Thursday, August 28, 2008

Dell Brings the House Down

Top Line: The stock market enjoyed the GDP news and jumped at the open. From there stocks didn't look back. The oil market had a brief scare from the hurricane (Gustav) which seemed to threaten the oil fields in the Gulf; but, after a quick shot up to $120, oil fell even quicker to the $114 level fueling the stock market (yes, we know, oil doesn't drive the stock market but they all think it does so that's what they report). After the close, Dell significantly disappointed the market.

Let's start with the GDP. The Deflator was up even though it was at 4.2%. This reading is at least "reasonable" enough for us to accept it. Still the GDP was up more than expectations of about 2.7%. We know there were a few extra dollars floating around from the government's rebate checks. We are surprised how the GDP can hold up this way even with the rebate checks because home sales are dismal.

The oil market did retreat a bit in the morning but there was persistent buying into the close after the lows of the day had been set shortly after the open.

But, a quick glance at the most active stocks on this very low volume day, shows us what was really moving. Top volume slot held Freddie Mac (FRE) up 11%, second was Fannie Mae (FNM) up 22%, Ambac Financial (ABK) up 41% was in third. Even the fourth volume leader, Citigroup (C), was up over 5%. On top of that, the Philly Housing Sector was also up nearly 5%. Apparently, the entire housing, financial problem has been fixed...maybe not.

The news after the market closed may be the biggest news of all. The world does think that the technology sector will be immune from any further weakening in the economy. How they can really think that is a mystery to us here at the Update. With the consumer starting to really pull back on spending, the technology sector should feel the effects just like everything else.

After the close this evening, DELL announced earnings that failed to meet expectations. The world expected them to Blow Out earnings which is also a reason for the 200+ run in the Dow. Then, after the news, there was a somewhat stunned spectator booth just before they sold off the stock to the tune of 10%, setting the stage for a fairly poor opening on Friday.

Look for the Update to return on Monday evening for your reading pleasure on Tuesday morning. Labor Day is Monday and the market is closed so there will be no post on Sunday evening.

FSI: 83.28 (up but not much)

VXO: 20.68 -1.00 (heading up to 50)

SDS: 63.87 -1.57
QID: 40.98 -0.32

Dow Industrials: 11,715.15 +212.64

Here are two of the best pics (so far) of Jackson:

Wednesday, August 27, 2008

Durable Goods Boost the Market

Top Line: The stock market had a little more spunk on Wednesday but the highs of the day occurred right around mid-day. After that, the indexes started to slip but still ended up but well off its highs. We are still thinking that the market is in the early stages of a major decline.

There are some near term possibilities in the market but the August 15th highs should hold. If they don't, we'll look at the upside potential. Since we don't think that will happen, we will postpone our discussion on it.

This morning, durable goods orders news indicated an "unexpected" jump in July. Meanwhile oil "jumped" $2 this morning which would normally suggest a huge drop in the stock market but Not today. No, today the Dow "jumped" on the oil/durable goods orders. Did we ever mention that we don't think the Dow moves because of the price of oil? Yes, we may have.

The market is trying to hold out, and it may hold out for another few days until after Labor Day, but ultimately we think it will succumb to the sellers.

FSI: 82.85 (down again on Wednesday)

VXO: 21.68 -0.04 (heading up to 50)

SDS: 65.44 -1.14
QID: 41.30 -0.37

Dow Industrials: 11,502.51 +89.64

Tuesday, August 26, 2008

Weak Response to Monday's Sell Off

Top Line: The stock market struggled to gain any traction Tuesday. Buying could not get going after Monday's drop. Normally, we would expect at least a minor buying exercise after a day like this case the relatively mild reaction seems bearish to us. Look for some more selling over the next several weeks.

Our prediction for tonight is that we Will have a complete post. Really. After that we can maybe start making some qualified statements about the stock market. Maybe not. We apologize for last night's miss on the post but let's get to tonight's...

After the big hit the market took on Monday, Tuesday was going to be a chance for the bulls to come in and bid stocks back up. There was some effort to do that during the day but prices didn't move much. This could be interpreted by us to be bearish because there are still enough sellers to keep the prices down on a day when the bulls were supposed to be back in the game.

We have mentioned the tendency of the market to have some buying going into the end of the month particularly when it coincides with a holiday this weekend. We haven't given up on the bulls just yet but there are some signs that they are not going to be doing much buying in the near term.

Well, we should be careful about these kinds of calls but the stock market is in the free fall period following the Kiss...uh...goodbye on Friday last week. There are targets to take out on this fall that are the March and July lows. We think over the next two months that these targets will be taken out and by a significant margin. You can see our round number targets in our August 19th post:

Our Position (from our August 7th post and our August 19th post):

Bearish on US stocks, Dow target of 9000.
Bearish on Gold, target of $600. (possibly a little aggressive)
Bearish on Oil, target of $100. (possibly a little timid)
Still Bearish on US Residential Real Estate, no real target (Case-Shiller said down 15.4% this year)
Bullish on US Treasury bonds, ETF TLT target of 100 (fine tune this soon)
Bullish on US Dollar, target 90
Bullish on Volatility, VXO to 50

We'll try to post our position at least once a week and certainly when we make any changes we will let you know here. For now, we see no particular reason to change these right now.

FSI: 83.20 (strong down move Tuesday)

VXO: 21.72 -0.60 (heading up to 50)

SDS: 66.58 -0.44
QID: 41.67 +0.12

Dow Industrials: 11,412.87 +26.62

Monday, August 25, 2008

Brief or Short?

Top Line: The stock market may have started its strongest down move in the down move from last October. As we mentioned in our last post, the possibility of the kiss of death increased with the down move on Monday.

The trading day may have been even more negative had there been a little more volume but the bulls should not be rationalizing the drop because of low volume. We think that in this stage of the move, low volume is a sign that there is no buying. The August timeframe normally has low volume anyway so we really can't conclude much, but certainly it's not an excuse to be bullish, like everything else seems to be.

Please tell me this didn't happen again. We have lost our post again...Something has to change...

Sunday, August 24, 2008

The Kiss of Death, Technically Speaking

Top Line: After the Update's week off, the market, as measured by the Dow, is just slightly lower than when we left you. As time passes, the market is getting closer and closer to the edge, hence tonight's title. More on that later.

With the last week of the month upon us, and time passing quickly, we look to the near term possibilities for the market. This time is traditionally a strong time of the month but with the market coming into a strong Down move, the complacency may just get a little jolt of reality.

To summarize last week, we would say that the market has tried to fool most of us into thinking that the worst is over when the truth is buried in the price facts that the market has previously given us. As we mentioned in the Top Line, the Dow is lower than it was the week before. And, going back two weeks, the Dow is down about 200 points. No, that's not much, but it doesn't match up with the idea of the strong up days. In addition, with some time to watch CNBC this past week, there was certainly a lot of talk about how much the market's ups and downs were mostly due to "the movement in oil prices", please.

Now, to the Kiss of Death: One (technical) interpretation of the current Dow position is something we have mentioned several times in the past. The idea is that support becomes resistance but in this case the support line is not horizontal like in most of our technical discussions. This time there is a "bullish" up trendline that has supported the rally from the July lows. Once this up trendline is broken to the downside, the market likes to try to come back up to it, pretending that the up trend is still in place, and as we mentioned trying to fool many.

The fact is that the market is now struggling to regain that trendline and it has just touched it from the underside. This touch from the underside of the up trendline is called the Kiss of Death and suggests a solid down move coming off that line. We see that the strongest wave of the down move that started last October is not in its strongest position so the Kiss may in fact be a legitimate read. Yes, it is technical but the situation does indicate a weakening in the latest up move since the middle of July. This weakening can be seen on the chart better than in the financial news...probably.

So, as we move into the new week, we will be watching to see how accurate the above analysis is. The market can do what ever it wants, but the complacency of the players as measured by the volatililty indexes does fit well. It seems that the greatest fear the players have at the moment is the fear of missing out on the next up move. Just imagine if that doesn't materialize. All of these new bulls will be very, very disappointed. The idea of the market letting them get in at "the Bottom" is pretty funny.

FSI: Tuesday 84.61, Wednesday 84.80, Thursday 85.10, Friday 85.85

VXO: Tuesday 23.22, Wednesday 21.70, Thursday 21.26, Friday 20.47 (heading up to 50)

SDS: Friday 64.52
QID: Friday 40.08

Dow Industrials: Tuesday 11,348.55, Wednesday 11,417.43, Thursday 11,430.21, Friday 11,628.06

PS We missed the question from Warren Buffet the other day, fortunately he's not related to the real Warren Buffett. But, he still needs an answer to his question. We were actually looking at ABK when we were discussing the 4 to 5 move and of course we saw it take off on Thursday morning after closing right around 4 on August 13th when we mentioned it. From there it spurted up to 6+ and recently has dropped back down to just over 5. Apparently we missed that move...oh well, it did seem to work out for those gamblers. Congrats.

Jackson meets Jeff's Day Care provider Sharon...not too sure about her.

Then there's the grin when Jason told him about his new black eye...

Tuesday, August 19, 2008

Special Update, Vacation (New Kind of SUV)

Top Line: The market is now getting into its own version of selling off. This move should be the one we have been looking for over the past several weeks...yes, early as always. We are writing this quick Update to say there is much more to go and we think the move will last approximately eight weeks with acceleration to the downside on the late end of that.

Our Position (from our August 7th post):

Bearish on US stocks, Dow target of 9000.
Bearish on Gold, target of $600.
Bearish on Oil, target of $100.
Still Bearish on US Residential Real Estate, no real target.
Bullish on US Treasury bonds, ETF TLT target of 100.
Bullish on US Dollar, target 90.
Bullish on Volatility, VXO to 50.

Not much has changed in our viewpoint but the precious metals call may be a little too aggressive on the downside. The GDX (gold mining index ETF) may have put in a short term low on Friday morning down around 77 after trading at around 97 a month ago. We still think the GDX can make a lower low but for now it's a bit oversold.
US Treasury bonds have moved up nicely over the past week with the TLT's up from just under 90 to over 93. We think the 100 level is a bit aggressive, too but will stick with it for now until we get closer to that level.
The reason that you are here is more for the stock market but these other markets will be places to trade as we go into 2009 and one that we have mentioned in the past is the Japanese stock market. Recently, it's being hit pretty hard and prices have come down into an interesting place. Remember that we like to buy...yes, Low, and sell High. In order to do that we need to see what Low is and buy it and see what high is and Sell it.

The US stock market is now in a strong down faze or should be with the trading of the last two days. We are reporting here around one o'clock CDT with about 2 hours to go in the trading day and the trading since Monday morning has been significantly lower. We use the word significantly to indicate that some important price levels have been breached so more selling should ensue.

Hope you're having a good week in spite of AIG dropping below 20 again today. As we mentioned in an earlier post, AIG May have put in its low for this move but a test would be in order and that may have happened today. Of course there is always more downside before it finds its real low.

FSI: Friday 87.50 Monday 85.83 (turn down?)

VXO: Friday 21.50 Monday 22.38 Now 23.52 (heading up to 50)
SDS: Friday 63.80 Monday 65.63 Now 67.00
QID: Friday 38.63 Monday 39.58 Now 40.55
Dow Industrials: Friday 11,659.90 Monday 11,479.39 Now 11,365.65 (9,000, a long ways off?)

The main reason we are posting today is to show a couple pics of Jackson (at the petting zoo).

Is that Bugs Bunny or the Easter Bunny?

Ready, Aim...Grab a Duck


Thursday, August 14, 2008

What's a Correction?

Top Line: Another up day on Thursday...we do not think this can last much longer. Options expire on Friday (the 15th) and that may put an end to the rally.

[Editor's note: As a reminder, the Update will probably be on vacation for the next week, with the next scheduled post on Sunday the 24th. Possible special posts may be available during the week, but no promises. Plus, we do have some new Jackson pics that may be posted over the next few days so come back on Monday for further info.)

Our position continues to be that this is just a corrective rally in a much larger downside move. What does that mean? Well, normally you think of a "correction" as a down move because the market "always" goes up so if it goes down it must be a correction. But, when it drops 20%, the media tells you it really is a bear market, not just a correction. Very Not helpful.

Here at the Update, we think the market can move in both directions and we try, heavy on the try part, to figure out which direction it is going. When the market moves in either direction, we can see it from a visual perspective. Then when the market moves in the opposite direction without violating the extremes of the prior move, that is a correction.

If you look at the Dow back in October (symbol INDU on, it was above 14,000. With the move down into the July lows, there have been a few up moves which never really got back up to where we started. Right now we are moving up from the July lows but have not even really made a dent in the drop from the 13,000 level back in May. Looking at the Dow, the move looks particularly anemic, not at all like it's about to jump back up to 13,000.

The picture over in the NASDAQ is a little different but has the same "structure" or look. If you look at the COMP (NASDAQ Composite) you see a "double" bottom at the March and July lows. This is generally a bullish development but in this case it doesn't look that strong. The NASDAQ has been stronger than the blue chips because the financials are getting hammered while the techs are enjoying the benefit of that money exiting the financials. As Fleck says, moving the Jell-O around the plate.

The NASDAQ stocks being more bouyant than the blue chips in this situation probably means that no one is at all worried about a sell off in the stock market. After all, the techs are holding up in spite of the news swirling around. As we have said many times, when the news doesn't match the market, we are probably in a "correction" and this time the news is bad and the market is going up. This can not last very long and it is just convincing many that the bull market is back on track and it is safe to put money to work in the market...we Know that the market is Not that easy.

Anyway, looking at these two charts, INDU and COMP, gives us a better perspective on how strong (or weak) any move really is. While the market can do whatever it wants, we think that the next move will be Strongly down and No bullish positions should be established. Yes, we were very early on our QID purchases but the SDS has not moved against us by very much at all.

When the market turns, many of these current buyers will turn into sellers. That would include those buyers who have weak Hands, meaning they will get nervous and sell, and those shortsellers who were buying to cover. In any event, buyers will be scarce in this next down move. The move so far has just been a correction and even with the huge feel of Power in the NASDAQ, those indexes are still below their early June highs and well below their highs from last fall (October/November). Going back to 2000, these indexes are Far from those peaks.

In two and a half years the NASDAQ Comp dropped from 5000 to about 1200 and then from the lows of 2002, we have seen a rally get to the fall 2007 highs five years later that were around 2750. Two years to drop powerfully by 3800 points and five years to limp back up 1500 points. That my friends is a correction and is begging for more downside.

FSI: 87.74 (new August high, below July highs)

VXO: 23.93 +0.93 (heading up to 50)

SDS: 64.49 -0.88
QID: 38.64 -0.98

Dow Industrials: 11,615.93 +82.97

Wednesday, August 13, 2008

To Gamble or Not To Gamble, That is the Question

Top Line: The stock market continues its efforts to defy gravity but we think that will soon end and a significant drop will occur. Patience is the order of the day.

While we wait there are a few orders of business we should take care of. The first is that we plan to be taking the week off next week and may not post anything during the week. We plan to put up a post tomorrow, Thursday but then no post until Sunday evening the 24th.

Then there was a question we received today via email that we wanted to discuss here. That was the question about whether a couple of stocks would be a good buy at this time. The stocks in question have taken quite a tumble over the past year and have a difficult future if you look at fundamentals alone.

What we would say is that if you are planning to buy these stocks or other stocks that have fallen from grace, so to speak, we would recommend you do so in the hope of trading for a mild gain and not expect that these stocks will ever attain the lofty prices from just a year ago. That doesn't mean that you can't "play" them for a good percentage move but that is what you have to do. You can't buy them and put them away.

The way to play stocks that are cheap is different than investing, it's more like gambling. So, you need to trade like you are gambling. Let's say that you put a bet down and win, what do you do? Let it ride and bet again? Or, do you take the money off the table and go home? Well, our suggestion would be to take the money and RUN. Such is the case of the quick gains (and we should say losses) that may be had in these types of stocks.

One of these stocks traded at 6 a week ago and today closed at 4. If you are planning to buy this stock, you should be very happy with a 1 dollar move which would be 25%. That is a great trade and would be a nice smile for a short trade.

Other than that, we don't think it very wise to buy this type of stock. The risk is that it goes to 0 and the reward could be a double or so. What is the purpose of the trade? Gambling is fun and that is what this is but play to win.

There are possibilities that show up at times that truly are good values and we are coming up to one of those times in the next few weeks or a couple of months. There will be chances to double your money over a period of several months to a year and without a lot of risk. There is always risk but if you can actually find some value, then you can simultaneously limit your risk.

We are looking at a couple of value trades that are materializing and the first one is the gold mining stocks which we discussed a few days ago. The GDX has already jumped 10% in those two days from 34 to 37.5. We're not suggesting that you should run out and buy this tomorrow but to watch for another opportunity. We think this is probably in an area that offers some interesting options...never say options to a trader.

There are a couple of other ideas we are entertaining but they can wait for another day. The biggest ones are to come up with appropriate long positions in the stock market when we have a good selloff...yes, we think that will develop over the next month or so.

As for the market action on Wednesday, the financials led the market lower in the early going. JPM continued its decline from yesterday. The banking index declined over 4% and appears headed for a test, at least, of the July lows which are 25% lower from here.

One of our main concerns for the market surrounds the actual traders that are making decisions with other people's money. There are so many highly leveraged (meaning they use borrowed money along with some of their own capital) and they are momentum players (meaning they have computers that let them know what particular stocks are being sought after and they get on board, too. Both of these have the ability to move stock prices fast and furious at a moment's notice so we think the best place to be is in Cash, King least for now.

FSI: 86.71

VXO: 23.93 +0.93 (heading up to 50)

SDS: 65.37 +0.82
QID: 39.62 +0.05

Dow Industrials: 11,532.96 -109.51

Tuesday, August 12, 2008

Twins Get Beat By the Yankees in 12

Top Line: The stock market struggled on Tuesday with most indexes ending lower on the day. The market is clearly overbought with the straight up move we've seen over the past ten days. Now, we simply wait for the pull back to get into gear...we expect that to happen very soon.

On Tuesday, the problem was in the financials again as the techs seem to be ignoring the problems in the economy. The Philadelphia Semi-Conductor Index was actually up today (along with our own FSI) in spite of the pounding the banks were taking. JPM announced plans to write down some mortgage assets by $1.5 billion in the third quarter. JPM was down nearly 10% on the back of that news today. And, that news was not received very well by the rest of the financials.

As we are writing this evening, we noticed that Japan's GDP drooped by 2.4% in the second quarter, an indication of recession. Going back to the first quarter, Japan's GDP had risen by a 4% annual rate. Did someone turn out the light? Their stock market is down 2% as we write.

We happened to be at the Twins/Yankees game tonight which took us into the 12th inning and didn't give us time to write a full update. We did receive an email from CM today with two great real estate articles that are at least good reads. Thanks CM.

The first is a general indictment of the viewpoint that subprime could be contained or that it was just subprime causing mortgage problems. The second indicates our position that the residential mortgage problems are far from over. The article points out that many home-owners are now Upside Down.

FSI: 86.90 (an up day for the FSI and not confirming the broader market)

VXO: 23.00 +0.74 (heading up to 50)

SDS: 64.55 +1.27
QID: 39.57 -0.09

Dow Industrials: 11,642.47 -139.88

Monday, August 11, 2008

Trying to Remain Patient

Top Line: Where to begin??? The major mover on Monday was Gold (and Silver and of course, the dollar). Haven't the Olympic Gold medals been paid for already? The stock market had another wild day which should be close to going down hard.

The stock market charged ahead for the better part of the day but ran into some trouble with two hours to go. It ended near the middle of the trading range. The main issue for the Update is that the market still thinks it can go up and of course it can if it wants to. Our position is that the rally from the July lows is only correcting the drop from the May/June highs and will eventually fail. The market seems strong to many and the price move has been strong. The strength can not last and when it does end the market should be in virtual free fall.

We have just lost the rest of our post for the evening and we are getting extremely tired of dealing with this. The essence of the remaining paragraphs is that the GDX, a gold mining ETF, has dropped into an interesting position this evening and deserves at least some consideration at this point. The mining stocks have been subdued with the rally in the metals and now they are leading to the downside. With gold dropping hard today and this evening, the mining stocks have told us that the gold will probably Keep dropping. As you know our target price for gold is around $600 but that doesn't mean the gold stocks will drop from here.

More tomorrow and hopefully we can keep the post...

FSI: 86.81

VXO: 22.26 +0.38 (heading up to 50)

SDS: 63.28 -1.22
QID: 39.66 -0.76

Dow Industrials: 11,782.35 +48.03

Sunday, August 10, 2008

Brand New Week

Top Line: The strength in the market on Friday is setting us up for an even stronger selloff. The higher the prices go, the fewer people will believe that the market can go down and will act accordingly. When it's time to rush for the exits, they will be last ones out of the theater.

Friday's up move was the conclusion of a strong week for the market, particularly in the NASDAQ, with the NDX up about 7% from Monday's low to Friday's high. As the buyers, including short sellers who were covering their positions, concluded the week, they were feeling pretty confident that there was no chance for a selloff in the near future. As we see it, the complete lack of fear of a selloff has deteriorated to No fear at all.

We are going to sit back and see how the market plays out this week. This happens to be options' expiration week and should bring its own brand of volatility. As it stands this evening, we do not have anything new for you. Take a look at our position statement from our last post to find out what our targets are.

The dollar broke out on the upside and in the short run that had detrimental effect on the commodities like the primary ones we follow, gold and oil, but also for many others. Of course the media has convinced the new market participants that whenever oil goes down, the stock market should go up and up it went on Friday.

One article to share this evening only because we have been following CDS's for a few years now and want to keep track of these types of articles, this one again from Gretchen Morgenson of the NY Times.

FSI: 85.34 (Still below the July 17th level)

VXO: 21.88 -0.75 (heading up to 50)

SDS: 64.50 -2.74
QID: 40.42 -1.61 (it was a tough day for the bears)

Dow Industrials: 11,734.32 +302.89

Thursday, August 07, 2008

Bear Market Can Now Get Serious

Top Line: The stock market has probably finished putting in its top for this move...finally. The market could possibly retest the highs of the last two days but that test should fail.

Our Position:
Bearish on US stocks, Dow target of 9000.
Bearish on Gold, target of $600. Bearish on Oil, target of $100.
Still Bearish on US Residential Real Estate, no real target.
Bullish on US Treasury bonds, ETF TLT target of 100.
Bullish on US Dollar, target 90.
Bullish on Volatility, VXO to 50.

The stock market opened with a thud as AIG opened about 15% lower. That alone dropped the Dow by about 50 points but it opened even lower than that, down 100 and quickly dropped another 50.

Another item that put a drag on the market was the pre-open announcement that jobless claims had hit a six year high. Unemployment is rising, but consumers are still finding ways to spend money as the consumer credit was up last month, even with the government rebate program mostly behind us.

From there we saw a little meandering, yes we said meandering, until the last couple of hours when the sellers persistently took it down to close 225 points lower.

Some of the move back up was instigated by the news that the pending home sales went up 5.3% for the month. We would really like to see transaction amounts versus number of sales. The report even said that foreclosures were being purchased at prices significantly less than other houses in their neighborhoods. These transaction numbers are available or will be soon.

In other housing news, we have mentioned previously that this housing situation is being compared to the lows of 1991. Today the headline went back to 1982. We enjoyed the reference to "Field of Dreams" in the article. The CFO of Hovnanian Enterprises said they were not speculating on homes anymore and his quote was good, "We don't build them and hope they come." Great line. Terrible reality for residential housing.

Over at the NASDAQ things were not quite the same. Looking at the NASDAQ 100, NDX, it did open lower but quickly bounced to trade up on the day. It was a rally grinding higher all morning from being down about 20 to up about 10. From there though, the sellers came in and took it back down to the morning lows on the close.

Then there was the subset of the NASDAQ, the Philadelphia Semi-Conductor Index. This is the new strength in the market--why, we can't say. The members of that index that jumped in price were INTC and AMD, as well as AMAT, several of the stocks we have been following for years (not too much mention here at the Update recently). Apparently the market doesn't think the current environment will affect these businesses. In addition, MSFT was up today and contributed to the strength of the NASDAQ indexes.

We think that the position we are in is fine for now and we will begin to research what we are going to do over the next few months. Our first clue to re-adjust our position is to see the VXO move up to the 35-40 range and we'll need to get serious when it gets even higher than that. So, in the mean time we will need to get a plan together and watch several asset classes--we mostly expect we will be looking at gold mining stocks but there will be others.

FSI: 82.24 (starting down?)

VXO: 22.63 +1.67 (heading up to 50)

SDS: 67.24 +1.99 (that's better)
QID: 42.03 +0.36

Dow Industrials: 11,431.43 -224.64

Wednesday, August 06, 2008

AIG Puts Up a Dud for Earnings

Top Line: The market tried one more day of rally and this might be the last effort in this up move. The over zealous buyers in the NASDAQ just couldn't buy fast enough leaving the blue chips to lag on Wednesday. This is a dangerous sign that the up move is Over.

To us it doesn't seem worthwhile to discuss much about the day's trading because we think tomorrow's trading should be much more interesting. The stock market, at least in terms of the NASDAQ, seems to have put in a high for the move which means that we should be headed into the strong down move that should follow.

We marvel at the market advancing for these last two days and just wonder what these buyers are thinking. Some of them, it would seem, are merely covering short positions they couldn't hold for one reason or another. Others, caught up in the "This is Definitely thE Bottom" thinking, just want to make a quick trade.

And, then after the close AIG announced their latest bombshell, a $5.36 Billion loss in the latest quarter due to writedowns tied to the, say it with me, Housing slump. For our colleagues at American General Finance, we see the article discusses the Wilmington Finance mortgage business:

"AIG's American General Finance lost $40 million as the home lender increased its allowance for loan losses and spent money to scale back its Wilmington Finance Inc. mortgage business. The unit earned a profit of $43 million in the same period a year earlier."

We continue to view AIG as a market leader, especially a financial sector leader. Right now the company has put up three negative quarters in a row with no current end in sight, something which should be coming to a financial company near you.

Speaking of financial companies having difficulty, we wanted to mention Freddie Mac this evening. FRE posted earnings, well not earnings at all, just losses, to the tune of $1.63 a share. This GSE does what again??? Right it makes money in the mortgage market, or again, just loses money in the mortgage market.

Fannie Mae (FNM) and FRE are poster children for the Wednesday Update's housing theme. These companies are essentially bankrupt, meaning they don't have any surplus on the balance sheet but they continue to do business because of their apparent government sponsorship. We don't want to spend much time here on this subject because we think we've sufficiently pounded it into the ground, but we will let someone else write that part. The article indicates that the new CEO thinks he can "time the stock sale" even after a little dividend cut:

"Freddie today slashed its dividend at least 80 percent, and Chief Executive Officer Richard Syron reiterated that the company wants to raise $5.5 billion in new capital, saying it is evaluating what the appropriate timing would be to do so."

How much does this guy Make???

Looking back over the past couple of weeks, we said some things that have actually turned out to be correct but we Didn't wait for them and ended up missing out on the good timing...great. As always we seem to jump the gun a little but we would rather be a little early than a little late.

The market decided it didn't want to actually be done with the upward correction and managed to prolong the move for another ten days longer than we anticipated. It is possible that the correction is still not over but today's action in the NASDAQ seems final even though it still may try a few more points on the upside.

In the end the Bear will win the battle and we will move into a severe down slope and we think that is upon us as early as tomorrow (Thursday to you). Yes, we had a thought it might have been last Friday morning after the jobs' report and then again right after the Fed's announcement on Tuesday. The market has held on and put in a new high for the move starting at the July lows, not in all our major indexes but some. This divergence seems to be important and we will watch to see if it is over the next few days.

FSI: 83.12 (good move but still nearly 10% off the July high)

VXO: 20.96 -1.09 (extraordinary, absolutely No fear left)

SDS: 65.25 -0.44 (down again)
QID: 41.67 -1.27 (that hurts)

Dow Industrials: 11,656.07 +40.30

Both Jackson and Grampa were trying to take a little nap.

Two pals :-)

Tuesday, August 05, 2008

Big Bear Market Rally

Top Line: Tuesday's move was definitely not what we expected. These types of giant up moves usually happen in bear markets, oh, that's right, we're in one and a day like this confirms it. The pattern has developed differently than we had considered but is still Just a correction of the drop from May to July.

When we put our post to bed last night, we thought we might have a little rally on Tuesday but for some reason the futures were up overnight as the European markets opened. When our markets opened they were on a tear and they never looked back, all day long. Prices just went up and up and up with hardly a rest all day. This type of move is what we were expecting about a week ago to complete the upward correction but it did not materialize then.

The media indicated that the market was up due to oil being down and not because the Fed left rates alone again and didn't raise them. That is an odd comment after Monday's trading when oil was down nearly $4 and the market was heavy all day. But, who are we to argue with the all knowing media?

As for the Fed, they are in a box because the world has identified inflation as a problem (to us, inflation is yesterday's news) and the Fed wants to show that it is being diligent about inflation, please. The Fed knows that the credit crunch is in full force and they are trying to stem the tide of credit going out.

Meanwhile, oil and gas prices are falling in the past month and many other commodities are falling, too. The quintessential commodity, that would be gold, is dropping strongly, too. Today's move brought gold solidly under $900, with the price dropping about $22. So, while the Fed is paying lip service to their fight against inflation, commodity prices are way ahead of them.

After the market closed, CSCO announced that they had beaten earnings estimates by (are they serious?) one cent. Mr. Chambers was less than his normal optimistic self but the stock moved up strongly after the announcement anyway. So, the market, at least the NASDAQ anyway, is set up to open strongly again on Wednesday morning.

This apparent followthru from today's trading will be telling, but we think the market is very near the top of its range. As you know, this month we are keeping track of the closing level of the VXO, a volatility index. Today's level is

FSI: 81.72 (good move but not even close to the highs of July)

VXO: 22.05 -2.80 (down 11.27%, fear has left the stadium)

SDS: 65.69 -3.81 (ouch)
QID: 42.94 -2.89 (double ouch)

Dow Industrials: 11,615.77 +331.62 (highest close since the July 23rd high)

Yes, we do have a few more pics of Jackson and we will put them up tomorrow. You gotta come back for those.

Monday, August 04, 2008

Patience, Waiting for the Fed

Top Line: The stock market is biding its time waiting for the FOMC meeting results before it makes its decision to go anywhere. Once their announcement is made, we think the market will be free to head South, now, it might be after a little trading excitement surrounding the news but ultimately we should see it drop. We don't think there is much time left to wait for a drop.

Since the drop is coming as early as five seconds after the announcement, we have completed our deployment of funds to the short side of the market. It took us about two weeks for this job because we were trying to get good prices. One thing, we had a notion that the NASDAQ would peak out a little later than the SP500 and that is what happened.

The SP500 peaked back on the 23rd of July and the next week could not best that high. The NASDAQ 100 made its high back on July 30 which is the last day we purchased QID. All of this is pretty fresh and is subject to being the victim of a spike in the next day or two but we do not think this will be the type of move that will take out the July 30th highs.

Today's action included a drop in the price of oil that took it down to a new low for the move since it peaked. Oil is now down almost 20% from its July peak of 147.90 but even a big drop today of just about $4 was not enough to help the stock market out of the red.

We have normally considered the jobs' report to be the significant news item of the month. We have also considered the period of time surrounding the end of the month or the beginning of the month to be a stronger time for stocks. Plus, normally Monday's are strong, too. We mention these things here due to the Lack of strength since last Thursday, including the jobs' report.

With the Fed meeting anticipated to be a formality with no real changes in the announcement, there should be no surprises for the market. The news should bring us the end of what little strength there has been over the past few days. We expect a small rally on Tuesday with the possibility of some continued temporary strength after the announcement. This will lead to a swan dive into the bottom of the pool over the next few weeks.

More after the news on Tuesday...

FSI: 79.67 (dipped below 80 again) [Editor's note: should be 78.50]

VXO: 24.85 +0.59

SDS: 69.50 +1.30
QID: 45.83 +1.05

Dow Industrials: 11,284.15 -42.17

Sunday, August 03, 2008

Try to Avoid Large Principal Losses

Top Line: The stock market started August with some weakness but ended the day much better than where it could have. The new week should show some renewed selling most likely right after the Fed's announcement on Tuesday, whatever that might be.

We promised a reader that we would give her some advice about what to do with her portfolio right now. She suggested that our writing style is a little over the top and could we please make it easier to read? Well, we can at least try. We do think the Update needs to be scanned most every day so you can get a feel for the way we describe the market and the way it moves. There is a continuity to this blog that you can become familiar and comfortable with as you contemplate your own thoughts on the market...but we digress.

To our readers, we wish to convey that there is more to go on the downside. The way this all works is that stock owners feel pressure every day about their portfolio because it is going down. But, the media or your conscience has convinced people to hold on through the downturn because you know no one can really time the market. But, people keep watching the value of their mutual funds drop and get more nervous by the day. Finally comes the day when prices go low enough to dry people to sell and that sell order is just to get out. That time is rapidly approaching.

Our advice to our reader last week was to do one of two things, either sell Right now, or don't do anything, well, ok, maybe do something, like turning off the television so as not to hear how bad the stock market is doing over the next few months but do not trade out of you funds near the bottom of the move. That way you aren't tempted to sell into the weakness.

The stock market is about to enter a steep decline so the prudent thing to do is to sell your equity holdings, no matter where these are located in the world. Then you can by-pass the worst of the decline that is coming up. The idea would be to get back in at some point, much lower than here. Try to avoid those losses.

FSI: 79.67 (dipped below 80 again)

VXO: 24.26 -0.41

SDS: 68.20 +0.73
QID: 44.78+0.84

Dow Industrials: 11,326.32 -51.70