Tuesday, September 05, 2006

Market Over Bought

Today’s stock market defied gravity for another day, again on low volume.  Something new happened in the volatility index, it went up in the face of Tuesday’s rally.  Normally, the VIX would drop against a rising market, so there does seem to be some interest in the other side of the bull trade.  Time will tell and we don’t think that much time will be needed.

We want to focus on the market this evening because today’s news just isn’t worth going through. The stock market has now managed what we would characterize as a strong retracement of the decline we saw from May through mid-July.  Our favorite index, the NDX, just completed a 50% retracement and we think that should be quite enough thank you.  Actually, the rally in mid-August took the index up to 1584 from the July low of 1446.  Now, we see a little bit of an improvement on that 1584 today with the index moving above and closing above 1600 at 1603.  For this index, there has been very little extra upside since that 1584 about three weeks ago.

Tonight, we are more adamant than ever about the market being ready to go down.  If there was ever a time that the market was overbought and the players were over confident, or complacent, this is it.  The market is “celebrating” the job cuts at INTC by rallying the stock during the day, only to face some of the music after hours.  These stocks are inflated and need to be taken down and we think the next couple of months will be painful for the bulls.

The best we can say for us bears is that we haven’t suffered too much with all of the hype surrounding this late August rally.  Yes, the move from 1480 to 1584 in the NDX was a little painful but since then, there has been little impetus to reverse our course.  In our Sunday August 27th post we mentioned the Spring high points in the three indexes we follow and continue to believe they will be in place for a long time.  We would have to reconsider our position if any of these highs was broken but since we are mostly in the NDX, we don’t feel a strong sense of urgency to exit our positions.

Many stocks are at good prices to sell and we recommend doing just that with most of them.  If you can’t do that, then take the opportunity to write some covered calls against them right now.  We would suggest a more aggressive hedge program than that if we thought you might consider it.  First, we would recommend selling stocks; second, if you can’t do that, sell some covered calls; and, third, get aggressive and buy some protective puts on your positions.  Feel free to ask questions in the comment section if you would like more information on any of these strategies.

Dow Industrials:  11,469.28  +5.13
QQQQ:  39.46
RYVNX:   20.89
RYAIX:  23.69
RYCWX:  40.91
TLT:  87.26
BEGBX:  13.75

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