Wednesday, July 30, 2008

Squeezing the New Bears Again

Top Line: The stock market enjoyed another volatile day and ended to the up side. The NASDAQ indexes were much weaker than the blue chips, giving the impression of weak overall performance. The headliner Dow was up nearly 200 points to give the crowd another reason to think the Bottom is in. Right.

We would like to spend a little time on some diverse subjects. First is the topic of the Federal Reserve. This morning (Wednesday), the Fed announced that it would extend and enhance the auction facilities that it began back in the dark financial days surrounding the Bear Stearns bailout.

We went back to our March 11th post entitled, "Helicopter Ben Is At It Again", and reviewed the decision the Fed made to get into the mortgage business via the TSLF (Term Securities Lending Facility) which was supposed to be a temporary stop gap to the credit crisis. Today the Fed announced that it would extend that facility through January, 2009.

This announcement should be carefully considered by the investment community for what it is, continuing fear on the part of the Fed that the credit crisis is definitely Not over as so many would like to believe. The Fed believes it can shore up the entire contraction in credit by offering more money to the banks for their less than perfect assets. To us, this is big news and sets us up for the FOMC meeting next week. Oh, in case you were wondering, there will be no rate increase next week. We didn't think you were expecting one.

Second, we would like to discuss the bear market we are in. For those of you who like to pay attention to Elliott wave theory, there are some important patterns playing out in the major indexes that need to be discussed again. We have been in what could be described as an upward correction in the down move and have just today completed our positions for the next down move (we couldn't resist the great prices we saw in the pre-market trading).

The market may need to get past the jobs' report on Friday and the FOMC meeting next week in order to decline in a big way but there is little doubt in our mind that the market will experience a mad dash for the exits over the next few months. The Elliott wave pattern we are in, or going to be in very shortly, should be one of the strongest down moves you have seen since 2002. This rally phase is failing miserably and will lead to further selling just around the corner.

So, we can talk about trying to get short at the very top of this corrective up move but what is important to remember is that we don't want to be exposed to the stock markets of the world while they are going down. We think there will be few places to hide in the stock market over the next couple of months.

Third, the commodities are rolling over and because of this there will be a few sharp and violent up moves. Why? Well, because that's what happens when investments move up strongly for a long time, people get confident that the move will continue until the end of time, which of course it will. So, whenever there is a pullback in any formerly high flying asset, the people that were wishing they had bought in think they now are getting a bargain price for whatever they are buying. This can cause a violent up move because there are normally several people watching and when they see the up move start they jump in too. Later, they find out that the price came down for a reason and that is because it was going down.

Fourth, since we have now completed our purchases for the next down move, we need to set our attention on the timing of getting out and moving into something else. And, what should we be looking at to buy? And, how do we go about making such a move? We will explore these questions as we see what happens but we can tell you that we are already considering what we would like to do.

As for our purchases over the past couple of weeks, we made several transactions to try to get good prices but sometimes work gets in the way. Many times we like to see how the market is opening in the pre-market trading to get an idea of what to do. That's exactly what we did this morning. We saw the pop in the futures and decided to try for a purchase of QID below the market. We entered a limit order before we left for work this morning and it filled during the first run up in the hour after the market opened. The point is that we didn't have to chase the price up. We simply have waited patiently (ok maybe not that patiently) for an opportunity to complete our purchased and we think we got a good one. We will find out over the next few days whether we have acted too soon (wanna bet) or not.

Fifth, we want to remind you that this blog is an extension of what we are doing with our assets. Whether that's something you should be doing is up to You. We do not have a crystal ball and our thoughts and actions can change quickly as market conditions warrant. So, BE CAREFUL.

FSI: 81.57 ( a weak up day)

PS We think it is time to include a couple of items here at the bottom of each post. We think relevant information is the VXO close and our main two assets as well as the Dow Industrials just to keep track of things. So tomorrow evening is the end of July and we will add them.

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