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 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...

1 comment:

Anonymous said...


Feel free to use any of the material.

Also, can you share your thoughts on the safety of a 401k's money market investments. It has always been thought of as safe but is that true? Is their an alternative between now and the anticipated bottom around 9,000 in the DOW for money market investments?