropping, the market is making big plans to go down while everyone is still bullish.

Lots more earnings to be announced this coming week so keep your eyes open for developments. We don’t look for much upside but are aware that spikes are a fact of bear markets. There is definitely too much optimism for a broad based rally. These spikes are usually short covering or day trader momentum chasers. I don’t know that for sure but it is very likely.

Here is our position on markets that we are involved with:

Stock market: Short most, if not all, sectors. Leadership is fading and we look for a sharp decline before Thanksgiving.

Gold: We think gold and its shares have peaked for the near term. We may get another opportunity for a long position before year end. We may see a bit of a bounce out of the lows set last week but another drop is likely. We will wait for a good opportunity.

Bonds: We are long the longer dated Treasuries, we think corporate spreads to Treasuries will widen so we would avoid corporates. The rally phase may not last too long but we see a good bottom at last week’s lows.

Dow Industrials: 10,215.22 -65.88
RYVNX: 21.66
TLT: 91.43

Thursday, October 20, 2005

Easy Come, Easy Go

We were expecting a fairly heavy volume day but with little movement as the Top of wave C needs some time to mature. We saw some heavy volume, almost as much as yesterday, but the market decided not to let the top of the C wave simmer too long and retraced pretty much all of yesterday’s advance in the afternoon. This is the nature of a down market; weakness can appear virtually at any time.

Yesterday we gave you a lot of techo-babble about Elliott wave and other technical indicators, we apologize. The point of it all was that not all “reversals” are created equal. Yesterday’s reversal was trumped by today’s reversal and this type of trading should be making some people very nervous. After yesterday’s stunning reversal, the participants had to face a rout like today.

There was some good news for the internet sector tonight as GOOG posted good numbers and the stock traded up about 10% in extended trading. It is possible that news like that can carry the market for a little while but we still think the path of least resistance in the next four to eight weeks is down, rallies should be sold.

We have had our eyes on several sectors recently and see that the gold sector has been hit fairly hard with the HUI down about 15% from its highs. We wait for a good opportunity there. Our little gold mining fund closed at 11.81 today as mining stocks continue to be pounded. Glad we traded out when we did.

We have no good idea what will happen tomorrow with the market in a schizophrenic state, not knowing itself what it wants to do. We think the general trend is down and with spikes like yesterday, it keeps the bears in check and the bulls hopeful. These are dangerous times to be in the market, especially long. Be careful.

Dow Industrials: 10,281.10 -133.03
RYVNX: 21.93
TLT: 90.59 (the bond market needs a push)

Wednesday, October 19, 2005

Outside Up Day?

Today the market staged a major reversal.  We had a question on the October 13th Post regarding an outside down day and replied to the question with our normal loquacious style.  The answer described how the market might overreact at the end of a move and would create a reversal.  That overreaction would trade much lower or higher than the day before but then would turn around and manage to go in the other direction and push past the previous day’s high or low, depending on which way it was going.  

Today we saw a reversal day that is considered an outside up day, which normally is a very bullish thing especially on the volume we saw today.  The one lacking thing is that it really didn’t happen on the end of a down move, it happened in the middle of an upward correction.  In Elliott wave theory, this would probably be considered a C wave which is the terminating move in a correction.  

To simplify that statement, we have seen a good drop in the market from the first of the month and now is time for an upward correction to relieve some of the market’s oversold nature.  The way Elliott wave teaches is that the correction should be a three wave affair with a nice up move (the A wave) and then a pullback (the B wave) and then the final powerful last up move (the C wave).  For those of you who read technical material, that’s what they are talking about when they say C wave.

Today was a classic C wave in that we saw a nice A wave from the lows of last week, near 10,150, to yesterday’s high around 10,360, about a 200 point move.  Elliott wave theory suggests that the C wave could be about the same distance as the A wave.  I know this is getting pretty technical but from this morning’s lows around 10,230, the bottom of the B wave, we should experience about a 200 point move, the C wave, to complete the upward correction.  Well, the Dow closed at 10,414 for about a 185 point up move so we might have another 15 to 35 points to go on the upside tomorrow.  

We also consider that there are several other significant resistance points in the 10,400 to 10,500 range that should impede further progress on the upside.  Of course, we could be wrong, but we do think another day of trading in a small range tomorrow on fairly good volume would signal to us that this scenario is gaining in stature.  We think that the oversold condition could relieve itself on a day like that, too, and could lead to the next, very deep, down move that we expect going into the end of November.  

More technical stuff including more Elliott wave for some of you:  The move from the highs around 10,700 in the Dow to last week’s lows around 10,150 is about 550 points.  A normal Fibonacci retracement would we about 61.8% of 550 points about 340 points putting us at 10,490. The other idea is that both the 50 day SMA and the 200 day SMA are trending down with the 50 under the 200 and the Dow under both pulling them down.  Both of these represent resistance to the upside progress with the 50 day at 10,422 and the 200 day at 10,509.  

We have predicted a rally that would give us a good chance to get more skin the game and the market has given us that gift we talked about.  Selling into a rally like this can be a little dangerous if we aren’t a little careful so we have given some parameters for upside containment.  If the Dow decides to travel higher than that tomorrow we will report tomorrow night.  We are hoping for a good rendition of our forecast of the C wave completion to the upward correction over the next day or two.

Treacherous market right now.  Be careful.

Dow Industrials:  10,414.13  +128.87
RYVNX:  21.53  (took a hit today with this up move)
TLT:  90.35

Tuesday, October 18, 2005

Giant PPI

Today didn’t look much like an up day.  In fact, it looked like a down day with the Dow down about 60 on the day going out at the low of the day.  A day like today is certainly not bullish.  We have talked about the oversold nature of the market and how it should bounce out of this past week’s low.  Well, after about three days of trying, it seems to have run out of gas.  With the market dropping today, our only thought is that if the lows of last week get violated we might be heading down in a hurry.  

We have mentioned several times in the past that crashes, or as they say in the politically correct world, nonlinear events, happen when markets can’t pull themselves out of oversold positions.  This is the time when investors get a little scared or Fear takes over.  We can’t say for sure that is what will happen but today’s market is definitely cause for concern.  Fortunately, we have moved into short positions and can enjoy a simple decline.  We did think there would be more opportunity this week to add to those positions or to lighten up on long positions.

After last week’s report for September CPI of a 1.2% increase, the most in 25 years, today we saw the PPI increase at a giant 1.9%, the most in 15 years.  The market doesn’t seem to be too worried about it but the numbers are big.  You would think the bond market would object to these big numbers too but it was up slightly today, too.  When these markets want to go up, they don’t go down anymore.  That doesn’t mean bonds can’t go down, just that they didn’t go down today.

Tonight INTC reported and the market was not overjoyed by the news as INTC dropped almost 80 cents after the news.  The news was that INTC sees some weakness in chip demand in the usually strong fourth quarter.  Yes, the quarter was good but the market doesn’t trade on yesterday’s news, it is forward looking and tonight, at least, the vision was not taken as bullish.

Overnight the NASDAQ 100 futures are trading lower, not significantly, but tomorrow morning is a long ways off.  Traders may like what they see in the morning light.  We will be anxious to see what develops tomorrow.  We have thought that the market would find a little footing here but today bodes badly for tomorrow and beyond.  If the market can finally get some traction tomorrow, we will not be surprised but it will mean that the bounce we have going may carry a little longer.  

I think that when most players think a rally is coming, including bears, there is a distinct possibility that one might not come.  This is a very bearish outcome, especially if the players have positioned themselves for a rally.  We wait to see what happens, with our short positions in place.  We put most of our short positions in place on October 3rd.

Dow Industrials:  10,285.26   -62.84
RYVNX:  22.42
TLT:  90.31

Monday, October 17, 2005

Monday Rally

The Dow pushed higher at the opening on news that GM’s profit was worse than expected and that stock popped by about 10% in the early going?  GM made some comments about cutting health care costs and the market liked that.  Later in the morning, Altria Group, formerly known as Philip Morris (MO) was up on the news of a favorable ruling from the Supreme Court.  The government tried to get the Court to review whether it could go after some of the prior profits of tobacco companies to pay some of the “fines” for the landmark ruling against the tobacco companies.  The Supreme Court denied the hearing.  Both stocks jumped large percentages today and with both of them part of the Dow, they pretty much made up the entire gain in that index with MMM (3M) up to finish out the 60 points.

Today’s stock market tried to go down in the morning but, by the end of the day, had a nice rally.  The Dow Industrials managed a nice 60 point move.  Starting at last Thursday’s rebound from the 10,150 area, the Dow has managed almost 200 points.  The biggest problem with the rally is the lack of volume associated with it.  And, today’s advancers were just a few better than the decliners at 1763-1499.  This is not exactly the kind of pop the bulls were hoping for today.  After all it is Monday.

We don’t think this rally will take the market up very far and should be over before the week is up.  You have been given a wonderful opportunity to exit more long positions before we see acceleration to the down side.  

As mentioned last night, we purchased TLT, the bond ETF.  The bond market had a decent pop at the opening and pushed the TLT to 90.61.  We decided to hold off our purchase until later in the day and were able to pick it up for 90.25 before it closed at 90.21.  We are content with the price we entered the trade.  Now we would like to see a move back to around 95.  We will keep you posted on our outlook.  We normally don’t like to bring bonds into the Wednesday Update but we make an exception this time with an ETF, which is technically a stock.

Gold was up today as well but failed to run past last week’s high.  We don’t expect much follow through and don’t think it can break last week’s high.  If it does, we are still not going to get long this commodity until we see it Drop about $50 or so.  For its part, the HUI managed to match Gold’s move today, up 5 points, but the HUI is well off its highs from a couple of weeks ago. Today it closed at 234.77 after being at 250.33 intraday on September 30th.  We are going to be very patient with this sector, but we are hoping to get back into it sometime later this year.  We’ll keep you posted.

Dow Industrials:  10,348.10   +60.76
RYVNX:   22.09  (still a good profit from 20.56)
TLT:  90.21  (Our entry point, 90.25)

Sunday, October 16, 2005

Short Term Bounce?

Sunday evening and the market is having trouble figuring out what to do for Monday morning.  Monday’s generally tend to be up days and tomorrow may not be an exception.  We have seen a bit of a bounce in the past two days of trading so we need to watch for a good opportunity to add to our short positions or sell into that strength.

Without good information that the market will deliver Monday, I am not sure how high this rally can bounce.  The futures are showing no movement in either direction tonight so I don’t think anyone else has much idea what’s going on tomorrow either.  We do know that the market is oversold in the near term based on the very negative numbers it generated last week.  More importantly, the market is giving you another opportunity to sell into some strength.  We think of it as a little gift from Mr. Market.

We hope you have had a chance to look at some of the free material over at the web site we mentioned the other day,  They seem to think the rally will carry the Dow back up near the 10,400 area but also say that if we see it below last week’s low of 10,156 then we should consider the next leg down to be under way.  

The two web sites, elliottwave in their Short Term Update and true contrarian, are both suggesting that bonds look to be ready to have a short term bounce.  We have noticed the 10 year treasury is at a relative high rate of near 4.5%.  We are considering taking advice from the three of us and purchasing Treasury bonds or funds that invest in Treasury securities.  The ETF, Exchange Traded Fund, that concentrates on Treasuries is TLT and we think it may have a 5% bounce in it.  It closed at 90.23 on Friday and could rally back near 95.  

Both of these websites offer additional information and are especially aligned with the way we think right now.  For their perspective please use the links provided in the blog, one at the left for the True Contrarian and the other one in the text of the October 12th post.  The elliotwave Short Term Update was posted on Friday evening and another one will be posted Monday evening.  Their free posts are only available until Wednesday afternoon so take advantage of that offer.  We recommend the October Financial Forecast as well as the Short Term Update.

Dow Industrials:   10,287.34   +70.75
RYVNX:  22.24

Thursday, October 13, 2005

Was This an Up Day?

The market tried to have an up day and I guess in the NASDAQ we did see a bit of a rally. We should expect some up days just to keep some of the bears, like us, guessing. The stock market, as I measure the Dow Industrials, is now in an oversold position. The past few days have served to push the indicators down but have pretty much left the prices in the Dow intact. This kind of thing will happen on a short term basis, but long term the market is destined to drop.

We are going to keep the post “short” this evening. We will be watching for a rally to sell into as this market keeps everybody guessing. We don’t expect anything like a move back to 10,500, but we do expect a modest rally that could occur at any time. Today’s mini-rally was fairly sharp and qualifies as an opportunity to sell with the Dow up about 80 points in an hour after lunch. In spite of the big rally in the Dow, the breadth (gainers and losers as well as upside and downside volume) was negative today as the broad market struggled to get positive. Sometimes this happens on the second day, as in tomorrow but we think the market is decidedly weak and rallies will be sold.

Still, the message of the market is clear, down ahead. Keep this direction in mind as we head into the weekend and early next week. Mostly, rallies will get sold and the market will continue to buckle under the downside pressure.

We repeat, we do not find any major sectors of the market worth being long. The opportunities are on the short side. If you can’t “bear” going into a short fund, then head into cash for some protection. Those of you who want to hedge your long positions should do so with a protective put strategy. This is not the time to be long but if you must be, buy some protection by purchasing some of the inverse funds we have mentioned or buying puts on the securities you own. ASK questions in the comment section. We will answer them as soon as possible, normally within a day unless we’re in California or something like that.

Speaking of that, no there is no significance to an inside up day. It could lead to an outside down day and that is a different story, a bearish one.

Dow Industrials: 10,216.59 -0.32 (big move)
RYVNX: 22.55 (modest loss today)

Wednesday, October 12, 2005

Time to Consider

The stock market is now facing its destiny, or density—name that movie. The leadership in the market has disappeared and stocks are ready to take a trip South. You say, “We’ve been going South for a long time.” Well, by my count, we have only been down for a couple of weeks that are noticeable. The question is “How long is it before we get a meaningful bounce?” The answer lies in the following question: “How fearful are you personally about the market dropping?”

By the looks of things in the stock market there is very little fear right now. We need to see a bit of a selloff before we could approach a significant, tradable low. And, even at that, we may not have seen the ultimate low in prices as normally price lows happen on much less emotion. So, did you answer the question, Very or Not much? I expect the answer to be, Not much for many if not most market participants.

We received a comment on yesterday’s blog asking if there was still time to get into (more) short positions. Our friend Erick was specific on the short index funds that track the Dow or the NASDAQ 100, the later of which we own in the form of the RYVNX.

We normally ask this type of question (we sure have a lot of questions and answers tonight) when we are holding a stock or thinking of buying it. If you wouldn’t buy it, then why do you hold it? But, let’s get specific…

The stock market has just shown us signs of weakening and we expect some significant selling over the next week to ten days. For us traders, we may take some short profits if we get a good selloff. If not, and there is a bounce that would give us another opportunity to sell some more. The only problem with getting in now is that you need to consider your exit strategy which may need implementing in less than two weeks.

Most of you are not used to dealing with short term positions like this but this is the time for a major drop in the stock market and when that drop comes it will be fast and furious. Then, we will want to get back into cash to decide whether or not to go long. We may consider going long if we get a deep enough correction.

Make no mistake, this move down will be the beginning of a very deep selloff that may take several years to accomplish. We don’t want to be long into any of this decline. So far we’ve fared well with our RYVNX. In my personal accounts I may decide to get a little more short. Right now there is an obvious downside target if you look at the charts. We should see another 5% from here in the next ten days. I am giving you the perspective of the end of the first leg down. We think the move down will take us to the end of November before we find a good tradable low.

Keep coming back here for further refinements to this call.

Moving to gold: The last two days probably marked a top in the gold. We have seen a very strong up move in the precious metals but in the last few weeks it’s been without the requisite move in the, gold mining stocks as measured by the HUI. As gold has been tracing out new highs for the move, the HUI is failing to confirm the move. Over the past several weeks the HUI traded as high as 250 but in the last couple days has only managed to get back to about 245. This is the type of action we generally pay attention to given that we believe the mining stocks lead the metals. To confirm the move down in gold, the dollar seems to have found some support and could rally again. These two don’t necessarily move opposite directions every day but they should trend opposite.

We are taking a bold approach here and recommending the sale of all gold and gold mining stocks tonight. We like the long term outlook for gold but we can’t justify being in an asset that looks like it’s about to go down hard. In fact, we might recommend adding one or two mining stocks to our short list. Since you don’t do that type of thing, you should make sure that your portfolio is now void of mining stocks, at least for the time being. If we see a change, we will immediately let you know here.

I guess it’s Wednesday night and I am writing with my normal Wednesday Update ramble, but I want to emphasize that you should consider getting lighter on your stock exposure here. We don’t know of a single major industry that should be purchased at the moment and that is typical of a downturn. For those of you who are bears with me, we have been waiting for this move for over a year and now it’s here. We need to miss the decline at a minimum and capitalize on it at best. I haven’t been this adamant about the prospects of a major selloff until the last couple of weeks. There is significant evidence for an imminent decline:

Interest rates are now trending up, bond market has probably seen its top (early June)
Oil is still at lofty levels
Market volume has picked up in this decline
Complacency, no fear, is still prevalent even in the face of this decline
The housing engine has slowed considerably
The saber rattling for a tax overhaul that would reduce the mortgage interest deduction
Mother Nature is wrecking havoc
Prospects for an expensive heating season are high
Consumer confidence is down

You can probably come up with your own list but the facts are there. The social mood is about to undergo a sea change with the stock market being immediately affected. With that in mind, we have a great opportunity for you to learn more about this from the people who write about it most often, Elliott Wave International. Their website is: and today they started free week on their site. This means that you can get some valuable information that normally would cost you about $75 a month for free for a week. You will need to register as a EWI Club member but that is free and gives you access to a lot of good information. I highly recommend the October Issue of the Financial Forecast and then also the Short Term Update that gets published on Wednesday, Friday and Monday.

With that I will finally sign off and leave you to your thoughts. This down turn has a long ways to go just based on how big this top is. You will recall that the Dow has been within striking distance of 10,500 for the better part of two years, so there is a lot of complacency out there and a couple hundred points is not going to cure it. Yes, the market is oversold but that is when we see some of the biggest selloffs. If stocks convince people that they are going down, they will go down hard and that is just what we think, down hard. If you have any doubts about what to do, go look at the charts of the stocks you own and make your own decision (use in the left column). Go back and review some of the posts to this blog for additional information and post a comment/question if you like.

Dow Industrials: 10,216.91 -36.26
RYVNX: 22.91 (up 11% so far)

Yes, the movie is "Back to the Future".

Tuesday, October 11, 2005

Market Trying to PUT in an Up Day

We hope you have enjoyed the little downturn we have had over the past couple of weeks. The Dow has dropped over 300 points this month, so far, with undoubtedly more to come. We should expect a bounce of some measurable magnitude but so far every rally seems to be sold. The market is near being oversold and that has normally been the recipe for a sharp upturn in prices. This time around we are seeing some buying interest at times and then it just leaks away.

We note that last week the market volume was fairly chunky during the decline. On Friday with the jobs report so good, the market managed some strong upside volume but had no follow through on Monday. Monday’s usually are the up day of the week but not this week.

With the Dow sitting precariously over the 10,000 level, traders have to be wondering if that will really hold, but so far so good. We don’t think it can hold so we continue to be short, realizing a short term bounce has to be coming soon. We don’t think that is absolutely necessary because we know that market dislocations can happen when the market is oversold, which it is close to now.

We would be Very surprised if the Dow made an attempt to get back to the 10,500 level before going down in earnest. The broader market seems much weaker than the Dow so when the Dow finally gets in gear on the downside and the broader market fails to confirm, we will start getting an idea when to cover our shorts. There seems to be some time for that to occur both in terms of price and time.

For now, we just bide our time and wait for a good opportunity to cover. When that day comes we may be able to set up some nice long positions that will do well for us. Until then, we just wait.

The Gold sector has not done much on the downside like we originally thought might happen. As you can tell, it hasn’t gone up or down much since we moved out of that sector. We do keep a close eye on it.

The other area of interest is the foreign markets, particularly Japan, although we’ve seen some strong moves already and don’t want to chase it too much. We will watch and you wait, together we’ll make some good trades.

Dow Industrials: 10,253.17 +14.41
RYVNX: 22.37 (a nice move so far)

Monday, October 10, 2005

GM Drags Down Stocks

Just a quick note this evening: The market has been having some trouble with correcting the drop we saw last week. The big news last week was the jobs report that showed a much better picture than was expected. Today, being Monday, we saw a very ugly drop in the market when we usually expect a little attempt at a rally. GM got spanked to the tune of about 10% on news that it might get some drag from Delphi after their bankruptcy filing. Some feel that GM is only a couple of steps away from bankruptcy themselves. The old saying used to be “as GM goes, so goes the stock market”, not a very good omen. GM is back down to the lows it set in April which are the lowest prices for GM since 1992. This stock has not been such a good "buy and hold" stock.

We will have a full post tomorrow evening but thought we’d get a short one out there tonight just to let you know we are still here. Our positions have done fine while we were gone so we are not concerned about them. We feel there is more to this downside and if we don’t get a fairly good rally soon, the market will collapse under the weight of the sell orders that will come in. We are in wait mode tonight even though we saw a pretty rough Monday today.

Dow Industrials: 10,238.76 -53.55
RYVNX: 22.15 (not a bad move so far from 20.56)

Wednesday, October 05, 2005

Possible Dislocation Approaches

What can I say? The market has perfectly followed what it said it wanted to do and that is “go down”. We got that in spades today as the Dow dropped about 124 points to cap off a 250 point drop in the last three days. We don’t have a good feeling about the way the market is trading, that is to say, we think the market is about to drop hard. There really is nothing to support it technically at this point. On top of that, the market fundamentals are weak.

I don’t really think there was a lot of fear today so the selling was contained, not panic selling. Market participants think they can just go ahead and ride out any drop since we haven’t really had a convincing drop for a long time. Today did show signs of no support under the market as the Dow dropped to a low not seen since July 7th, and the same is true for the NASDAQ COMP and the SP500. That is called three months of overhead supply, meaning anyone who bought in the last three months is losing money. Admittedly, not every stock is lower than it’s been in the past three months but the indexes are at three month lows, so many stocks are, too.

We note that the oil complex was down today, too. Is that supposed to be bullish? While the precious metals were firm, the HUI, our gold mining stock index took a beating, causing our little gold mining mutual fund, BGEIX, to drop to 12.64, so far we're glad we took profits. Like I said, we will keep watching it for opportunities.

Right now, our “short” position has done fairly well in the two days we have owned it. The RYVNX fund that we paid 20.56 on Monday is now at 21.45 for a nice 4.3% profit. We did have to pay a commission in our account but maybe you didn’t. Either way, the profit is significant in just two days. We don’t think there is any real reason to worry about the position as we think the market has a ways to go before this is over. We have been waiting for this for about two years so we’re going to enjoy it.

Dow Industrials: 10,317.36 -123.75 (10,500 is a memory)
RYVNX: 21.45

The Wednesday Update may not have another post until next week. We are going to be on vacation and may not be able to post anything to the blog. The latest we should return will be Tuesday evening for a Wednesday morning post but we could post occasionally in the next few days if conditions warrant. We don’t think the market is going to go against us for several weeks even though we might get an up day or two along the way. We still would stay the course, the “short” course, that is. Take Care and we will be back soon.

Tuesday, October 04, 2005

No Time For Complacency

What a difference a day can make! Last night as we were writing the post, there was still a little bit of a question about the near term of the market. Tonight we have seen another significant reversal of fortunes in the market. Putting these two days together you get a very bearish picture. The news was that the Dallas Fed president Richard Fisher said the Fed needed to stay the course in its fight against inflation. So, if the market truly sold off due to that news, we should see a good rebound Wednesday. Otherwise, maybe it wasn’t the news after all but a weak market. We will soon know, even if we don’t know Wednesday.

In other news, the New York Times had a front page article on the New York housing market saying that is had stalled a little bit. In the past quarter, the average sales prices had dropped 12.7% but that year over year they had still risen 10%. One other key point was that that the time it took to sell a home was up 30.4% in the last quarter. And, as a side comment, the article mentioned that the insiders at big home builders have sold almost $1 billion worth of stock this year... The cracks are beginning to appear...

Looking at our current favorite index, NDX, the NASDAQ 100, we get a good idea of the kind of day we had. If you look at the (java) chart, the most important chart tonight is the six month daily chart and here are the highlights as we see them. Back on August 2nd and 3rd, the NDX traded at 1628, the highest levels since the end of the year highs around 1635. On September 13th, the NDX traded to a high of 1619. These are the last two pronounced highs in this index. Today we saw a big move up in the morning to take the index up to almost 1618. There it seemed to hit a brick wall; we call it resistance, the resistance that two prior peaks created. The point being that it failed to get back to the previous high on both occasions. The same type of chart pattern exists on the SPX (SP500) and the INDU (Dow Industrials).

There are few other notes about this chart. If you consider a trendline, and you can actually draw it in with, from the April 29th low spike through the July 7th low and then through the August 29th low, you will see that trendline broken decisively on September 21st. Then we see the market rally back up through the line and today it broke down through it again. This is another bearish chart pattern.

If you were to put in the 2 SMA (Simple Moving Averages) lines for 50 and 200 days like we usually do, you will see that the 200 day line has started down sometime around mid-month. This is just something else to notice. You shouldn’t buy a stock with a downward trending 200 day SMA, why should you own the index?

The last thing to look at is today’s key reversal (on heavy volume--not shown on the chart). You may want to pick a shorter time frame to see it closely but this is an outside down day, another very bearish chart pattern. An outside down day is the market peaking higher than the day before but closing below the prior day’s low price.

Well, the NDX has tipped its hand a little today. There does seem to be some underlying weakness in prices. We choose to get into the RYVNX inverse fund based on the NDX without seeing the last two days of trading because the evidence is mounting that the market is ready to roll over. Now that we’ve seen the past two days we are much more confident in our call.

If the long anticipation of a bullish stock market over the next few months turns into a downturn right here, then there are a number of traders on the wrong side of the move and there could be some serious dislocation. This could develop quickly. Please don’t wait too long to decide.

Dow Industrials: 10,441.11 -94.37 (Say good bye to 10,500 on 10-5)
RYVNX: 20.82 (not a bad first day)

Monday, October 03, 2005

October Begins

Today was a picture perfect start to our forecasted October.  We saw a nice rally at the start of the day and then a fade with another rally to test the highs of the first rally and then a drop into the close.  For traders, this is a very nice bearish day.  This being the first day of the month, we should have seen a pretty strong day and we saw a modestly up day.  The market is tired and is ready to go down.  The momentum indicators we follow have not come up much in this little rally we had over the past week and just that is almost enough to give us courage.  We expect a down move here over the course of the next six to ten weeks with possibly a tradable low sometime around late November.  

Today’s news was dominated by the September ISM manufacturing report which showed an increase in the face of an expected downturn.  This did not make the bond market very happy and it traded down.  Of course, the dollar was up due to the market’s interpretation that interest rates would keep going up and that would mean dollar assets would be sought after.  The market’s wisdom is a little misguided sometimes.  Since we have taken our profits in the precious metals sector we aren’t going to argue.  We would like to see a pullback in that sector so we can get back into it later.

Then there was the other story about car, or should we say SUV and pickup, sales at GM and Ford, although they weren’t really picking up at all.  The slowdown was attributed to two things, one being the “employee discounts” that were offered in the months before and therefore reducing demand now.  And, the other being the surge in gas prices and some aversion to purchasing gas guzzlers.  Whatever the news, the market wants to go down.  Let’s get on that trade.  And speaking of that…

Just as a matter of record, we are going to report here tonight the early morning prices of the stocks we mentioned in our post last night.  The market was very generous this morning, allowing us to add to our short positions on a nice up opening.  While we may still see some upside over the next day or two, we are getting what we consider to be fairly good prices for our shorts.  Last night we mentioned several stocks and funds and for stocks we list the price about a half an hour into the trading session and for the two mutual funds, the only price available which is the asset value at the end of the day:

Low risk tolerance:
RYAIX    23.00

Moderate risk tolerance:
RYVNX    20.56
INTC         24.90      close      24.60
GOOG     316           close   318.68  (one little stinker)
RIMM        69          close     68.10
YHOO       34           close     33.76
JPM           34.40      close     34.19
AMAT       17.20      close     16.98
MER           62.40     close     62.19

High risk tolerance:
We mentioned that we would be available for questions on the options strategies.  We don’t think most of you should get involved with speculative option positions, but we do recommend a strategy if you are unable to sell your positions, covered calls or protective puts.  Again, let me know if you have any questions, put them anonymously in the comment section for all of us to read and comment.

Dow Industrials:  10,535.48   -33.22
RYVNX:  20.56   (our entry point as we mentioned last night)

Sunday, October 02, 2005

The Time is Now

The Time is here and we are reviewing our normal investments for opportunities.  We have been patient for long enough and we are ready to dive into the market with some short positions.  The end of last week brought with it a good rally for us to trade.  The Dow Industrials is again in the 10,500’s and we just don’t think something like that can hold out much longer.  

In fact we are pretty certain that the much awaited “correction” will happen over the next month or two.  The US stock market has seen complacency in the face of quite bad news in the past couple of years and we must now act to preserve our liquid assets.  In the next few days we are going to see some reaction in the market.  You ask me how I know.  The reason I know is that the market is telling me.  Since early August the stock market has been struggling and now it is moving up again.  We had an interim peak in early September as traders (?) assumed Katrina would spur economic activity in the rebuilding effort.  Now later in the month we see another spurt higher but failing to actually get as high as the Katrina rally and falling far short of the August high.

The stock market is telling us in no uncertain terms that this near term rally is about over and the next big move will be down.  The hurricanes may have delayed the onset of real selling due to widespread, but probably misplaced, optimism about the “positive” effects of the hurricanes on the US economy.  

At the very least there is complacency enough to go around several times.  With the Dow sitting on 10,500 for the better part of two years, the stock market has had time to build a very significant top.  The major question is “What do I do?”  The answer is to get yourself away from stock market exposure.  If you want to participate in the downside of the market, then you need to determine your risk tolerance and how much of your capital you want to risk.  These are important points because you want to balance your risk tolerance with your ability to invest.  

For those of you who want to participate in the downside, there are several levels of trading that you can do.  First, which is a low level of risk, is to buy an inverse fund like we have been talking about for a while.  We follow the NDX (or the QQQQ’s) and think a good place to be is in the RYAIX which provides return inverse to the NDX.  That means if the NDX goes down, the fund value goes up.  What a concept!

For more aggressive short funds in the RYDEX family, you can purchase 200% inverse funds, like the RYVNX fund.  This fund provides twice the move that the RYAIX provides and both are in the opposite direction of the NDX.  This one tends to move quite a bit and may not be suitable for you.  Check your overall risk tolerance first before investing in any of these techniques. (We begin tracking the RYVNX fund on this site for the next couple of months.  We have purchased some already and are looking to add to the position on Monday.)  

Second, which is an average level of risk, you can short some stocks.  You may want to consult me before doing this, as this strategy is fairly risky.  You need to be able to protect yourself from loss and you can do this in various ways.  We can discuss via email or just use the comment section so everyone can get involved.  You don’t even have to leave your name.  We will figure out your questions.  We would recommend shorting stocks like INTC, GOOG, RIMM, YHOO, and our other favorite JPM.  There are several others too like AMAT and MER.  

Third, which is a higher level of risk is trading options directly.  This is something you should probably ask more about in the comments and probably shouldn’t actually do.  But, the most aggressive, a place where you can make a good return, strategy when the market is moving is to be in options.  We think options strategies could be used for a number of lesser risk positions too but we need to talk about them.  

Right now we need to focus on two things:  eliminating stock market exposure and possibly adding some exposure to the short side.  Hopefully the week will give us some good opportunities.

Dow Industrials:  10,568.70  +15.92  (five up days in a row)
BGEIX:  13.41  (last day of tracking this here—we will follow it but not report)
RYVNX:  20.65