Tuesday, September 30, 2008

A Bounce for Quarter End

Top Line: Tuesday saw a major retracement of Monday's drop. This rally is most likely based on two things, quarter end and just the fact that the market was down so much on Monday, bargain hunters or bottom fishers were out in droves.

Well, the other reasons include "hope" that the financial crisis will be taken care of by someone someday soon. Last week we had the rally for the Emergency Rate Cut from the Fed that was supposed to happen today actually. That didn't materialize, not to say that it won't. We fully expect the Fed's campaign of lowering interest rates to continue in the not too distant future.

The buyers continue to come into the market place meaning there are still many who don't want to "miss" the bottom. As long as this mentality holds, we don't think the bottom is in. We know that the volatility index crossed 50 yesterday but a higher volatility number is coming, in our opinion. And, a higher volatility number would be caused by Lower stock prices.

This article from Fortune (CNN Money) is pretty good and will be writing our post for the evening. Pay particular attention to the deleveraging which is what we consider to be the primary "problem" the $700 billions is supposed to fix.

One other article from CNN Money that shows the news in the past few weeks. We like these kinds of articles so we are putting it in the post tonight mostly so we have it for ourselves. You can take a look at it, too, if you like. We haven't read it but it looks like it might be a good way to see how all these dominos fell...

We apologize for a "short" post tonight. Sometimes life gets in the way of a good post but we would refer you to yesterday's post if you haven't read it...the basic idea remains the same.

We received an email asking why the market didn't shut down on Monday with such a huge loss during the day. Well, the answer is that the market didn't go down enough to trigger the circuit breakers that are in place. The triggers are set every quarter and the first trigger is set at a move of 10% in the Dow. There are two other triggers, one at 20% and then one at 30% which actually shuts the market down for the day. Here is a link for "circuit breakers".

GDX 33.79 (may get another chance at this)
BGEIX 16.55
HUI: 314.24

FSI: 63.97 (a bounce from the annual low)

VXO: 44.51 (probably will go higher than the 55 set on Monday)

SDS: 70.30 -6.20
QID: 56.72 -6.78

Dow Industrials: 10,850.66 +485.21

Monday, September 29, 2008

Lucky 7's, Dow Down 777, but NO $700 Billion

Top Line: What can we say...let's take a breath. There should be more downside over the next two weeks.

The House decided to shoot down the $700 billion Plan and the US stock market dropped hard and fast. Right around the time of the decision, the Dow dropped about 400 points in about five minutes. That was breath taking which is why we suggest taking a breath at the Top Line.

By the end of the day, as you already know, the Dow was down a lucky 777 points. We saw that the Dow was showing down about 600 at the close. Then, as the final trades were being matched up, the Dow kept dropping for several minutes before the final number was established, down 777, just like at the casino waiting for those seven's to line up.

We received an email, before the House's decision to defeat, from EC who indicated his position that this legislation should be defeated. He shares my opinion that the financial sphere needs to take its lumps and it will come out stronger. Yes, this is a difficult decision to make but that's what needs to happen. After the medicine is taken, the market can then get back to business, a business that puts risk in a proper perspective. These are our words but hopefully he thinks we did ok...if not, he can present his statements in our comment section or with permission we would include some of his comments in our post tomorrow...

Anyway, let's skip the news, you've heard enough about that. The reason you're here is the stock market analysis that we try to provide. The Update has given you the roadmap to this decline and it's now time to fine tune our forecast.

This down move is Not over but volatility will be extreme over the next few weeks before we get some good signs of a buying opportunity. The main indicator to tell us that we are in a range for a low is the volatility indexes, particularly the VXO that we have been tracking for a while now. This indicator has now pushed over 50 and gives us our first indication that we are getting close to a low and confirms the fear that a day like today produces. Our opinion is that the price decline has not been enough so the VXO may actually go a lot higher as more fear is generated when prices drop even more.

What else? For now, we will keep our 9000 target for the Dow and we will use that number as sort of a loose target. The problem with these multi-year lows is that there is the possibility of the low occurring during the day. There may be a spike down for some reason and then the market may come back very strong. This may start at 9200 one day and drop to 8350 or so and then rally to 9500 by the end of the day. So, the report will be that the market rallied 300 points when it really was a watershed day and then a huge rally out of the lows. We would measure the low, on a day like that, as 8350 but in a 401(k) there are no intraday moves, just end of day prices.

The fact is that a day like today gives you an idea of how the market is ready to go down. Please don't forget that we are currently under a Ridiculous short seller block. That means that today's huge loss was not aggravated by shorts. The real story is that without shorts around, there are fewer buyers for markets like this. In a normal selloff like this, short sellers would stop the decline because they would be covering their positions. How do they do this??? They Buy. Ok, enough of that...

Let's talk about the Q's (QQQQ). The Q's are the basis of the QID that we own so we want to understand where they are going so we can figure out what to do with our QID. There are several ways to estimate where the Q's may go but let's just get right to where we think they can go. The close today for the Q's was just under 38 and we would say that there could be another 10% to 20% to go. We would start looking at the 35 area as a target due to the 2006 low being right above 35. This move feels like it could make a run down through that low.

Let's make the calculation easy to understand, let's put the Q's down 10% more than they are tonight. That would make the QID 20% higher. At 61.20 now, a 20% rise would put the QID around 73. That will be a place we start looking to sell our positions.

Today was the break and there should be more from here. We don't think that one day will be enough. There are so many people that are now gritting their teeth and convincing themselves not to sell. Almost any media coverage you hear is not to sell into this, stay the course. When this move is near complete, there will be selling and it will be accompanied by real fear.

We give you a target for the Q's and the QID because the NASDAQ will most likely find the spike low to be the low of the move. The Dow and SP500 may continue lower while the NASDAQ will hold...but that's a little ways down the road.

Just for something a little different...as we drop into the lows of the year here in the next few weeks, there will be opportunities galore. One of them may be the GDX that we got you into back down around 28 about a month ago. The GDX has come down about 15% and may give us another good opportunity to get in as other stocks go down. It is likely that the 28 low is the low of the year but we could get back down to the low 30's again.

GDX 34.00 (may get another chance at this)
BGEIX 16.93
HUI: 321.10

FSI: 59.37 (All Four components down big today...take FSI to new low)

VXO: 51.84 !!! (50 or higher Attained...probably will go higher)

SDS: 76.50 +9.79
QID: 61.50 +10.23

Dow Industrials: 10,365.45 -777.68

And, here's Jackson...

Hanging out with Uncle Jason at the Twins game...

Getting ready to go see the game, we can smile...

Sunday, September 28, 2008

Historic Times

Top Line: The big government intervention program for troubled assets came into better focus on Sunday, yes, before the "markets" opened. Now that the markets are open, they seem to be, at best, ignoring the news. The US futures are down slightly as we write.

The Update continues to expect the market to decline over the next few weeks. With the government program and the short sellers ban, the stock market moved up a little but has now settled into a wait and see mode. On Sunday the details came into some more focus. There was some give and take between all the parties but in the end the taxpayer still gets to foot the bill of the modest sum of $700 billion.

We have a few questions. How did they come up with $700 billion in the first place? How do they know that this is the right amount to "take care" of the problem? Who gets to decide what assets to buy and how much to pay for them? How long does the government plan to stay in these assets so that they can "make" money? There are more but we think there are few answers to these and many of our other questions.

Our Biggest Question is the one that asks, "What problem are we solving?" The problem is that housing prices are dropping. How does providing $700 billion to buy up distressed mortgage backed (in-)securities prop up house prices? The politicians want us to think they're doing the best they can for the tax payers but the fact is that nothing can actually prop up house prices now that they are falling.

Our position is that the "bailout", as it is being dubbed by the masses, will fail and they will come back to us and say that the reason it didn't work was we didn't use enough money. And, could we use some more? We don't think the tax payers will find the next request tolerable.

The Update does think there is a major problem with the credit system so they would be correct. The very credit expansion in the past several years needs ever increasing credit in order to keep the entire "house of cards" up. Now that the reason for the credit expansion has begun to fail, that would be house prices are falling, there can be no further credit expansion.

The government is buying assets. They are telling all of us that they think they can make money on them if they hold them long enough. Do you believe this is true? The only way these assets will be worth more than what "WE" pay for them is if house prices stabilize and go up.

The Update has tried to help you think about the concept of buying Low and selling High. What is the government doing with our $700 billion? They are essentially buying on the way down which is equivalent to buying lower than the high but then holding to much lower lows. Thank you very much...but that's just our opinion.

We would appreciate your comments on the matter. This subject is of historic consequence and we intend to spend more time discussing it over the next few weeks.

GDX 35.83
BGEIX 17.50
HUI: 329.18

FSI: 68.05 (RIMM put a big drag on the FSI on Friday down about 27 points)

VXO: 39.41 (September 18th high of 45.81, getting close to 50 or higher)

SDS: 66.71 -0.12
QID: 51.27 +0.09

Dow Industrials: 11,143.13 +121.07

Jackson went to his first Twins game on Sunday.

Jackson wonders if he should get a Joe Mauer shirt, too.

Thursday, September 25, 2008


Top Line: Stock market is poised to drop hard on Friday morning with some disappointments after hours. The first was RIMM's earnings forecast which hammered the stock price by 20%. Then, if that wasn't enough, there were some snags in the government's bailout plan.

Let's start with Thursday's open. The bad news on the jobless claims didn't do much to dent the enthusiasm for the possibility of a bailout resolution. Then the durable goods orders fell more than expected as well as last month's number being revised downward. Again, the market was not paying attention to these developments...

The Dow popped for 250 points early and kind of churned higher so that it was up about 300 late in the day. As we went into the close the Dow couldn't hold its gains and ended up 200 points on the day. Then the after hours market was greeted with RIMM's news and that tipped the NASDAQ 100 down immediately. Then, after the bailout was delayed this evening, the SP500 futures also started dropping. As we write this, the futures are down about 1 1/2%.

Oh, and then there was the "little" news about WaMu being shut down and then taken over by JP Morgan. This news has been expected to a certain extent due to the mortgage woes in general but also because it had been under so much price pressure, much like AIG except AIG's price dropped quite a bit faster...but it only added to the pressure on the futures. Washington Mutual's failure is the largest bank failure ever with a total asset base of $300 billion.

This evening we need to prepare for the coming decline...plan for what we are going to do. We have exited our bond position (TLT) already and we have entered our gold mining position (GDX) position. Those are good but we have our short stock positions (SDS and QID) that will require a change as we see stock prices drop. And, then, of course, we would need to roll into some of the other long positions. Yes, we said LONG POSITIONS, no NOT YET.

Since the futures are down tonight, that May mean that the market opens down but we are more interested in the selloff that gives us good prices to exit our short positions. Remember that for this exercise, we are looking at the volatility index, VXO, for a good signal. When the VXO gets above 50, we will be getting interested in moving out of our shorts.

We are talking about this now so you can do your homework over the weekend to see what your portfolio looks like now and what you would like it to look like in the next upswing. If you have any shorts such as individual stocks, these don't always push down to their lows at the same time but as we drop into the 2008 lows over the next few weeks there will be well over a 1000 52 week lows on the NYSE. With about 3200 stocks on the NYSE, that would be at least a third that will put in new 52 week lows.

We have positions that are index shorts so we need to pick the index lows to trade out. If you are individual stocks, you have to pick your low points for each one, or at least pick a point to cover...a profitable one, hopefully. Next week we will start making some progress towards identifying exit points for our shorts and entry points for some new long positions. Go do your homework and see where your assets are and where you would like to see them be. Then next week we'll talk about what to do.

It is possible that tomorrow, Friday, will be the time to do the changes to the portfolios. We hope that is not the case because we are not prepared and we need to change that at least by next week. Hopefully, you have better prepared than we are. Again, we want to see some fear and that will be measured in the VXO...

GDX 36.40
BGEIX 17.77
HUI: 336.11

FSI: 71.97 (RIMM will put a big drag on the FSI on Friday morning)

VXO: 36.75 (September 18th high of 45.81, getting close to 50 or higher)

SDS: 66.83 -2.27 (looks worse than it is...distribution was about $4 Wednesday)
QID: 51.18 -0.26

Dow Industrials: 11,022.06 +196.89

Wednesday, September 24, 2008

A Calm Day for a Change

Top Line: The stock market seems to be in a wait and see mode when it comes to the government's CessPool project. We are still bearish going into the middle of October.

Wednesday's market was one of the calmest days in the past few weeks. Then in the evening, the President tried to explain the need for the $700 billion CessPool project in an address to the nation on national television. The public is none too happy with this plan so we'll see if the President changed their minds tonight.

With the public outrage for saving highly paid CEO's and/or Wall Street, or even their own bank, the Congress is having significant trouble denying their constituents. They are asking the "experts" what they can say to justify passing this blank check legislation. The answers they got were not what we would call rock solid or something that will be accepted by a normal person...

What we are having trouble with is the actual transaction. Let's say a bank wanted to take part in the sale of some "troubled" mortgage backed securities. The bank has a current value on it of about $5 million, having been written down from $10 million. They want to sell this to the government CessPool. What would you do? Would you offer it to the government for $3 million knowing you really can't sell it for any amount of money on the Street?

Now, let's complicate your decision. Let's say the current public pleas that want the CEO's that take advantage of this "bailout" to take a pay cut get to be part of the final legislation. So now, if you want to be part of the "reverse auction", you now may face the penalty of a lower paycheck. To us, this is where the plan falls short and presents problems. In fact, some opponents suggest that companies that take advantage of these should be taken over by the government. These are just ridiculous enough to be endorsed by congressional legislation...

We may have to wait until next week to find out if Congress can get something together for Hank and the boys. The question is how the market will react to such action. We are confident that there are people who still want to buy here because they don't want to miss the bottom. This type of thinking gives us Contrarians a thought that the worst is still in the future for the stock market. Be Careful out there...

Our Position (from our August 7th post, August 19th post, August 26th post, September 10th):

Bearish on US stocks, Dow target of 9000 (possible dip below 9000)

Bearish on Gold, target of $600. (possibly a little aggressive, we'll keep the $600 level for now)

Bearish on Oil, target of $100. (Target Acquired)

Still Bearish on US Residential Real Estate, no real target

Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)

Bullish on US Dollar, target 90 (Sept 10th we said dollar was at 80 and ready for a short term pullback, very close to being over now near 76)

Bullish on Volatility, VXO to 50

GDX 37.39
BGEIX 18.28
HUI: 346.02

FSI: 70.94 (is the Big Bounce over???)

VXO: 39.28 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 69.10 -0.33 (distribution today)
QID: 51.44 -1.37 (distribution today)

Dow Industrials: 10,825.17 -29.00

Tuesday, September 23, 2008

Buffett to Prop Up Market All By Himself

Top Line: With the boys on the hill, the market didn't know which way to go today so they went in both directions in a wild session. The moves were sometimes very quick and powerful but in the end the market was down on the day...but after the close, there were some developments. Whatever rally may "develop" on Wednesday, we still think that the market will be lower three weeks from now than it is today.

The "development" after the close was that of Warren Buffett's $5 billion commitment to Goldman Sachs, one of the perceived winners/survivors of the mortgage mess. The news has given the overnight US futures a chance to get happy. We can only surmise that the world has now become risk free because Buffett has decided to take a dive into the market. We get to this conclusion because the NASDAQ 100 futures are way up, too, and there are very few banks in the NDX...

This article gets at some of today's top items. This time it's about CDS's which are contracts that allow a company to lay off the risk of particular bonds. Of course, other company's would be taking on this risk, as was AIG's involvement. The article says that regulation seems to be the name of the game these days. More government has never solved the problems. Again, it's the old story of the government is there to help you since you definitely need help.

CM asked a question in the comment section which goes something like this: "Why doesn't the government just suspend the valuation of these troubled assets and suspend mark to market for a set period?"

Thanks for the question CM. Maybe you were making a statement that they should do that rather than asking our opinion but we can't resist answering. It's an interesting concept because the problem seems to be the valuation of assets which is why the G-men want to buy up the poor performing assets.

Anyway, the problem is not that they are valuing the assets so low, it's that there is no liquidity in the market place. What the Fed has been trying to do, for about a year now, is to provide liquidity so that banks will continue lending. Since we are in the contraction of the credit bubble, there is less and less money around for loaning. This causes all manner of problems which the Fed has tried to solve by throwing money at it. This has done something to put off the result of a contraction in credit, that being real live deflation.

Let's say that the value of residential real estate was $22.5 trillion in 2007 and that the value of that real estate dropped say 10%. That would suggest that household wealth decreased by over $2 trillion. That's a big number and is at the heart of the financial issues faced by these financial institutions. Yes, some homeowners have not lost any real money just home equity but they have stopped their big home improvement projects.

We will have to pursue this topic more...hopefully tomorrow...gotta go to bed.

GDX 37.18
BGEIX 18.21
HUI: 344.45

FSI: 70.39 (is the Big Bounce over??? Wednesday should be interesting.)

VXO: 38.54 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 73.48 +3.28
QID: 53.02 +1.02

Dow Industrials: 10,854.17 -161.52

Monday, September 22, 2008

Going Down???

Top Line: You said you like volatility, right? More on the way, in case you were wondering. The market needs to go down and the next three to four weeks should be the time for this move.

Oil was up a bunch along with gold as the dollar got hit. The dollar has taken the little drop we were looking for a while back.

You can see that our gold mining suggestion has done well with the GDX moving up to 38 today from around 28 just a couple of weeks ago. That trade alone should pay for your subscription to the Update. Seriously, the gold mining complex has come up quite a lot but we are waiting for a pullback before we recommend getting in. This may not happen but we still think we should be patient with any more buying.

We should be talking about the government bailout so we'll remind you that you should go back to our last post and read Gretchen Morgenson's article. The reason we like the article is the analysis about the details. You have heard that the government is hoping to buy troubled securities at a discount with the possibility of "making money"on them over time. And, on top of that they expect to help the banks out now.

For some reason, we don't think all of these things can happen. If they can buy at a discount, doesn't the bank necessarily have to take a loss right now? So, if this plan is implemented, several banks will still have losses to report and it seems that their capital will be depleted rather than enhanced. Is there a bank that wants to do this??? We are so confused...Apparently, if you give a guy a checking account with $700 Billion in it, you should expect that there may be some contradictions.

In case you were wondering, we don't think the government will be making money on this transaction. Congress is trying to figure out what to do and we understand that it is a difficult thing to make a good decision on something like this. Our position is that we don't think any bank that is "bailed out" of its toxic assets should retain its management. This isn't a giant Texas Hold'Em tournament where you get to buy back in.

Remember that this and all other "bailouts" are designed to help the banks...remember, confidence in the banks and confidence in the government. It's a Con Game...

GDX 38.09
BGEIX 18.65
HUI: 354.13

FSI: 71.27 (is the Big Bounce over???)

VXO: 36.28 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 70.20 +3.17
QID: 52.00 +3.32

Dow Industrials: 11,015.69 -372.75

Sunday, September 21, 2008

Two Day Rally Complete???

Top Line: The stock market has succeeded in convincing most that the worst has been seen. A massive rally over the period of less then two days can do that. The most likely resolution is that the market will need to go down.

For the time being, many are relieved that the market has been saved by the government...we are reminded of the saying, "We're from the government and we're here to help." Thanks but no thanks. These overt steps by the US government will only end up being inadequate. The point is that they think they have to "do something", anything.

In this case they are fixing a problem with big money, taxpayer money. They are telling us that they think there is this big problem but the GDP has not gone down and the Dow is near 11K. Apparently, the news of this big problem hasn't reached the stock market.

The US futures are not happy this evening and indicate a bit of a down opening on Monday. There could be a little more buying that comes in after this but the highs of Friday morning should hold. Even if they don't, the market has exhausted a lot of energy on this two day move and will have difficulty moving much further.

The SEC has decided to halt shorting on several (799) financial stocks for a ten day period with more coming on the heels of that if necessary. The shorts provide a lot of liquidity in the market and not having them in place will create some issues for the market over the next few trading days.

In case we haven't been specific enough, the powers that be know that there were a lot of short positions last week. What was needed last week was for buyers to come into the market to hold it up or more to the point Push it up. Where do you find buyers when no one is buying? That would be in the huge pool of shorts. What are they going to do for an encore? Good question.

We would like to comment on the government plan to save the world but we saw a NY Times article by Gretchen Morgenson has captured the essence of our thoughts and we thought you could read her article.

GDX 35.20
BGEIX 17.23
HUI: 323.74

FSI: 75.21 (part two of the Big Bounce)

VXO: 33.55 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 67.03 -5.47 (Friday's ouch)
QID: 48.68 -1.92

Dow Industrials: 11,388.44 +368.78

Thursday, September 18, 2008

Bernanke, Paulson, and Cox to Save the Day

Top Line: The stock market staged a huge relief rally on the back of some rumors and after the market closed these rumors are starting to take shape. The sharp rally is what we have been talking about the last couple days. Options are expiring on Friday (19th) and we have been oversold.

Every day that goes by we can't believe the things we read. Tonight the government (WSJ) has decided to ask Congress for the right to set up a sort of financial cesspool that would be a repository for distressed debt (similar story from NY Times). The rumor this afternoon brought a huge rally that has carried over into the after hours market.

We won't know for sure what the details are until later. What we do know is that the three stooges....wait, the three public servants, Bernanke, Paulson, and Cox (in case you don't know this name, he's the Head of the SEC) have talked to Bush and have suggested that something drastic needs to be done.

Our first reaction to this misguided plan is that it deviates from the free market system and continues this theory that we can't let Banks fail. Make no mistake about this, it is a plan to Save banks. Wachovia (WB) is a case in point. It's stock price rallied 60% on the news, up from depressed prices caused at least in part by some financial rot in their assets.

Any time there is a big government intervention, it will be to save the banks so that there continues to be confidence...confidence in the banking system and confidence in the government. The mere fact that the Fed aided AIG tells you that banks were dependent on them to provide some stability in bank assets. Yes, AIG is/was a big company with fingers in a lot of places. Here is an article we received from one of our readers describing why they didn't let AIG fail.

We need to go to bed but wanted to let you know of one other item, this one from Chris Cox, yes the same one as above, head of the SEC. He is going to be clamping down on short sellers because, don't you know, this is where the problem is...not in our opinion. Our opinion is similar to this one which is kind of a good read even if you don't agree with the author.

Let us be clear before we sign off that this rally is strictly a bear market short seller panic and will soon be erased as we go into October. Tomorrow should be an up opening, a big one based on the markets' action this evening. Last night we reported on the Asian markets getting hit pretty hard. Well, by the end of their session, they had recovered most, if not all, of the losses we had reported. And, tonight, they are sporting some hefty gains on the back of the news out of Washington this evening.

GDX 34.20
BGEIX 16.35
HUI: 313.90

FSI: 72.62 (part of the Big Bounce)

VXO: 36.06 (high of 45.81, getting close to 50)

SDS: 72.50 -5.32 (ouch with more ouch on Friday morning)
QID: 50.60 -3.68

Dow Industrials: 11,019.69 +410.03

Wednesday, September 17, 2008

Some Fear in the Market on Wednesday

Top Line: The stock market decided to go down on Wednesday. While the market could stage a strong rally at any time, the market has more work to do on the downside before we call the end of this drop.

When the market dropped about 500 points on Monday, we didn't have a sense that there was any fear at all, even though the VXO moved up strongly. Today, we do think there was a bit of fear in the market as the benefit from the AIG "takeover" by the Fed was short lived. Part of the reason for the short life was the Fed's early morning hangover. The US Treasury said today that it was going to hold an auction of bills, the proceeds of which would go to the Fed to expand its balance sheet. We were hoping this kind of thing would not happen and it spooked the market. [Editor's note: Please see Glenn's comment on AIG in yesterday's post.]

We had a meeting at work last week in which we were talking about negative interest rates and how Japan had them for a while. Well, believe it or not, the one month Treasury bill traded above its maturity value today which in effect is a negative yield. At the same time the 90 day Treasury bill was trading near 5 basis points (0.05%). The rates on these securities dropped like this back in March, although not to zero. These are the rates we normally compare to the Fed Funds rate that the Fed "sets" at its FOMC meetings, like the one this week when they left the rates at 2%. The Treasury bill rates would indicate they could move to zero...

One shining upside sector was none other than gold mining. (Gold, the metal, was up a stunning $75 today.) The GDX was up over 11% Today and is up over 20% from its lows set last week, yes, when we said it was time to buy it. Once in a while we get something right around here. We don't think the time is right to buy it now because we think a pull back will occur to give us another opportunity down around 30. We'll let you know when it looks good.

The market news of the day was the market but there were other things going on. This article summarizes some of the big issues floating around on Wednesday. There are not a lot of news items that convey a positive situation. We have mentioned that in this stage of the bear market cycle, the news tends to match the direction of stocks, which is down. Sometimes a contrarian outlook is ok (yes, we are guilty) but in this moment in time the news is bad and the stock market is bad, too.

Take, for example, today's news on housing. The housing starts figure for August was disappointing and the report included a downward revision to the July numbers. August actual starts were 895K versus expectations of 950K with July being revised to 954K from 965K. Building permits dropped more than housing starts indicating more contraction in that industry. Building permits dropped from 937K to 854K on expectations of around 930K. These numbers can be compared with over 2 Million just a couple of years ago. [For reference, these are annual rates.]

The stock market still has some distance to go down before it's safe to get back into the pool. As we are putting our post together this evening, the Asian markets are suffering from the US market slump. Hong Kong is down over 7% with China down nearly 6%. Japan is only down about 3%.

Right now, we are patiently waiting for the market to show us the cover point for our short positions. We think the first serious indicator will be the VXO going over 50. Today, the VXO was just shy of 40. If it hits 50, we will be getting to a point that would allow us to start moving out of QID and SDS. As far as the gold mining stocks/ETF's, we think any further buying should wait until we see a nice pullback in prices. And, we are out of the TLT's, the Treasury Bonds since they hit our price target yesterday.

GDX 34.10 (up 11% plus today)
BGEIX 16.24 (up 9% today)
HUI: 314.33 (up 11% plus today)

FSI: 68.64 (lowest point since March 10th, the low of the year)

VXO: 39.22 (high of 39.40, getting closer, and heading up, to 50)

SDS: 77.82 +6.25 (it's not too bad after all)
QID: 54.63 +5.41 (over 10% move)

Dow Industrials: 10,609.66 -449.36

Yes, a little treat for you:

Exercise Class: OK, everybody, put your foot in your mouth, literally, not like we always do.

It's a rainy day, time to get in a little reading with Gramma.

Tuesday, September 16, 2008

The Fed Owns AIG...What???

Top Line: The only issue tonight is the Fed's intervention in the AIG saga. By now you've all heard about it but we were stunned by this move.

Looking back to the Bear Stearns' buyout by JP Morgan with a little $29 Billion help from the Fed, we think the move seems calm in comparison to the events of the past two week(end)s. In a highly criticized Fed intervention in that case, JPM took a "bold" step on short notice to save the world from financial collapse.

Ten days ago, in what we consider a widely anticipated move, the US Treasury took over the GSE's Fannie Mae and Freddie Mac in order to save the world from financial collapse. We wondered at the time what alternate universe we were in that would have the government take over the GSE's. Now, we are equally bewildered.

Over the past few days, we thought maybe the powers that be had sent a strong message that they were not going to be getting involved with the little messes that financial companies found themselves in. The first time was when Paulson said a big "NO WAY" to a Treasury involvement in the Lehman troubles. The second was this afternoon when the Fed said "NO WAY" to a modest rate cut even though the market wanted one.

Oh, but tonight's news that the Fed was in the business of loaning money to AIG trumps both of those denials. The Fed used some emergency powers this evening to bring yet another lending facility to the situation. Going back to Bear Stearns, the Fed was in the process of setting up a lending facility that would allow them to loan money to financial companies like Bear Stearns but the setup date was two weeks out, way too long for Bear Stearns to make it. That meant that the Fed's hands were tied so that's why they twisted JPM's arm and loaned them $29 Billion in order to do the Bear Stearns' deal.

Since AIG is an insurance company, they aren't afforded the same privileges from the Fed as a normal financial company. This time the Fed just said, we can do this using "emergency" powers. This time the Fed just decided there were no lenders for AIG that could put up the necessary $75 billion so they decided to put up $85 billion of their own??? Not only is the number unfathomable, the loan is for 24 months. This deal seems to provide the Fed with "options" or "warrants" that give the Fed the possibility of 80% ownership of the company and some control over decisions that are made.

We know that we are not giving you anything new to chew on but this is one of the biggest financial news items of a generation in the US. It will get some recognition in the media on Wednesday but it will not live in the spotlight it deserves. We think it is a large step in the Wrong direction. AIG dwarfs LEH in terms of the magnitude of the impact its failure would have on the financial world but that doesn't make it the right thing to do.

We have been telling you for a long, long time that the Fed will be powerless to prevent the oncoming train wreck but they are doing whatever they can to slow it down. We do not believe that the problems are over with this move. We think they have tried to be on the front end of the problems to prevent "bad" things from happening...but since their huge drops in interest rates (3.25%) over the course of the last year were not enough, the Fed seems to have spent a lot of their funds to keep the economy going.

It was February of 2007 when the subprime mortgage "issue" surfaced. Back then, the news was that it was a small problem and it would easily be contained. Right...

Today's market action took out another one of our positions, the TLT's traded above 100 so we are out of them for now. The run was pretty good with about a ten percent move in three months plus dividends of about one percent over the period.

As for the short positions we are in, SDS and QID, we were thinking about selling them this morning at the same time as the TLT's but decided that the lows are still in the future so kept them. That decision was punished as the day wore on but, if we have to, we will re-evaluate the situation over the next week or two. Our expectation is that the market will hold up for another few days since this is options expiration week and the market put in a strong low this morning and rallied out of it with the "positive" AIG news.

GDX 30.55
BGEIX 14.90
HUI: 281.36

FSI: 74.02

VXO: 33.03 (high of 37.69, getting closer, and heading up, to 50)

SDS: 71.57 -2.44 (it's too bad)
QID: 49.22 -0.89 (and more after hours)

Dow Industrials: 11,059.02 +141.51

But, why you are really here is for Jackson pic's :-)

Just playing at Grampa's house...

Every once in a while a guy just needs to clean up...

Monday, September 15, 2008

Downside Pressure

Top Line: The Dow dropped over 500 points on Monday which sounds like a lot of downside. We didn't see much fear exhibited during the day. There were several bombs that went off but it seemed like the main driver was that this was a good buying opportunity...so the bottom is still a ways off.

The fallout from the weekend's big meetings was a rough start to the week's trading. The Dow opened down about 300 points. One of the things we tried to get into last night's vanishing post was a discussion not of how much the initial drop but of the Next move. We have seen buyers step in on most of these "little" morning drops but this is a Bear market and things are different in a Bear market.

Today's reaction to the initial drop was the predictable buying but it really didn't get very far. Ok, maybe it was a 150 point up move but in the grand scheme of the day, it wasn't very far. And, that move turned out to be the high of the day. From there, Persistent selling took the market down and down until about a half hour when a rally moved the market out of the 400 loss to a loss of only 300 going into the last 15 minutes. From there, a vicious selloff occurred taking the Dow down 200 points to close down the 500 you have already heard about.

The market didn't seem to exhibit much fear and the 100 point rally late in the day sort of proves that theory. We see some recognition of the financial problems in the market coming in but capitulation has not arrived. The VXO did spike to 34 this morning so it's moving toward our target of 50.

There is a little Fed meeting on Tuesday to put a big question mark in the near term stock market plans. The Asian markets are down quite a bit this evening and that seems to be dragging down the overnight US futures but we all know how fickle those thinly traded futures can be. Plus, with the events of the weekend, the Fed Funds futures actually show a chance that the Fed could lower rates tomorrow by 25bps. We have been of the opinion that no rate cut will happen tomorrow but we could be wrong. If we had to predict the move by the Fed, we would have to say no change tomorrow but look for future cuts in the meetings to come.

The market is still due for a drop with the Dow dropping below 10K and our guess would be near 9K over the next few weeks. Like we have said, we are on red alert looking for a place to switch out of our short positions (QID and SDS) and into something a little more...bullish.

As far as Treasury bonds are concerned, they had a giant upside move today. The TLT's moved above the 98 level and are getting to a point where there may be little upside left in them. At any rate we are getting ready to sell our positions here in the 98 to 100 range. If the stock market can open lower, bonds could open up and prices near 99 seem pretty good given our entry point around 91 or lower.

And, oil has dropped well below 100 so our target has been met there. Gas futures fell hard today after Ike has moved on but we see that pump prices have popped a bit over the weekend. This move up is not justified by the market but we understand how prices get pushed on the whiff of fear generated by a large hurricane. Scarcity in some areas has been reported to sort of justify the high prices.

GDX Friday 31.25 Monday 30.33
BGEIX Friday 15.15 Monday 14.49
HUI: Friday 290.45 Monday 276.91

FSI: Friday 74.83 Monday 72.81

VXO: Friday 29.33 Monday 33.61 (heading up to 50)

SDS: Friday 67.41 Monday 74.01
QID: Friday 47.09 Monday 50.11

Dow Industrials: Friday 11,421.99 Monday 10,917.51 -504.48

Yes, we do have more pic's of Jackson from this weekend which we will try to post in the next few days. Too late to do that this evening.

Sunday, September 14, 2008

Another Bad Night

Top Line: The stock market took a hit tonight as the financial meetings over the weekend were less than productive. The failure of Lehman seems to be at hand. The failure of us to keep a post seems sort of permanent. Please see the papers for full information of the events of the weekend. The US futures are down hard this evening following that news. With the market in the perfect position to fall hard, this seems right in line with our way of thinking. We need to remain at red alert for a good time to take some profits in our short positions and our main indicator to do this will be the VXO approaching and/or exceeding 50. It closed just under 30 on Friday so there is some distance to go but a big down opening on Monday morning will push that number up closer to 50. A last minute emergency rescue of Lehman may be worked out overnight because the government knows that a financial system crisis can induce massive fear in the markets. They don't want that but with all of the bombs going off the last few days, covering them all is a bit difficult. Merrill Lynch says it wants to be purchased by the Bank of America and AIG is trying to restructure. Lehman seems to be very close to liquidation. All of these things are going to be too much for one weekend's worth of work.

Be alert this week and protect yourself.

Thursday, September 11, 2008

Impressive Late Day Rally

Top Line: The stock market has every reason to go down but the fantasy of a rally is alive in the hearts and minds of the bulls. Today's two reasons to keep the fantasy going are related to the Fed and Lehman. Any near term rally should not have much staying power and again, it will be completely reversed.

The stock market opened on its lows of the day and pretty much ran up the rest of the day. With about a half hour to go a news item, or should we say a rumor, hit the Street that suggested that Bank of America was going to buy out the troubled Lehman Brothers. When that story broke the Dow was slightly down on the day but that quickly changed as the buyers bid stocks up in the final half hour of trading. It was a stunning rally that added nearly 200 points.

This past week, enough bad economic news to indicate that inflation may be somewhat less of a problem than was thought just last month. By now you already know what the combination of these two things means, the market expects a Rate Cut...Now. Well, next week the Fed will meet and decide what to do with rates. Just for the record, we don't think that the Fed will lower rates next week. We do think and have thought for a while that the next rate move would be down so it's nice that the world has once again come over to the Update's way of thinking.

In spite of the "bid" for Lehman, it did not respond in the late day rally. Lehman and Merrill Lynch were punched for harsh losses on the day and were in the top five volume leaders. Lehman was down another 40% on the day while MER was only down about 15%. Another stock in the top five was AIG which opened down in the morning and traded under 14, unbelievable.

We apologize for another post without answering the important questions we have been asked over the past week. The important thing is that the answers to those questions are still going to be relevant next week.

We've started to keep data on way too many items but we think they represent the most important of what we are tracking right now so we'll stay with them. Have a good weekend.

GDX 28.20
BGEIX 13.75

HUI: 262.97 -5.76

FSI: 75.28 (relief rally)

VXO: 27.11 -0.28 (heading up to 50)

SDS: 68.03 -2.01
QID: 46.92 -2.14

Dow Industrials: 11,433.71 +164.79

Wednesday, September 10, 2008

Just the Facts Tonight

Top Line: The Lehman earnings news was not pretty but the market seemed prepared for worse as the market opened fairly strong. As the day wore on, the Dow managed a gain of about 125 points before ending up only 38. With the Fed meeting coming up next week, the market may now be a little distorted for the next week or so. Still, we are Significantly bearish.

Tonight's post is mostly just stats and very little to no analysis. We'll be back tomorrow.

The US futures are down along with the Asian markets tonight. The stock market is on the edge and is just about ready to fall off...that is the primary focus right now.

As it is Wednesday evening and since we just made another recommendation in our last post, we thought it appropriate to take a look at our current position.

Our Position (from our August 7th post, August 19th post, and the August 26th post):

Bearish on US stocks, Dow target of 9000 (timing is close)
Bearish on Gold, target of $600. (possibly a little aggressive)
Bearish on Oil, target of $100. (possibly a little timid as oil traded at $101 today)
Still Bearish on US Residential Real Estate, no real target
Bullish on US Treasury bonds, ETF TLT target of 100 (may be the maximum, sell into strength)
Bullish on US Dollar, target 90 (now at 80 and ready for a short term pullback)
Bullish on Volatility, VXO to 50

So, not much change here but we want to add some others:

As we mentioned in our last post, Gold mining stocks are ready for purchase and we thought they may give us some slightly better prices today which they did. GDX traded down to 27.43 after closing at 28.10 on Tuesday. This opportunity may be available over the next few weeks but for today, it probably was the best long term buy along with several other gold mining stocks including the ones we mentioned in yesterday's post.

Bullish on GDX, target, well, let's start with 50 (September 10th)
Bullish on BGEIX, target about 25 (September 10th, 14.07)

HUI: 268.73 +8.48

FSI: 72.55 (lowest close since March 19th...actually March 20th)

VXO: 27.39 -0.49 (heading up to 50)

SDS: 70.04 -0.80
QID: 49.06 -0.46

Dow Industrials: 11,268.92 +38.19

Tuesday, September 09, 2008

Time for Gold Mining Stocks

Top Line: Stocks were down hard and have more to go.

The stock market attempted to rally at the opening bell this morning but that effort failed and stocks tumbled most of the rest of the day and closed on their lows of the session. Tuesday's session presented some good opportunities, as well.

There are several topics to discuss this evening and we hope that there is time to get at least some highlights. Let's start with the gold mining stocks since they had the largest move that we could see. We suggest that you open up another window on your browser (you can use our link to Bigcharts on the left)and take a look at some of your favorite gold mining stocks. In case you don't have any favorites, we will mention a few here along with some gold funds and you will be able to see what we're talking about by looking at these dramatic charts.

We like to follow the HUI index and will use that as our basis for the discussion. If you choose a time frame of six months you will include the high for the year, symbol is HUI. The high in March was about 520 and today's close was right at 260 for a 50% drop in about six months. Looking back over the period from mid-July, you can see that the high was around 480 so in about two months the index has dropped 220 points with over 25 points just today. Looking back over just the September trading, six trading days, the index has gone from 345 to 260 in dramatic fashion.

We have mentioned that gold mining stocks usually lead the metals and this should be true now as well. Gold has not come down quite like the mining stocks have. You can see the gold chart (with one less decimal place--in case you're wondering, it allows a lower trading price) using the symbol GLD. In that chart you can see the March high over 1000 (100 on the chart). The price of gold has tumbled it's true but not like the mining stocks. We think gold will continue lower based on the mining stocks' lead.

Our favorite vehicles in this area are BGEIX (a mutual fund), GDX (an ETF), PAAS (a silver mining company), and NEM and ABX (gold mining companies). All of these have now come down to a place where the prices are compelling for purchase. It is possible that the lows of today will be exceeded in the short run but then they would be even more compelling. It is also possible that these prices represent the spike low that will be considered The low in this move.

The other thing about the move this group has exhibited over the past six trading days is that it could be a preview of what we will see in the stock market at some point (very soon). The GDX has dropped from 37.64 on the last day of August to today's 28.10 for a 25% drop in six trading days. SIX DAYS. It's time to buy the gold mining complex.

Some stocks drop quite fast all by themselves and today AIG and LEH were among them. AIG dropped nearly 20% to a new low for the move and LEH dropped 45%, yes today, on news that its talks with a Korean company had ended. LEH is scheduled to announce earnings on Wednesday morning. In general, financial institutions reversed any upside they had on Monday. Of course, as we write, the US stock futures are up this evening...

Just a quick comment about oil and gas, both were down today and made new lows for the move. Oil was down about $3 a barrel and gas was down about 10 cents a gallon...on the exchange, not the pump. Here in beautiful MN, gas is $3.47 this week and with today's 10 cent drop in the market we would expect pump prices to drop about 10 cents within a day or two...oh, yeah, right...of course we won't get that, it will be more like two weeks. Ok, we were a little aggressive on our date for $3 gas a Labor Day but we still think a $2 handle on the the gas price is coming...

We have other items to write about but there is no time this evening. We wanted to make sure to mention the gold mining opportunity, that was our main focus this evening. These things don't last very long.

CM sent us a link to an article that happened to be posted that described the weak rally on Monday. While it is a little late getting it to you, the points made in the article by the highly regarded Mark Hulbert coincide closely with the Update's.

We received a few questions over the past few days in regard to the recent drop in the stock market as well as some residential real estate questions and some further questions about the Fannie and Freddie Take Over, so we will try to discuss those in tomorrow's post. Any comments on these three or other topics would be welcome. Just click on the comment link below...as always, you can remain anonymous or tell us who you are, it makes no difference.

HUI: 260.25 -26.29 (lowest close since December, 2005 when gold was about $500)

FSI: 72.70 (lowest close since March 19th, last night's number was really 73.97)

VXO: 27.80 +3.08 (heading up to 50)

SDS: 70.85 +4.19 (SP500 was down big on Tuesday)
QID: 49.52 +1.65

Dow Industrials: 11,230.73 -280.01 (two day net gain of 9 points)

Monday, September 08, 2008

Take Over Monday, US Treasury Style

Top Line: No real surprises in today's market. The Fannie/Freddie take over by the government in the form of the US Treasury dominated the trading on Monday. The opening bell ushered in the High of the day and that point now will be a ceiling for prices, in other words overhead resistance.

Here is a quote from the WSJ:

"The Treasury plan limits the size of each company's mortgage portfolios to a maximum of $850 billion as of the end of 2009. (Fannie currently owns about $758 billion of mortgages and related securities, while Freddie's total is about $798 billion.) After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company."

Read the last sentence again...shrink about 10% a year until they reach about $250 billion...

What that tells us is that the government does Not intend to "grow" the business but shrink it over time. They don't say how fast they would shrink but you can't shrink unless you don't expand... Effectively, this Take Over will take these two "companies" off the grid of future home sales, reducing their involvement in new mortgages to a bare minimum.

The mortgage business has relied on the GSE's to provide lower interest rate mortgages due to their quasi-government backing. The chatter today was how mortgage rates can now go down because the government is back in the game backing mortgages. We don't see it that way.

The market takes it to mean, and they should in our humble opinion, that the mortgages already on the books are now going to have better government backing. As with all of the actions taken by the Officials in power, this one is designed to protect the banks (and maybe to encourage foreign central banks to hold onto their mortgage backed securities rather than dump them on the market).

We can not emphasize this point enough so the market reinforces it for you. In the stock market, the biggest losers were the two GSE's, FNM and FRE. The other top two losers were Washington Mutual (WaMu as we call them) and Lehman Brothers, the two weak sisters in the mortgage game.

To round out the top ten volume leaders, we find Citigroup, Bank of America, Wachovia Bank, Wells Fargo, and JP Morgan, to mention the banks. All of these banks were up big on Monday, not surprisingly because of the perception in the market that the government has taken care of them...yes, Again.

And, while the banks were cruisin', the techs were bruisin' as GOOG was down 5% on the day helping to drag the NASDAQ 100 to a Loss on the day, see the QID below (it was up because the NASDAQ 1oo was down). A strange day indeed...

We may have further comments as the "weak" progresses but we do not believe this is a bullish event, both the jump in prices off the bell this morning, or the Government Take Over of the GSE's. The government may have needed to step in to this pile of dung but they can not stop prices of homes from continuing their journey Southward.

FSI: 76.77 (lowest close since March 20th, GOOG is five points from its March low)

VXO: 24.72 -0.72 (heading up to 50)

SDS: 66.66 -3.00
QID: 47.87 +0.57

Dow Industrials: 11,510.74 +289.78

Here are a couple of Jackson pics:

Relaxing at home and smiling at, well, Gramma.

It was Grandparents' day at Jackson's school,
so Grampa got to spend a few minutes with Jackson and his friends.

Yes, Gramma was there, too, and one of Jackson's friends took our picture :-)


Sunday, September 07, 2008

Fannie and Freddie See US Treasury's Money

Top Line: Over the weekend, the US Treasury decided to take over the big mortgage GSE's, Fannie Mae and Freddie Mac. This move gives the bulls some extreme ammunition over the next few trading hours. We think this is only a temporary rally that will be fully retraced with further lows coming on its heals.

With Monday's opening expected to be a complete moon shot, we can only wait until this thing is over. As we have mentioned in the past, these types of rallies normally only happen in bear markets so we don't think this indicates underlying strength.

The government has been working hard for over a year, trying to provide some "confidence" to the markets. Meanwhile, the Fed has done whatever it can to provide liquidity to the markets (ok, to the banks). These things have been done when there really wasn't any fear in the market place. The powers that be have tried to anticipate how to deal with the financial problems that seemed to be coming. So far, the public has never really felt any fear...especially as measured by the volatility measures we have been following. (see the VXO below and for prior days)

This weekend it was the US Treasury's turn to Save the People with its take over of the GSE's. This plan proposes, Again, that if the government doesn't do Something, the world will never be the same. They can't let these poor GSE's go under because Maybe something bad might happen. We couldn't let that happen, could we!?!

This is supposed to be a Free market system but it seems that every time the government gets a little whiff of possible problems, they have to Do something. Well, the time is coming when what they Should be doing something and they will have run out of bullets to do it.

We know that the market wants to go down and we think it will. These "major" interventions do little to stop it.

FSI: 76.77 (lowest close since April 17th the day before GOOG jumped 90 points)

VXO: 25.43 -1.30 (heading up to 50, spiked a little today)

SDS: 69.66 -0.30
QID: 47.30 +0.31

Dow Industrials: 11,220.96 +32.73

Thursday, September 04, 2008

Stocks In High Gear and Heading South

Top Line: With the market down on Thursday, we may finally be seeing the relentless down move (persistent selling) that we have been waiting for these last few weeks. Since Tuesday morning's blast off, the Dow has dropped 600 points with little intervening upside. Over the next few weeks we'll see how strong the bear is.

As the market was opening this morning, there was a gloom hanging over the street after weekly jobless claims came in higher than expected. Now, the number was up 15K from last week to 444K when expectations were to drop to 420K. Is that the reason for the 100 point drop in the Dow at the bell?

What we think is that these numbers have little to do with it, at all. The Bear is back and fear is taking hold. Please understand that the news in this period pretty much matches up with the way the market is trading...look for more "bad" news in the next few weeks.

Now that we finally have seen some downside, what's next? Well, we have our sights set on the July lows first and the NDX, NASDAQ 100, has a jump on the rest of the indexes we follow. This index being the first to make a closing low that is lower than the July closing lows gives us confidence that other indexes will follow suit.

The NASDAQ 100 is a good leader to the downside. Over the past few weeks, the Dow has held up better than most other indexes. Now, it is following the broader market lower.

We like to call the Dow the Headliner Index since that's the number that people hear on the news, as in the headline news. So, as the broader market is letting us know that the up move is over, the public is seeing the Dow Hold its own, no worries.

Right now, the public has now been brought into the "recognition" mode when they believe that stocks are going down and convinces them to sell. The market is now getting severely dangerous because the public is getting ready to sell.

The problem is always, when will the public decide to sell? The important thing is to be In Front of them. Either that, or just be prepared to buy when they are about done with their panic selling. We are a little ahead of ourselves (we think) but the time is going to be upon us suddenly and we need to be prepared.

The lows of the year are in jeopardy as we go into the next few weeks of trading. We will get some of the best prices of the last few years.

As the market opens on Friday morning, there will be an important news item, the jobs' report, to deal with. We don't think anything can change the selling that's building but the number could be a "reason" for the media to tell us why. We'll have to wait until after the numbers come out and the market's reaction to them before the media contorts the news to match the market.

Today, oil was down during the collapse of stock prices so what did the media do? Why, of course, they let us know that dropping oil prices are not good for stocks. So, now we're waiting for them to agree with the Update that they really don't have much to do with each other.

Let's get back to our comments about gold mining stocks last night. Today, the GDX fell hard and gave us an even better chance to buy but of course we are pretty loaded up on the short side and have little cash to be buying gold mining stocks. Again, we are hoping to get another chance in the next few weeks.

FSI: 77.40 (lowest close since April 17th the day before GOOG jumped 90 points)

VXO: 26.73 +3.58 (heading up to 50, spiked a little today)

SDS: 69.96 +3.85
QID: 46.99 +2.69

Dow Industrials: 11,188.23 -344.65

Wednesday, September 03, 2008

Stock Indexes Diverge

Top Line: Financial stocks were strong and semiconductors were weak so the Dow was up on the day and the NASDAQ 100 was down. This type of divergence is not a hallmark of a strong market. We continue to wait until the selloff occurs. Patience is in order.

The next four to six weeks will give the market time to find some sellers. In the mean time, we seem to be content with our positions. As the gold complex has moved down just a little, there may be some opportunities there as well, right now with GDX spiking to a low this week near 33.50.

The news on Wednesday came from the Fed's Beige Book, yes, it's a clever name based on the color that this report comes in. Anyway, the Fed said some negative things about the economy but said that inflation has been affecting prices but not wages so much. Thank them for this earth shattering info when you get a chance, brilliant. Oh, yeah, the analysis by the media was that the Fed would probably not raise interest rates at its next meeting...really???

The other news was from the car makers who still make cars but are having some trouble actually selling them. GM had a remarkable month of August with sales down Only 20% and said that with the overwhelming success of its Employee discount to all program was going to be extended to the end of September. We can't make this up.

As for the gold mining stocks, we noticed that the GDX fell to a low price again today on the back of a small pullback in gold. This may represent an opportunity to consider. Gold mining stocks have been hit very hard over the past two months, about 30%. GDX was trading under 34 today after being up around 52 in July. Our favorite trading vehicle is the mutual fund, BGEIX, but GDX works well, too. NEM is a gold mining company and ASA is a closed end fund that specializes in gold mining stocks. At the moment, we are more interested in being short the stock market but this is an excellent opportunity. We were hoping to see it go lower along with the rest of the stock market but that is not a sure thing.

FSI: 80.30 (lowest close since August 4th)

VXO: 23.15 -0.69 (heading up to 50, spike there sometime soon)

SDS: 66.11 +0.16
QID: 44.30 +0.90

Dow Industrials: 11,532.88 +15.96

Tuesday, September 02, 2008

Outside Down Day

Top Line: The stock market was off to the races early in the day with oil down about $10 before the market opened. The celebration lasted about fifteen minutes before the turn around came. Persistent selling for most of the rest of the day left the Dow precariously positioned for a severe selloff.

When the market starts out strong and ends weak, it is generally bearish and can be an outside down day if certain criteria are met. Key characteristics of an outside down day that the prices have to be higher than yesterday's high at some point during the day, preferably the morning, and then close lower than yesterday's low. But, regardless if Tuesday was an outside down day or not, it certainly was a reversal to the downside day.

When the crowd woke up on Tuesday, it found out that the predicted, expected results of Gustav were not occurring. They also woke up to find that the stock market was rushing off without them so they had to get on board, too. Unfortunately, the early morning buyers were followed by even more sellers and the market dropped.

We read the early stories about the stock market rallying on lower oil and then the later stories about the stock market reversal. Those stories didn't know what to make of the decline in prices because as luck would have it oil was Not rallying to cause stocks to fall. This continues to be a problem. When studying the moves of any market, the media rarely knows what to make of it. What makes "sense" to them is that higher oil should be harmful to stocks but the facts just haven't borne that out. It just happens that markets sometimes move together and sometimes they don't. Simple correlations do Not work for trading.

What we mentioned back in our August 24th post, Kiss of Death, Technically Speaking, that the chart showed that prices had cut through an up trendline and had then come back to that up sloping line from the underside to "kiss" it goodbye. Since that Friday (August 22nd), the market has touched that line two more times, Tuesday's strong opening should be the last.

The last month and a half has been a buildup to this trading day. With Tuesday's reversal, we may have entered the downtrend we have been expecting for several weeks now. The market normally is weak in September, not always, but usually. The mantra is that you should Sell in May and go away Until September or October.

What was strong today? That would be banks and home builders...with oil services down hard.

We are getting close to a large selloff and we are going to have to be prepared for covering our shorts and getting long. We were in too much haste when we established our short positions and didn't get the best prices for our entrance. We want to be handle this better this time. We will prepare for it over the coming two weeks and then see how it works.

FSI: 80.72 (lowest close since August 4th)

VXO: 23.84 +1.25 (heading up to 50)

SDS: 65.95 +0.84
QID: 43.40 +1.09

Dow Industrials: 11,516.92 -27.04

Monday, September 01, 2008

Happy New Year to All

Top Line: The weekend's news is mostly about Gustav. The oil market has dropped about $4 this evening as Gustav is thought to have been a little less severe than expected. Yes, you guessed it, the US stock futures are stronger on that news as well.

As we go into the new week (and it's a considered a new Year here at the Update, BTW, Happy New Year to you), we are expecting a week that will disappoint the bulls. We saw the strength last week but the market was Down for the week and we expect further downside this week, net downside anyway. The news item of the week is the always popular jobs' report due out on Friday morning. This week, the announcement is expected to continue the trend of negative job growth with a loss of about 60K jobs.

The stock market is showing signs of fatigue, especially on Friday when the NASDAQ dropped almost enough to take out the rally of the two prior days. The NASDAQ should be leading the way South on this next down move. Last week as the Dow was trying to put on a brave face by holding up near the 11,600 the NASDAQ indexes were not faring so well. And, DELL did have a very negative impact on the NASDAQ on Friday, being down nearly 14%.

Our other indicator for this down move is the volatility measure, VXO. This index may have found a bottom and should have some upward mobility over the next few weeks.

We're going to pay special attention to the stock market these days because we are getting very close to a cliff dive and we want to be prepared for some action...that would be getting out of our short positions and consider the long side.

We trust you had a safe and enjoyable weekend. More from the Update tomorrow. Oh, yeah, the Update has a notion that the start of the "year" is Labor Day, not New Years' Day. This is because of the new start in the fall that we all had by starting school around Labor Day.

FSI: 81.11 (lowest close since August 4th)

VXO: 22.59 +1.91 (heading up to 50)

SDS: 65.11 +1.24
QID: 42.31 +1.33

Dow Industrials: 11,543.55 -171.63