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

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