Top Line: Market has fulfilled the price targets we have been anticipating. Now, we need to figure out what specific positions to add and when to add them. Since we here at the Update are generally a tad early on our calls (isn't that better than being a little late???), we will probably be early again with this sell but we think the market is about to roll over once again. We think the maximum potential move down right now is 9000 in the Dow which is significant indeed, but we are way ahead of ourselves...
The market got kicked down as the market opened on Tuesday from the AAPL news on Monday evening. Well, that and the American Express news which pushed the fantasy that things in the prime sector are doing ok. From there the buyers came in and pushed prices up to about even in the Dow where we traded in a narrow range until about an hour to go. Then the buyers came in to rally stocks strongly in the last hour.
A few weeks ago we said we would take a look at the Dow to see if it was higher than it was then. We don't like wasting time on this sort of thing but are happy to report that the market finally did turn up and give us a good rally since the Dow lows around the 15th. Since Then the Dow has rallied over 600 points and has vindicated our call, whew.
But now we are in a bit of a dilemma this evening because of the position of the market. We have been thinking, persistently, over the past three weeks (check the Top Lines in July) that the Dow would rally into this period of time. What now? Well, we think the rally maybe has some more room to go and we would like to sell into any big early morning strength.
The market has weathered the storms of some large earnings problems and by looking at some of the stunning rebounds in some of the financial stocks you could think the market is on pretty good ground. So, that is where we will start this evening.
Let's start with AIG. We have watched this stock with interest for many years and have found it to be a leading financial stock, meaning it leads the financials (lower in the recent case). When it comes to the stock market generally, the financials seem to lead so AIG has been a front runner to a certain degree. The rally in AIG has been breathtaking going from a low of 19.73 back on July 15, just a week ago, to today's close of 28.14. No matter how you cut it, that is a 40% up move in a Week. Wow. That brings us to tonight's main item, timing.
Stocks don't all bottom at the same time. It may very well be that the 19.73 price on AIG last week is the low for the move and we won't see lower prices on it until some time next year or the following year. We do think a pullback is in order for the financials but it may only be enough to test the lows set last week. Still had you purchased AIG near 20 last week, a 40% move in a week should be just what you wanted. Just remember that the 70 price may not occur again for a long, long time.
Our point is that AIG may have put in its low for the year last week and probably several other stocks did as well, particularly financial stocks. Generally speaking, the news on the financials has matched their performance during this move down from the May highs. Over the past week we have seen a nice corrective rally to relieve the oversold condition that had presented itself in early July.
As many of the stocks that produced that the low last week, some of them were actually at their year lows and will not be able to help put in the final low of 2008 in the averages which is coming over the next two months. While that sounds like we have a crystal ball, we don't; what we do have is a sense about the pattern of the market and an election in November. We think a low needs to happen in front of the election and then a rally going into the end of the year that may carry up until Spring 2009.
For now, we think the market is putting in a high which may have some more to go but we don't think there is very much. That is why we think further strength represents a good opportunity for us to move in the short direction. So, that is what we are going to be doing...adding short positions as rallies appear. Since the 2008 low will probably be involved in this move, we want to be flexible to be able to start thinking about what to do when that low arrives. If it's anything like the move we saw in the financials over the past week, we definitely want to be ready.
Let's not get ahead of ourselves, there is a possibility of huge downside in this next move and the warning signs for a Low are the least of our concern at this point. We will need to see some fear with this next move so that we know there is a serious low in place. Remember those volatility indexes VIX and VXO, they should be bottoming out here in the low 20's after pushing up to the 30's last week. Then get ready for a move up to significant highs near 50 which will be our guideline to get back into the long side...for now, let's stick with the next strong down move that is just around the corner.
FSI: 79.69 (actually up on the day after AAPL's crushing news on Monday)
Trying to add a couple of Jackson's pics but the site couldn't upload them so we'll try again tomorrow...sorry.