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: http://www.elliottwave.com/ 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 bigcharts.com 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".