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.