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

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