Thursday, October 30, 2008

Happy Halloween

Top Line: The stock market rallied nicely on Thursday even though it could have really rallied based on the moves in Asia. Tonight the world is taking a breather from the big rally that started on Tuesday.

With that, the Update is taking a breather tonight, too. There isn't much to say tonight and the world is resting, getting ready for the weekend.

Here is our current position:

Bullish on stocks, Dow heading back up to five digits soon

Bearish on volatility, VXO going back down to 25 or less

Change in our Gold position...Gold may have bottomed near $680
Now Bullish on Gold, buy pullbacks, do Not chase...we'll set a four digit high target later

Bullish on GDX, target 50 (or higher)
Bullish on BGEIX, target about 25
Don't forget to buy some silver...$10 now going much higher.
PAAS may be in play again too around 10.

Still Bearish on US Residential Real Estate, no real target

Bullish on US Dollar, target 90 (back to rallying, now over 80 again)
Dollar made it to 88 and we said it would back off since it rallied so hard, backed down to 83
Dollar probably has a lot more to go up but not at the moment...we'll go neutral for now

Bearish on Treasury bonds but will take No position

Happy Halloween

Wednesday, October 29, 2008

Black Hole Discovered on Wall Street

Top Line: The final ten minutes of trading on Wednesday found the stock market succumbing to a breathtaking 450 point selloff. This instability is what keeps most sane people out of the market.

The wild volatility in the stock market never seems to stop. Wednesday's rate cut provided no new news but did bring some interesting trading for a half hour. After that was over, the market marched higher until the final ten minutes of trading. With ten minutes to go, the Dow was up about 300 points. It finished down about 75 after being down about 150 just a minute or two earlier.

There was a rumor floating around that GE's CEO made some offhand comments about next year's earnings which was taken to mean something bad for the future. CNBC, a division of GE, tried to downplay this rumor. It doesn't really matter because the market can only do what it will do regardless of the news. With that, let's get back to the market...

The significant move today was in the dollar which dropped hard, finally. We said the dollar had gotten ahead of itself and suggested that it would take a break. Any pullback in the dollar could give a boost to the commodities and that's something that happened today. Gold stocks jumped on this dollar pullback. Over the past two days, the GDX has gone up about 25%. Yes, we're still down on our trade even after buying some around 17 the other day.

The action after the bell is probably more important than the Fed rate cut of 50bps this afternoon. The Asian markets are responding to rate cuts and are up incredible amounts tonight. Hong Kong cut rates and China cut rates. Another development has the Fed getting involved with some other countries. We don't have time to explain it but here is an article to provide you some information on the subject which is driving South Korea up tonight.

As we write, stocks in Korea are up 12.5%, Japan is up 8.5%, Hong Kong is up over 10%. These are unbelievable moves in world stock markets. This is what happens when stocks get oversold and liquidity is injected into the system. The money doesn't really have anywhere to go, so it goes into stock markets.

Futures here in the US are up but you have to remember and take into account that cliff dive at the end of the day. Thursday morning gives us the first GDP estimate for third quarter. Estimates are running at down a half a percent with more red ink expected in the fourth quarter.

Our target for the Dow was to be over 10K by the election. If we get something close to that over the next few days, we will probably be adjusting some of our positions. At this point, these volatile moves are giving us a headache.

Tuesday, October 28, 2008

Violent Rally...ahhh

Top Line: You might have heard by now that the stock market decided to rally on Tuesday. For tonight, we will leave it at that, but we do see more upside coming.

This rally is now being tauted as a one day bull market suggesting you should have sold at the end of the day or at least by Wednesday morning. This talk is just what we have been looking for from the world...skepticism about upside moves.

The best open on Wednesday would be a selloff for a little while and then find no more sellers so the market then moves up. If the market opens up, then there is a danger that it will not hold and we would consider some changes. This evening the Asian markets opened strong but have since backed off. They're still up on the session but weakness has shown up which has now pushed the US futures down.

The biggest event of the day on Wednesday will be the Fed's interest rate cut of 50bps...ok, maybe it will be the rate cut. There could be other items of more interest but the interest rate cut will rate right up there...yeah, yeah, we do feel pretty good this evening after that rally today. That doesn't mean the humor is any better.

We remain bullish for the near term. Why? Our "tells" are in the confirmation of the up move by the Treasury bond and volatility drop offs. For the short run, we repeat our thought that the Fed's rate cut will be positive for the market even though it may have been priced in on Tuesday (today). Plus, we have the election next week.

After today's rally, there remains a risk that the market could be setting up for another harsh down move. Yes, the technical picture remains a little murky due to the extreme volatility so we need to pay particular attention to our tells, the VXO and the TLT.

Let's see how Wednesday goes...

Monday, October 27, 2008

Waiting Again

Top Line: The stock market took another late day dive on Monday similar to what it did on Friday. With the Dow just under 8200 there shouldn't be much downside left. The rate cut expected on Wednesday may be an inflection point for a major turn.

A check on the general stock market analysis shows that the world expects the market to go down hard and fast so be prepared to buy then. We here at the Update actually said that a while back but need to take the contrarian approach and expect that most will be wrong. Any further downside will take the wind out of many bulls' sales but we recommend not paying attention to those feelings...

In fact, the Update wants to remind all of those analysts out there that this market is not the same as the 1987 two day crash. This crash has happened over a longer period of time with similar price consequences. The Update suggested that the October 10th trading could have been the clean out day that we were looking for, sans the volume. There's the problem, and we mentioned it back then...low volume is a problem.

The market continues to look weak, especially when it couldn't hold those nice gains during the day on Monday. The weak opening on the heels of Friday's late day drop led to a powerful rally. Late Friday the Dow traded as high as 8550 and then fell to close at 8380. On Monday morning the Dow opened down around 8200 for a 350 point drop from late Friday.

From that 8200 the Dow rallied for several hours and traded just at 8600 so we saw a 400 point rally during the day. That looked pretty strong but then the selling started in earnest and by the end of the day we saw the Dow drop below the 8200 floor that had held since the lows of October 10th.

Does breaking the shelf of support create a black hole to the downside? That is the question on the chartists' minds. We think a more balanced approach to technical analysis is required. The major indexes have new closing lows as of Monday even though the Dow is well above its October 10th lows. Of course, with the type of volatility we have seen lately, several hundred points in either direction doesn't seem out of the question anymore.

Generally the Dow is the last to put in a low but with the financials being supported by the powers that be, maybe that's not going to happen this time. We are not sure these types of analysis are appropriate.

The stock market is being hammered from several fronts and most analysis is bearish. The general view is not always the incorrect view but being bearish now seems to be a little late. Where were these analysts last October?

This evening, the Asian markets are moving up as we write and that should give the world a little better Tuesday than what we had Monday. The Fed starts their meeting on Tuesday and announces on Wednesday.

We had an idea come in from Erick. He pointed out this article in Barron's on convertible securities. Since we don't follow convertibles, we read the article with interest. There are so many good values out there...this looks like a good one, too.

We're waiting for the Fed to act.

Sunday, October 26, 2008

Quick and Dirty Tonight

Top Line: Lots of negativity on Friday did not produce the forecast stock market collapse. To us, that was pretty bullish news...but Friday's late trade served to cloud our optimism.

With the futures down limit on Friday morning, about 5% for non-trading hours, the stock market looked like it was headed to the abyss. For whatever reason, when the Real trading opened, there wasn't as much selling as feared. Yes, the market was down but there was a collective sigh of relief when the market didn't open down 1000 points.

The trading at the bell was overwhelmingly negative but was the low of the day. From those opening trades, in the major indexes, the market rallied strongly for a couple of hours at which time a two hour selloff occurred. Someone has mentioned that the selloffs are most intense at the beginning of the day and over lunch time because that's when the public normally trades. They are trying to get out of their positions and normally trade at these times. Who knows, he might be right.

The point is that we shouldn't be doing what the public is doing. The media has been so negative on the stock market over the past month and may have actually persuaded the public to sell some of their holdings. The market has collapsed this year going into October. Now, they want to sell???

We don't have anything in the way of solid analysis this evening. The weekend has been busy with little time to prepare for a good post.

For those of you who are waiting for a response from us, we will try to get something out in the next day or two.

For now, we see the market is trying to hold on this evening.

As for Friday's close, the Dow dropped 150 points in just a few minutes to close out the session setting us up for a potentially difficult Monday opening. Tonight there is some tentativeness as the Asian markets open but there is only a little downside pressure in the US futures. We'll have to wait and see how it opens on Monday.

In any event, a violent rally should be happening very soon due to the great sales job the market has done for the past few weeks. This week brings the Fed's FOMC meeting which should give us another 50bps drop in the fed funds rate. Then there is the end of the month and the election...all of which are normally bullish.

We'll be back tomorrow for a bit more substance...

Thursday, October 23, 2008

Everything is Crazy

Top Line: The Dow closed up on the day with the NASDAQ down after a wild ride. This felt a little different than we've seen over the past two weeks. Time is running out on this decline...

Another roller coaster of a day on Wall Street. The market opened down and then went on a tear taking the Dow up nearly 400 points from its low about 90 minutes into the trading session. Then the bottom fell out and the Dow dropped from 8800 to 8250 over the course of the day before jumping into the close to finish near 8700. Crazy.

As the Dow was dropping to that 8250 low, the NDX decided to drop to a new low for the move. The prior low was 1192 and today's low was 1177. Most other major indexes did not fall below their prior lows. It's true, the Russell 2000 did just about touch it but it didn't.

We don't consider the GDX or HUI to be a "major index" and they did selloff more giving us a couple of great opportunities. We had an order in to buy at 17.98 which filled early in the session when the GDX dropped to 17.90. From there the GDX went to 19.53 and we were feeling pretty smart just before it started dropping and went under we decided to buy some more there...yes, we are Crazy, too.

A possible reason for the early drop in the GDX was that gold dropped under $700 briefly. From that low gold bolted up nearly $40 taking GDX up to that 19.53. Gold then sagged back to $710 as the GDX dropped below 17. We can't believe how GDX continues to get hammered. The GDX expects that gold should go to $250 an ounce...Crazy.

Going over to Japan, SONY warned on earnings and has taken the Japanese market (Nikkei) down about 7% this evening. The rest of Asia is down tonight as well and has taken down the US futures tonight. The Dow was up 172 during the regular trading session and tonight the futures are down 172...Crazy.

Wednesday evening AMZN (Amazon) reported disappointing earnings which dragged the futures down overnight. AMZN dropped from 50 to 43 Wednesday evening so we expected the FSI (remember that?) might be able to break to a new low on Thursday...but by the end of the day AMZN was Up on the day so no new low in the FSI...Crazy.

Greenspan testified before the House Oversight Committee on Thursday. (Or check out Friday's WSJ. This is the WSJ's article, vicious attack on Greenspan.) He was Grilled or Skewered as the case may be. The committee asked him some tough questions and he admitted some failures in his model and his view of the world. A few years ago he's the Maestro and now he is being de-"Maestro"ed in front of the world...Crazy.

We need to remind you of the great marketing scheme put forth by Chrysler this summer. Do you remember the gas price guarantee of $2.99? Even at the time, we thought it was brilliant because of our view that gas would not be above $2.99 for long. We saw a station with a price of $2.29.9 this evening. Crazy...

Have a great weekend.

Wednesday, October 22, 2008

It Must Be Wednesday

Top Line: Our top line this evening is a little bit of a backtrack...we think the market wants to finally put in a price low. This process should happen fairly quickly with a washout of prices.

Wednesday's price drop seems to beg for more selloff to come. The prices we are seeing in several stocks are three to five year lows or more. In the case of gold stocks, the HUI index is at levels last seen at the lows of 2004 and 2005 when gold itself was $300 lower than it is today. We have always said that the mining stocks lead the metal itself but we don't have any scenario that allows for gold to go $300 lower as soon as the HUI level would indicate. We have revised our low for gold to $650 on this move.

Back to the real world...our appraisal of the situation changed today but just slightly. We thought the 7900 low back on October 10th would be the low we were looking for but tonight we realize that probably was the momentum low we had talked about in a previous post. Back on October 10th the market put in a strong low with nearly 90% of the stocks hitting new 52 week lows. That is a definite momentum low.

About a week later, on October 16th, the market dropped once again. This time the Dow dropped to 8200, well above the 7900 from the week before. That same day, the NDX did breach its own October 10th low but not by much. On the 10th the NDX just went below 1200 but on the 16th it fell a little further but only to 1192. (Possible nonconfirmation)

Now, there is a lot of panic and fear that the world is coming to an end...again...and the Dow and the NDX closed at 8519 and 1237 respectively. These numbers are not far above the lows but they are indeed above them.

We can't make a good estimate for the low but we do think that there is a good chance for another new low. This should be a buying opportunity for those of you who are still on the fence. We would remind you that if you want to take advantage of this opportunity, you will need to be somewhat nimble due to the likely quickness of the move down. If you are trading in your 401(k), then you have fewer options but if you are trading stocks/ETF's, then you have to Pick a spot to enter.

We of course think that GDX is one of the best values in town and will probably buy more down here, if we get the chance. One thing you can watch for at this point is to have the price of gold drop and finally the GDX Not going down anymore. This would indicate a great buying opportunity for the GDX.

One thing we want to mention about the GDX is the utter collapse in the price. There are certain times that just don't make any sense. As for the miners dropping so much without much drop in the gold price, we think this has to do with the prior owners. They could be hedge funds caught on the wrong side and just looking for cash to meet redemptions. These players have very little interest in fundamentals or good exit points. If they want out, they just sell and as the price drops, others are "forced" out, too.

There is considerable long term value for GDX but in the short run the previous owners have been squeezed out. What is the attitude of the current owners? Are they getting squeezed with this huge decline or are they patient? We think that there are many who have either recently gotten out that are total gold bugs and don't want to be out. Once the price starts up, there could be just a violent of a price move up as there has been on the downside.

We would also like to mention Erick's comment from yesterday's post. Erick mentioned the article we included in Monday's post and we include it here for your ease of reading, "Bernanke is Fighting the Last War". (Go read it again, it's good.) We do agree that we need to take America back and stop this era of government intervention, and don't forget, Federal Reserve intervention.

The current world is starting to come to understand why the economy needs to have recessions once in a while. Ok, maybe we are a little early on That call, too. But, when the world sees that the Fed or the government doesn't let anything bad happen, people start taking undo risk. The Fed augmented its job description while Greenspan was chairman by adding "eliminate the economic cycle, always have growth no matter what level of interest rates allows it".

We have long thought that the biggest problem child in this whole mortgage mess has been the rating agencies. The reason is that they would rate these mortgage backed securities (MBS) at Triple A so investors buying them had "confidence" that they were Safe. Had the rating agencies put a Correct rating on them, they may not have been purchased at all but here we are after the fact. We heard that these rating agencies were in front of a House Oversight Committee answering some questions.

Scott Cohn of CNBC left us this little gem from the meeting. It's a quick read and it's a result of the world where such things could happen. Today, the market will not accept it anymore. That's what bear markets do, they raise investor's awareness of risk. Bear markets do a lot of other good things, but they get such bad press.

Back to Erick's comments...government change out might be a good idea but we would like them to work as little as possible. And, thanks for mentioning the comedian running here in Minnesota. President???

We feel the need to continue this is Wednesday, after all.

The dollar has exploded to the upside over the past few days along with the commodity collapse, which makes some sense. We don't think this trend will hold for long. The dollar has gotten ahead of itself (yes, we still think it can go to 90 but it's almost there now) so there is a possibility for a pullback at least...which would allow a bounce in the commodities or at least their stocks.

One more overall subject. Where we are in the stock market Cycle. We have been calling for a low being put into the market this fall and as usual we were a bit early. The point is that with a low either having already been put in or one that is about to come, we have had a significant destruction of value across the globe. (Asia is down 5% plus again this evening.)

What our focus is happens to be that there are more bears around then we have seen for a long time. There is also more fear out there as prices drop...people sell into the weakness by throwing assets away at whatever they can get. That's the toughest time to be a buyer but it usually is the best time to buy.

Let us make it perfectly clear...We are long term bearish and we might add, Very Bearish. Right now we are experiencing the end of the First large wave down. The next move is an Up move that corrects this 6000+ point drop in the Dow. After that we get the Real Bear market, the one that will have huge percentage drop.

There are so many things to mention this evening but we can't mention them all. The one we are missing is the currency trades that are going on right now and the Japanese Yen is at the center of the conversation...if you have time, go look at the news items centering on Euro/Yen.

Tuesday, October 21, 2008

AAPL Tries to Inspire the Market

Top Line: After hours AAPL announced their earnings and gave the market a weak forecast. That didn't stop the market from enjoying the news and the NASDAQ 100 futures are up this evening. This sets up another up morning on Wednesday.

[As we end our post, the futures have now dropped as the Asian markets have suddenly weakened with Japan and Hong Kong both down. Japan is down nearly 6%. And, European markets are called opening lower as well, as the recession word is finally slipping out of more mouths. We'll have to see what happens in the real trading session.]

The stock market's volatility continues at a high level but does seem to be coming down somewhat. Today's Dow moves were in the 250 range, down 250 points to start and then up 250 points and then down 250 going into the close.

There are several crosscurrents going on in the markets today and the Update has a weak post this evening. Maybe we see something important in the next few days.

The Fed created some new lending facilities as they seem to have a never ending supply of money to accomplish these endeavors.

Anyway, the NASDAQ 100 was extremely weak on Tuesday with the components of the Wednesday's FSI . The last hour fell apart and it could easily be that the larger mutual fund companies trying to add to their liquidity because of or in case of fund redemptions and to beef up their cash fund.

Just a quick review: The VXO was up slightly today and the TLT was up. These are not the directions that are supportive to stocks. We continue to think that the market will rally into the Fed's meeting next week which leads to month end strength and the election in two weeks.

Sign off tonight but we should have some additional info on Wednesday. What are your thoughts???

Monday, October 20, 2008

An Up Monday

Top Line: The stock market staged a good rally on Monday. The volume was weak but the price move was strong. Pullbacks would be reasonable but we are looking for more upside over the next few weeks...Fed's meeting next week and it's the end of the month, too.

The market seems to have accepted the ING cash infusion from the Dutch government. ING rallied about 20% during the day. We'll see if the market continues to think this over the next few days. We will drop this item from any further posts...

The stock market didn't feel too strong during the day but we may be a little biased due to our favorite index, NDX (NASDAQ 100) being weaker than the broader market. We realized early on that the four horsemen were trading weak all day even going into the close, with RIMM ending down about 10% on the session. Our FSI was up but less than 1% compared to the NDX going up 3% and the Dow going up almost 5%.

The big mover was the GDX which gained 11.5% on the day. Gold itself wasn't up very much but the miners were trying to make up for lost time. Yes, it does have a long ways to go and it should continue to rally into the reliquification phase of the central bankers' plans. Interest rates should come down which could give gold a good cushion.

After the close, Texas Instruments disappointed and the market dropped TXN's price. At the same time, the news pushed the US futures down on the evening forecasting a bit of a drop going into the morning.

We remain bullish stocks against the low point around 7900 on October 10th. We expect a good tug of war between the bulls and bears for a while. The strength in the market should be enough to move the market up strong into and shortly following the election. There are too many positive items on the media's agenda over this period of time.

We, here at the Update, are proud to be aligned with Warren Buffett. We were too engrossed in the news items to remember to include Mr. Buffett's Op-Ed piece from the NY Times in yesterday's post. We include it because he must have been reading the Update and decided to follow our advice to get out of his Treasury securities and go long equities. Mr. Buffett doesn't short stocks so he just waited for our call on the move out of TLT (long term Treasuries) and into stocks. Well, maybe he doesn't read our blog but we think it's perfectly fine that he is following our lead.

There are two other great articles to share with you this evening but they may not be available to you because they are from the WSJ. The first is an interview of Anna Schwartz, a 92 year old who co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression. This article, "Bernanke is Fighting the Last War", is a great read.

Ms. Schwartz suggests that Bernanke has a good idea, from reading the book mentioned, how the Great Depression could have been avoided. She thinks that Bernanke is fighting that war and not the current one which has a different basis. She thinks the banks that made mistakes should be allowed to fail. For those that invested in those failed banks, they would lose money and that would be ok, she says. Go, Anna. Meanwhile, Bernanke spent the morning arguing for another "fiscal stimulus".

Then there is another article in the WSJ. This one is from James Grant entitled, "The Confidence Game". Mr. Grant is a good writer and has tackled a difficult subject. We recommend reading the article. If you have any comments or questions on any of these subjects, let us all know by putting them in the comment section below.

Sunday, October 19, 2008

ING in the News Over the Weekend

Top Line: We are operating under the assumption that the Dow bottomed on Friday the 10th of October down around 7900. The market should get a lift this week as we come out of options expiration last week and get ready for the Fed meeting next week along with the end of the month and the election in early November.

Last Friday's expiration (options) didn't deliver on the rally we were looking for but we did have some volatility. The Dow opened down about 200 points but spent the next four hours rallying and during that time went up over 500 points before dropping about 400 points going into the close. It almost seems tame compared to what we've witnessed over the past few weeks.

The two indicators we have been watching, the VXO and the Treasury bonds (TLT), suggest that stocks should go up. The VXO was up by the end of the day but stayed below the highs of Thursday and well below the high of 103.41 established back on October 10th. The Treasury bonds were down.

We did take the opportunity to purchase some more GDX on Friday morning and got fairly good prices for it.

The big news over the weekend involved ING and since we are employed there we cannot discuss it. For further info please see the main stream media. And, check the stock chart if you like over at bigcharts.

We are going to keep this post brief this evening due to the news on ING and our focus on our day job. We should have something different to mention after Monday's session.

Thursday, October 16, 2008

Happy Expiration Friday

Top Line: Friday is options expiration so we expect a rally to squeeze down some of these expensive puts. A strong rally should take hold going into the election. (By the way, BUY GDX)

This evening we wanted to take a minute to describe our thinking process. The selloff of last week should have been the end of what will be the first wave of a large bear market. From the lows, the market should stage a major corrective rally to correct the decline from the October 2007 highs to this month's lows.

A normal retracement should be a Fibonacci 38.2% move and would take the Dow back to at least the 10,500 level. Other retracements would be 50% or 61.8%, the latter of which could take the Dow back up to the 12,500 area. While these levels seem impossible at the moment, they are theoretically possible.

The bear market has gone to an extreme and has pushed sentiment as well as prices to oversold levels. As some of our holdings go to even cheaper, we feel the intensity of the decline along with all of the stockholders who held on all the way down. The volatility of the last two weeks gives everyone a shudder, even if they're making good choices.

We want to emphasize that we continue to be bearish on the economy and the stock market over the long term. The problem is that in a corrective move, the stock market kind of moves in the opposite direction of the news. So, we expect the news to continue to be less than spectacular but the market will defy the news because of its oversold position.

The sentiment has recently been extremely negative against the market. The public thinks the market is going down because of the economy or because it might be going into a recession. Please. The massive moves of the Fed and the Treasury have been done in the face of No declared recession and No negative in the GDP. Meanwhile, several large financial institutions are being eliminated. Certainly there is something going on that is recessionary or deflationary.

The headlines for Wednesday's huge decline in the market said that recession fears caused the market to go down. This is the best the media can do? This is either old news or people are worried that once a recession is declared the market will really go down. None of this makes any sense.

What makes sense is that there is considerable fear in the public and they are wanting to sell rallies, like the one we had from late Friday last week to Tuesday morning this week. From our perspective the selloff of Wednesday going into Thursday was much less intense than the selloff of last week. Today (Thursday) the NYSE had just over 500 new 52 week lows compared to the 2900 registered last Friday.

The VXO has not rallied above the 103.41 that we saw last Friday although it did push pretty high during the early morning decline in the market getting just over 84 before closing at 70.34.

The TLT's, our proxy for the long US Treasury bonds, did not muster a rally even last Friday and today they are even lower than they were on Friday. This gives us some confidence in a stock market rally.

Speaking of a stock market rally, let's get to the market action for the day. As the market opened this morning, there was a little party going on with the Dow jumping 100 points. From those highs the Dow plummeted about 500 points over the next hour and a half. This selloff was oddly reminiscent of last Friday by the way it just let go but all of a sudden it ended.

After being down 400 points on the day, the Dow staged a rally that pushed up about 400 points to the breakeven level for the day and then traded around there for a couple of hours. Going into the close, the Dow got a second wind and rallied 400 points by the end of the day. Just before the close the Dow touched 9000 but just couldn't hold it.

Then, after the close GOOG announced good earnings but somewhat flat revenues. This news must have been good because the stock rallied about 10% right after the news. The news also gave the broader market a bit of a lift so we'll see how Friday trades...we think the options expiration will cause a spirited rally with intermittent volatility, as normal.

Let's mention our biggest problem child, GDX. This security has just been hammered over the past few days and now represents the best investment we can see. We did take the opportunity to purchase some more of it today and we may buy more tomorrow.

There is no reason for GDX to be trading at these levels. Gold did get hit today as the New York market opened but it didn't even come close to the lows we saw in September. Back then gold hit a price that was $50 lower than this morning.

What was the GDX doing, you may ask? That was back when we were first getting excited about the gold mining stocks and the GDX was trading around 28. Today it traded below 22 and gold is $50 higher. This has got to be the buy of the season. (BGEIX would work, too.) If we liked GDX at 28 we Really like it here at 22. Now that the dust has settled, we see that we didn't put enough of our assets into GDX anyway, so we'll make that up on Friday, early...

Jackson gets to go to a MN Gophers' hockey game...
Great seats with Dad and Mom...who had to stand behind the camera.

Wednesday, October 15, 2008

Price Low Coming???

Top Line: Stock market looks like it wants to test the lows set last week. The possibility exists that that test will fail and prices could drop a bit further on this decline...Treasury bonds ended up on the day and VXO was up, too, both confirming the lows in the stock market.

Wednesday's decline, including the 300 points in the final hour of trading, sharpens up the focus on the pattern that exists in the market. As the market was dropping last week, there was truly no where to hide as nearly 90% of stocks hit new 52 week lows last Friday. Today, there were just over 200 stocks that hit new 52 week lows so the intense drop is not showing up in the majority of stocks, at least not yet.

We tried to describe this in earlier posts but maybe this is the best time to try again...last Friday was the Technical low in the market or most likely it was. Now, we are on the way to making the price low in what the Elliott wave would call a fifth wave. Fifth waves are ending waves and are followed by a corrective wave and in this case the direction would be up. When the low in the fifth wave hits we should see another pop like we saw on Monday.

The problem with all of this thinking is that the low price could be quite a ways below where we are now. This last move down could be bone chilling like today's down move was. It seemed as if there was a large leak in the bottom of the boat as the market just collapsed into the close and beyond. Yes, the market continued dropping into the after hours trading and has a large drop planned for Thursday morning. The Asian markets are strongly down this evening as well.

There will be more opportunities to buy over the next few trading sessions. If the market decides to drop through last week's lows, it will feel like the world is coming to an end...which we felt was the event that was in play last week. In any event, the down move may be intense but it will end and the market will roar back.

We should have sold some of our positions on Tuesday morning and we knew it then and we are punished now. Trading is not always the worst thing to do but sitting on your positions and closing your eyes is not a good idea. This market is treacherous and you need a cool head in order to manage your portfolio. That or just put your money in Treasury bills at 0% and go play video's easy to get whipsawed in two in this market. We have been pretty accurate with the market for 2008 until the last ten days...and in that ten days we could have made a fortune if we would have traded properly. That was not to be. We have not offered the best advice over the past two weeks and for this we apologize. We hope that your portfolio has not suffered too much. Today was not good for ours.

Tuesday, October 14, 2008

Volatility Easing?

Top Line: The stock market is in the process of telling us what it wants to do now. Tuesday's response to Monday's monster rally was to sell off, a natural event.

The stock market jumped to a huge gain on Tuesday morning which did give us an opportunity to sell the strength. Of course we didn't actually take advantage of it but looking back to Friday afternoon to Tuesday morning, you can see how the stock market might be a little tired.

You may recall that with two hours until the close on Friday, the Dow dipped below 8000. On Tuesday morning, after about ten trading hours, the Dow traded around 9800, an 1800 point move about 180 points an hour on average. Similarly, the NDX, our favorite index, traded down around 1200 late Friday and opened at 1470 on Tuesday, for 270 points.

To think the rest of Tuesday was spent selling off seems like a reasonable thing. It gives people a chance to sell smiling that they waited for a bounce. Once these sellers get done, we should see another little run but when will they be done?

The selloff in the NDX was more than in the Dow, with bank stocks moving higher, but both were well within normal ranges. Actually, the Dow selloff was almost a perfect 38.2% Fibonacci retracement at the day's low. Wednesday should be interesting.

Tonight after the market closed, INTC announced earnings that were a little bit of an upside surprise, at least to us. INTC did have some trouble providing guidance for next quarter but the market was fairly happy for the news. For some reason, which we're not too sure about, after enjoying a little pop after the INTC news, the US futures fell off and are down a little this evening.

[Ok, we did find something...a Fed official, although not an interest rate setting voting member, thinks the US may be in a recession. Janet Yellen said this evening that she has changed her mind on the economy and she is now thinking the third quarter GDP may be flat.]

What we left you with in our last post was our tells for continued market strength, lower Treasury bonds and lower VXO. On Tuesday, Treasury bonds continued lower and the VXO dropped a little, too, even in the face of selling from the opening bell. The market opened up 400 points but sold off most of the day. This action should indicate further strength in the market.

One other item we should mention is the options expiration this Friday. Our opinion is that the expiration this month will bring buying into the market. Since the VXO is still high and coming down off even a higher level, put buying has been the biggest game in town. We don't think these puts will be rewarded with even more selling. These puts will be squeezed out by Friday and that should start on Wednesday. This is our best guess for what drives the stock market this week.

We think the excitement in the market is about over. So much volatility can not be maintained for long, it's too exhausting. With the break in prices last week, the market is still trying to find its bearings and we will have more fits and starts but we do think the Friday low around 7900 in the Dow should be the 2008 low. If the volatility does slow down, we may actually have time to explore some other ideas or maybe some pics of Jackson.

Monday, October 13, 2008

Spectacular Global Rally

Top Line: Global stock markets enjoy powerful up moves. Here in the US, the Dow screamed higher to the tune of 11%. The US futures are up a couple of percent after Japan opened this evening. The stock market has violently reversed the lows of last week. What's next???

By all accounts a day like Monday is extraordinary but that is not anything new in the stock market of late. There have been many extraordinary days recently and maybe we're getting used to it.

We have been richly rewarded already for taking long positions last week and now we have to figure out just what is going on now. Can the market continue to move up after this 11% move or do we take our profits and go home?

We need to take a look at what's going on and then try to decide. On Monday the market seems to have responded to the intervention over the weekend. On Monday, the banks were closed due to the observation of Columbus Day so the cash Treasury bond market was closed, although the bond futures were open. With the stock market gains, the Treasury bond futures were lower on the day. Logical.

On Monday, the Japanese stock market was closed and is now making up for the lost time. As that market opened tonight (Tuesday in Japan), circuit breakers were implemented due to the surge in prices. Circuit breakers are usually thought of as keeping a price decline in check but they are really collars that don't allow large price moves in either direction. As we write, Japan's market is up 13% allowing the US futures to continue their own rally.

The main issue tonight is what to do. The run up that occurred on Monday is the reason we wanted to be in before the rally started. The extreme nature of Monday's move begs the question of whether it was just a normal short covering rally in an ongoing bear market or if it is truly the beginning of a bullish trend.

Right now we have two items that are validations of an up move. The first is the VXO which traded over 100 on Friday and Monday's drop in the Treasury futures. The VXO dropped hard today which makes sense considering the Dow was up 11%. VXO dropped to near 60 by the end of the day. As long as the VXO continues to drop and Treasury bonds continue to drop, we would imagine that the uptrend can continue, at least for a little while.

We still think the Dow can cross over 10K sometime around the election which is in three weeks. In the meantime, there are any number of scenarios that could evolve. We can only say that we will monitor the market for opportunities.

For now, the best opportunity seems to be the gold mining stocks. Of all the commodity type stocks that moved up on Monday, the gold stocks held back a bit due in part to the drop in the price of gold. This drop in gold does not seem to confirm the latest inflationary moves made by the weekend intervention boys.

We will see if the market advance can continue around the globe one more time on the back of Japan's advance. We really don't think it's a good possibility but we may get some follow through into Tuesday. An 11% move is hard to follow with another up day. We should expect some pullback in the market. Some say that this is just a massive short covering rally so we will watch to see what will happen. The VXO is important right now...keep an eye on it for further clues.

Sunday, October 12, 2008

Beginning a Bullish Trend

Top Line: The US futures opened strong this evening, giving us an early indication that Monday's opening could be strong, too. The 2008 low may have been established on Friday morning near 7900. Time for a big rally...

[Editor's note: If you haven't already, please check out the special Friday post just below.]

The Update spent the last week focusing on the market. We spent five days moving into long positions which was our plan. The flaw in our plan was the exit from our shorts, which happened over two quick days, and should have been carried out over a period of five days just like our purchases.

Final down moves like we saw last week are rare and scary. These moments create some of the best opportunities but having the confidence to take advantage of them is difficult to muster. For those who can, great rewards are usually the result. At least that's our hope.

For those who think this is easy, take a look back to May when everyone thought that gas was going up to $7.50 a gallon or more and oil was going up to $200. This was supposed to drive inflation up and both the bond market and the stock market down. Then, as the energy complex started dropping, the pundits said that the stock market could go up. Now that oil is under $80 and, by the way, gas is finally under $3, here in MN at least, you might think the stock market should be at 20K as measured by the Dow.

The past few months have confounded the Fed and the US Treasury department as they have tried to manipulate the markets. This time the markets said, "NO", and gave the world a harsh taste of reality. With all of the money that has flooded the system, both from people selling stocks and the powers that be adding liquidity, we expect much of it will find its way into the stock market. This should be a sudden burst of power.

For this reason, we have wanted to be in our positions in front of the move. We did sacrifice some of our profit in our short positions, but mostly because we didn't plan our exit very well. We won't have another chance at that for a long time. We will try to be better at this next time. You are receiving free advice and should regard it as such...we are still learning, too.

Having a plan is usually a good idea and then you have to implement that plan. The market dictates the timing and the job is to do something. It's easy to start thinking that the market will go to zero or below but we have had the guidance of the VXO, the bond market and actually our own FSI which was up on Friday with AAPL putting in a strong performance.

What should we do now? Well, we have completely reversed our position and have now gone to an extremely bullish stance. This is unusual for those of you who know the perpetual bear. You now know why we have been bearish for the past year plus.

Our current positions:

Bullish on stocks, Dow heading back up to five digits soon
Bearish on volatility, VXO going back down to 25 or less

Not so Bearish on Gold, our target of $600 was a little aggressive and we'll update soon
Bullish on GDX, target 50 (or higher)
Bullish on BGEIX, target about 25
Still Bearish on US Residential Real Estate, no real target
Bullish on US Dollar, target 90 (back to rallying, now over 80 again)

Bearish on US stocks, Dow target of 9000 (Target abandoned before it was Acquired)
Bearish on Oil, target of $100. (Target Acquired)
Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)
Bullish on Volatility, VXO to 50 (Target Acquired)

We will dispense with our normal display of the FSI. It has provided entertainment for us since Cramer declared that the four horsemen would carry the market. We decided to test his theory out in the next few months which ended up being about a year. Looking back on the four stocks in our index, AAPL, AMZN, GOOG, RIMM, we see that the peak in the FSI came on November 6th at 111.86 and the low seems to be last Thursday at 51.73. The prices on those days were 191 and 88 for AAPL, 87 and 56 for AMZN, 741 and 328 for GOOG, and 131 and 59 for RIMM. All AMZN down more than 50% for the year.

Friday, October 10, 2008

The Great Deteriorate of 2008???

Thank you to those of you who provided some kind words for us since our last post. It is much appreciated.

We pretty much completed our buying program today after five days of buying. We think we have gotten very good prices for the purchases we made today but we may not have caught the lows. We are just grateful that we can buy at such remarkable values. Normally, catching the low or the high in the market is Impossible but, even if this week isn't the low, we still got great prices. We do have a little cash left but we like to keep some powder dry for possible future opportunities.

Ok, let's get to it. Here is a quote from our Monday, September 29th post:

"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."

On Friday, October 10th, we see somewhat similar numbers with similar magnitude but just a little off. Thursday's close in the Dow was, let's round these numbers, 8600. Friday, the Dow spiked down to 7900, about a 700 point drop and by late in the day the Dow sported a 300 point advance at the 8900 level but failed to hold it. Not a bad representation but not quite what we wanted to see to absolutely call a low. That's not to say it wasn't the low we were looking for, just that we would have liked to see a positive close. That means that Monday could fulfill that requirement. We'll wait until we see what the weekend brings before we get too definitive.

Friday's trading was truly mind boggling. The 700 point drop to start the day gave everyone chills for about two minutes and from there we saw a Straight up move that took the Dow to a positive 100 reading in about a half hour. How long does it normally take to get an 800 point up move in the Dow?!? Usually more than 30 minutes.

During the day the VXO jumped, and we do mean jumped, to an extraordinary high of 103.41. You may never see this number again in your lifetime. Yes, it was higher than that back in 1987 but this is a monster number and means there is extreme fear, which is a major under estimate.

When the VXO hit that 103.41 (we still can't believe that number), the Dow decided it had enough of the downside and went on another tear like the 800 point rally in the morning. So, for the second time in the day, the Dow sprinted up 800 points before dropping about 400 points to close down a little over a 100 points.

As part of this day, we decided to take a quick look at the number of new lows. We have been mentioning this indicator over the past few days because it puts this move in some perspective. On Friday, there were 3306 issues traded and 2901 had new 52 week lows...we are running out of words to describe these things.

These are truly historic times and will be talked about for years to come. We still talk about 1987 but now we can add 2008 to the list of stock market topics. Going back to last October, the Dow was over 14,000 and today it traded under 8,000 for a 6,000 point decline for the year. No wonder people are scared.

This past week of volatile stock market action should put a cap on the "Stock Market Decline of 2008". That would sound better if it was the decline of '09 so we need to change it to the "Stock Market Deteriorates in 2008". Ok, Ok, it's not that good either.

To finish our special Friday night it's not a Saturday night special...we wonder what will be on the minds of the people this weekend. Will there be another major down opening here in the US due to people talking themselves into selling, finally? If so, it is very possible that a severe decline could appear on Monday. If people are feeling relief because the market managed to recover from its steep decline on Friday, then we may just go straight up on Monday.

You may remember we still think the Low will occur on Monday, but we have no problem if Friday held the low of the year 2008.

Thursday, October 09, 2008

A Difficult Week for the Update

We are breaking with our normal post this evening. We are changing We to I but just for tonight.

The Dow dropped 500 points in the final hour of Thursday's trading, falling strongly through the 9000 level and showing just how weak the market truly is.

My estimate for the market as published here for several months has been 9000. Since I thought that the Dow was going to go to 8000, I wanted to be conservative in my estimate so 9000 seemed like a good place.

Unfortunately, I abandoned that position about a week ago and have paid the price in my own portfolio. That is something that I can live with and have lived with in the past. What I don't like is advising you incorrectly this week, with confidence. I have been given the title the perpetual bear and now that the market has a week like this we are bullish...I just can't believe how far off I could be.

The only consolation I have is that I hope you took my advice about investing a little at a time like I have done. I think it's important to be confident when moving my money from one position to another. It's difficult to be confident when you are buying good values because it is Tough to buy in this time of panic selling. One positive is that I tried to talk you into buying the GDX and that has performed much better than other stocks.

I started buying on Monday and have bought every day this week and plan to be buying some more tomorrow (Friday). That was the plan. I really did think that the true Low would be on Monday, October 13th and that date is coming into clear focus especially during the last hour of trading on Thursday. What I didn't envision was such a flush in prices this week, particularly today. I thought there would be a volatile week giving us good buying opportunities.

Since the Dow dropped 500 points in an hour, I must conclude there is more to come on Friday and the futures are indicating that this evening. Japan is down about 10% as we write this and our futures are down about 3%. The European markets are anticipating a huge selloff as they open.

For those of you who were short with me for the past several months, you enjoyed some profits and put yourselves in a good position to be buying at these lows and it may work out very well indeed due to the extreme nature of this decline.

Since we want to focus on the future, we need to examine where we are and where we have come from. This event is a crash and has been a global phenomenon. Fear has gripped the public and they are so afraid that they are selling. So many advisors continue to recommend that people hold onto their portfolios but they don't care. They see the market dropping 600+ points in one day and they think that there is another one like it tomorrow and the next day. The problem is that they don't know what to do.

I want to remind all of us that the Dow peaked a year ago (today actually) and has dropped over 5000 points this year. People have been watching their portfolios and have hoped that the market would come back but to no avail. Now they are throwing their portfolios to the wind just to get Stable is king.

Banks and other financial institutions are trying to gather more cash because they are shoring up their capital positions to stay out of bankruptcy. It's not so much that the banks aren't lending to each other, even though that is happening. It's more that they are trying to take care of their own house. In order to do that, they are selling whatever they can. They were selling to the Fed until the Fed really couldn't buy anything more from them.

Why has the market dropped so much? I think that the facts have been coming out for the past two years with regard to the housing market. The news hasn't been getting any better on that front but the Fed has tried to inject funds into the banking system for months in order to prevent deflation. They don't have enough funds to make that happen so they went to the US Treasury for help. Ultimately, that effort has to fail because there isn't enough money to go around.

Tonight, a Japanese life insurance company has declared bankruptcy partly causing a 10% drop in the Japanese market. Here in the US we have seen our share of large long term institutions End. AIG announced that the $85 billion wasn't really enough so could we please have another $35 billion please. And, the US Treasury wants to invest in banks now similar to what England did this past week.

There is the possibility that the US market fell hard in the last hour because of redemptions and mutual funds anticipating the need to get cash for their fund holders. That could be the way we can find an end to this drop. Significant selling has already occurred but we have been waiting for that huge volume day with a reversal in it. That has not happened.

What has happened is the volatility indexes showing strong fear and a buying opportunity, or at least what looked like a buying opportunity. I still think the buying opportunity is at hand at least for an intermediate term.

There is one looming problem with my theory. The US Treasury department thinks that there is a constant supply of money that they can use to "fix" the problem. When does the world say, we don't have any more money to give you. Remember, no official has declared a recession to date. With the Fed pumping money over the past year, we can't help but wonder what they will be able to do if a real recession shows up...

Here's my example. Let's say that there are two countries in the world, the US and one other. Let's say that the US economy is running at $1000 a year and the other one is running at $10. Without going into the details, the US trades with the other country and causes about $1 for the other country's economy. So, the other country takes that $1 and loans it back to the US and this continues for a few years. Then the US starts to have a problem and wants to add some liquidity to their markets so it goes to the other country to borrow some money. How much can the other country lend? There is definitely a limit and it can be reached.

Ok, I could continue this all night but there must be an end to this conversation. Please stay calm and enjoy the prices that you are being able to buy at. We have been watching the pharmaceuticals and they got knocked hard on Thursday. Why is that? Well, they can sell them to get cash. ETF is PPH but we have been looking at PFE for a long time and tonight the price is at a not seen since about 1997. 8% dividend while you wait... There are so many bargains out there right now.

I'll try to post once over the weekend and a reversal on Friday would prompt another special post. I will be buying on Friday in any event...assuming a low coming on Monday next week.

I know you are all adults and can make your own decisions. My job is to provide you with a little different perspective than what you hear on the main stream media.

Wednesday, October 08, 2008

Fed Fires Off 50bps With 150bps To Go

Top Line: As we expected, Wednesday was a wild day. We would expect more volatility in the market over the next few days. Plenty of opportunities still available.

With the gold mining stocks kicking into gear, we know the bargains aren't quite as good there as they were on Tuesday. That doesn't mean that the GDX shouldn't be purchased. It just means that the very low price is now gone, more than likely, and any further profit will be somewhat diminished because of the higher price that would need to be paid.

Gold and mining stocks benefited from the global rate cut with both performing to the upside. The GDX was up close to 15% on the day. We have been buying GDX over the past week or so and we hear some of you have been, too. A day like today makes you glad you did.

The stock market tried to benefit from the orchestrated rate cuts but couldn't really decide one way or the other and finally just gave up at the end of the long, wild day. The Dow was down nearly 200 points making it six down days in a row. Today's new 52 week low count is unbelievable at a full two thirds of total issues traded, 2223 out of 3302.

The NYSE volume figure was a little heavy but just over 2 billion shares, not anything to get too excited about one way or the other. We would have liked to have seen a large volume day (4 billion shares or so) with a nice reversal to give us a better idea that the market has turned but you don't always get what you, you don't...oh stop it.

Going back to the market action, it was a wild ride as we expected yesterday and we didn't even know that the Fed was going to lower rates. The rate announcement came very early here in the US, well before the market opened.

The futures had been down about 3% going into that announcement but jumped to being up about 3% right after the news. Then before long, sellers appeared and sold off the futures so that by the time the market opened the prices were down about 2%. From there the Dow went on a quick 400 point rally within 30 minutes and then sold off over the next several hours to new lows on the day. From there the Dow rallied 400 points again and traded there for about an hour (up 200 or so on the day). In the last 40 minutes there was a furious selloff that dropped the Dow 400 points. That is a wild ride.

The wild ride had a positive effect on the volatility indexes. At mid-day the VXO hit another high for the move of around 72...72!!! This alone is enough to make you want to buy stocks so we did. We have been buying modest amounts over the past few days but today we stepped up our buying and probably did two to three days worth of purchases. We have learned our lesson that we need to keep some powder dry for even better we had today. Amazing.

We leave you this evening with the market on the edge of exploding to the upside. There may be another pullback after that rally but the question remains, will it take the market back down to these levels. Prices are great and we continue to buy.

GDX 31.26 (up 14% today)
BGEIX 15.13
HUI: 299.49 (up 18%)

FSI: 53.07 (a brand new annual low, barely)

New long ETF's, QLD is based on NASDAQ 100 and SSO based on SP500:
QLD: 35.57 -0.93
SSO: 34.54 -1.50

VXO: 68.23 (Sixth close over 50 and second close over 60)

Dow Industrials: 9,258.10 -189.01

Tuesday, October 07, 2008

Stocks on Sale

Top Line: The stock market continues lower which is giving us nice opportunities to pick up some good bargains. As usual, we were a little early taking our profits but now we are leisurely able to shop for bargains.

When it comes to shopping, most people like to look for bargains. Some won't pay full price for anything...anything except stocks. When it comes to stocks, people like to pay full price. Why is that???

When stocks were cruising higher a year ago, people were happily paying full price for any number of banks and other stocks. At the time the Dow was over 14K and there were no coupons for 25% off stocks. Buyers were not thinking there was any possibility of a decline in prices.

Today, the stock market in terms of the Dow has hit a five year low and people are running scared because the market is going to go to zero or something like that anyway. If this was a sale at Kohls or Sears, they would be rushing to buy, not so with stocks.

This afternoon, stocks tumbled 500 points and the VXO closed above 60. These are sweet numbers to bears but there is some evidence that the powerful selloff has lost some of its strength. Yesterday we mentioned that the number of new 52 week lows hit a huge high of 1973 but today that number was a more moderate, but still very high, 1232. Lower prices but not as much power in the move based on this one indicator.

The other item is the price of Treasury bonds. The long bonds fell today even with the stock market plummeting. Where is the flight to safety? Treasury bonds would be the natural place, and have been the natural place, for money that has exited the stock market. With them being down, there almost seems to be the notion that risk takers are moving out of those bonds and into the stock market.

Then there is the VXO which closed at a new high today. It did not break Monday's high even with a huge down move in prices.

So, what's going to happen? The world stock markets are sinking in concert and there is a point where that will stop...probably by Monday next week. [Erick, my 9000 is looking like a possibility after all.] We want to be fully into our purchases by then or least that's the way we see it tonight. We will update you further as the week progresses. In the mean time, we will continue to quietly buy.

The news is filled with central bankers trying to stem the tide of the credit contraction. The latest is the Fed alluding to a rate cut. We have been expecting one any day but for sure by the time of the next meeting, with a rate decision announcement on October 29th.

Then there is the business of the election in November which should be greeted with buying at least for a little while before and after. We consider this to be a high probability event in conjunction with the rate cut announcement. The market may not like the rate cut all that much but the money that the Fed is pumping into the system should provide some support for stocks pretty soon.

On a final note, the Asian markets are getting hard hit and that has spilled over to the US stock futures. We could be in for a wild ride on Wednesday. Opportunity knocks...

GDX 27.38 (continues to be a great buy)
BGEIX 13.28 (incredible buy)
HUI: 252.28

FSI: 53.29 (a brand new annual low)

New long ETF's, QLD is based on NASDAQ 100 and SSO based on SP500:
QLD: 36.50 -4.06
SSO: 36.04 -4.34

VXO: 63.06 (Fifth close over 50 and first close over 60)

Dow Industrials: 9,447.11 -508.39

Monday, October 06, 2008

Possible Intermediate Low Today at Dow 9525

Top Line: The way the US stock market traded today suggests that a solid intermediate low may have been established. We would normally expect a much stronger rebound out of the low but the 400+ point move in the last hour qualifies as a reversal.

Our primary guidepost for a low has been the VXO, the volatility index. We have mentioned 50 as sort of a first alert and we have now closed above 50 four times and today's high at 69.40 is an extreme that hasn't been reached for many years. In the aftermath of 9-11, the VXO didn't get over 60. We think the last time the VXO was over 60 was back in 1987.

At one point during the day, about an hour before the close, the Dow was down 800 points and then the turn came that gave us that 400 point up move. Sometimes the market creates a spike low like this and then, after a bounce, will create a lower price low. This new price low may show much less technical power and would then confirm that we are done going down.

Some technical indicators were extreme today. For example, the number of new 52 week lows on the NYSE reached 1973. There were 3300 stocks traded today and 1973 hit new 52 week lows. This is 60%.

For us, the biggest problem would be that the volume was not what we expected. Volume on the NYSE was less than 2 billion shares, about half of what we thought it should be for a solid low.

The main idea is that this trading day gave us enough evidence to suggest that a good low was seen today.

For those of you that we spoke with today, we were pretty direct with our instructions and we know that you may not appreciate our suggestions the way we give them. This market gives you very few chances like this. As an example, let's take a look at the GDX. Even with Gold up 33 on the day, the stock market was down so gold mining stocks were down. The GDX was down nearly 15% with about an hour to go. This Was an incredible bargain at that time. It traded down to 25.30 and closed at 27.90 after closing at 29.05 on Friday. This is just one example of the great bargains available today.

We closed out the rest of our shorts on Monday morning and spent the rest of the day trying to establish some of our long positions. We are a long ways from being done with our buying and are hoping to deploy much more of our funds over the next few days. The purchases we made today were such incredible bargains that we are going to be disappointed by the prices we'll have to pay. Like we have already said, there could be another drop which puts in a new price low that would give us another good opportunity so we will keep you apprised as best we can.

We are now going to bullish on stocks and will be buying pullbacks aggressively especially if the VXO goes back up into the 60's. We'll establish targets over the next few weeks but this is going to be multi-month advance. Do Not chase it but take advantage as you can.

After the market closed tonight, Bank of America announced poor earnings which dragged down the after hours market but since then, the market has righted itself.

You may get the feeling as we do that the powers that be are working overtime to make sure the market doesn't go down. As you have seen over the past month, these steps have mostly failed but the market may be ready to advance inspite of those failures. We do Not condone the actions that the government has undertaken because the free market should have taken care of the problem. In the end the market has taken care of some of the problem. Our point here is that the market may have now decided to stop going down regardless of what the government did or will do.

A note in history: We remember the day the Dow crossed over 10K the first time. That was March 29, 1999. That day was marked with marked with lots of enthusiasm and with hats that had Dow 10,000 on them. Today's cross of 10,000 on the Down side was not met with any celebration. We hate to ask the question about why long term investors would hold stocks for ten years with virtually no change. Oh, right, they got the dividends. Great.

GDX 27.90 (extreme low today at 25.30!!!
BGEIX 13.44 (incredible buy)
HUI: 252.46 (new 52 week low today at 234.35)

FSI: 57.71 (a brand new annual low)

VXO: 59.50 (Fourth close over 50 with a high today at 69.40!!!)

SDS: 84.34 +7.23 (high of 91.29 today)
QID: 68.87 +5.82 (high of 74.37, very near our 75 target)
[We are eliminating these two ETF's from our display as of today since we no longer own them.]

Dow Industrials: 9,955.50 -369.88 (first close under 10K since October 2004)

Sunday, October 05, 2008

Update Exits Shorts

Top Line: We have seen enough evidence to think a low in the market is fast approaching. While there could be some more downside, we would like to be concentrating on using these opportunities to position ourselves on the long side. The next two weeks will give us ample time to find some good bargains.

The main concern this evening is getting some homework time to find some bargains. We have already mentioned the GDX which gave us a good opportunity this past week. Now, we need to figure out what areas we want to be in for the next move, which should be up. Looking at our FSI components, AAPL has come down under a 100 for the first time since early in 2007. AAPL is now priced at half of its high and down from 170 in late August...

You probably can't believe that we exited our positions late on Friday, but we did. We want to make sure that we have our concentration on what to buy into the selling this week and possibly next. We should be close to a low point in terms of time and hopefully price as well.

We have been talking about the VXO as being our guidepost. We said we wanted to watch the VXO in case it jumped into the 50's and it has done so now on two separate days. This is consistent with our selling the short positions that we have been in, SDS and QID. We are not saying that stocks can't go lower because they probably will. This will be our opportunity to buy into some good prices.

More direction after we see how Monday's trading goes.

Our Position has changed (from October 1st):

Neutral on US stocks, Dow target of 9000 not reached and probably won't be reached
Not so Bearish on Gold, our target of $600 was a little aggressive and we'll update soon
Bullish on GDX, target 50 (or higher)
Bullish on BGEIX, target about 25
Still Bearish on US Residential Real Estate, no real target
Bullish on US Dollar, target 90 (back to rallying, now near 80 again)

Bearish on Oil, target of $100. (Target Acquired)
Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)
Bullish on Volatility, VXO to 50 (Target Acquired)

GDX 29.05
BGEIX 14.55
HUI: 269.08

FSI: 59.42 (Not a new annual low)

VXO: 51.76 (Third close over 50)

SDS: 77.11 +1.98
QID: 63.05 +2.46

Dow Industrials: 10,325.38 -157.47

More pics of Jackson are coming this week...but not tonight.

Thursday, October 02, 2008

Incredible Continuing Volatility

Top Line: Stocks got off to a bad start and then went into a slow grind lower the rest of the day. The market still doesn't know what to make of the "bailout" but our position continues to be that, no matter what they decide on the bailout, the market will resolve lower this month.

The selloff was accompanied by a gold and gold mining stock selloff. This selloff is the one we have been waiting for to take advantage of the upcoming mining stock rally. The GDX was down nearly 15% on Thursday which gave us a great opportunity. Today's low of around 28.50 is about a point higher than the low back on September 11th.

The Washington show is not settling anyone down. People are looking at their stock portfolios and have started to imagine that the buy and hold strategy might actually be the right thing for most people but not for them. This thinking process is going to compel many of them to make the decision to get out of their positions because stocks will never go up again. In fact, this would be just the wrong thing to do but we will be buying from them...ok, we're getting ahead of ourselves a little.

The market needs to continue its journey downward towards our target of 9000 or thereabouts and it needs to do it soon. With the next Fed rate cut on the horizon and the election coming up, there will be plenty to get the bulls excited...not to mention lower stock prices. We think that the Fed may have no choice but to lower rates, maybe in a "special" emergency between meeting cut but no later than the October meeting. The question now is what will it be, 25bps or 50.

When the election hits us, there will most likely a well established uptrend in place that most of the public will be selling because they have now been convinced that the market is going down. These are the very times that we want to be buying.

But, there is the business of switching over from short positions to long. We think there is about a 10-15% drop still coming but it could be more than that. In that time we need to understand that the exits will be crowded and trading will be near impossible. That's why we want to start getting our orders in early.

With everyone trying to exit their positions, we will be trying to enter them. Imagine a crowded theater and someone yells, "fire". There will be many trying to get out. We will be like firemen trying to get back into the theater--it will be tough.

The idea of switching is somewhat difficult unless you plan ahead for what you are going to do. That's one reason why we are glad to see the GDX down today so we could get some of our long positions done early. There still is the notion of trying to get out of our short positions, SDS and QID. We believe the lows being put in later this month will not hang around for long.

In that regard, we will be moving back into long positions in our 401(k)'s and our IRA's and our pre-tax dollars as we move out of our short positions. This can be tricky business at the lows. Rolling out near the highs is normally much easier because they aren't violent affairs. We expect a 4 billion share trading day with a major reversal during the day as we mentioned a few posts ago.

We want to remind all of you that this talk of a bailout is just talk and any implementation of it will take a long time. It's not like the Fed doing its normal lending facilities that can happen instantaneously or nearly so. This is a process that has a lot of red tape associated with it. No, we don't think the bailout can have any impact except in "hope". Right now that hope is being challenged on many fronts.

So, if the House approves of the Senate's bill, then all the politicians can go home to their constituents to get re-elected and try to explain to them why they had to go against their wishes. But, in the end, the politicians can pat themselves on the back for doing a good job when they have no idea what they were doing or why they were doing it. This goes for both outcomes, passage or rejection, it makes no difference.

Next week we will be getting very serious about what to do, specifically, when and how to unwind our short positions and to put on some longs. Do some thinking on your own and make some comments. We need help with this...these spike lows are infrequent and discussing how to get this done would be very helpful to all.

Oh yeah, there is that little pesky jobs' report to deal with on Friday morning, too. The market has been preparing for a bad number. We expect it to be worse but the counters do know how to massage the numbers so we'll have to wait for the number...futures are up a little in front of the number.

GDX 28.95 (this is our chance!!!)
BGEIX 14.34
HUI: 265.70

FSI: 60.20 (not quite a new annual low)

VXO: 54.16 (second close over 50, probably will go higher than the 55 set on Monday)

SDS: 75.13 +5.36
QID: 60.59 +5.18

Dow Industrials: 10,482.85 -348.22

Wednesday, October 01, 2008

Senate Passes Historic Legislation, Now House's Turn

Top Line: The stock market went back into wait and see mode as the Senate intimated that they would be sending a new bill back to the House for consideration. This bill passed the Senate without difficulty this evening even though the number went up to $850 billion. Whatever happens, including tonight's modest selloff in US stock futures, will lead to further downside over the next couple of weeks.

The stock market is being distracted from the economic realities with this "little" government intervention. As stock market participants do most of the time, they have all of the bad news in their vision but the magician is mesmerizing them with the big rescue. In the perfect scenario, the big rescue should, in their minds anyway, take care of all of the problems for everyone in the galaxy.

In any event, the news is twisted into being bullish. We can't imagine a bullish scenario for the economy when the administration is standing with their hand out in front of Congress begging for $850 billion. This is after the $160 billion rebate to the people and after the $300 billion Hope for Homeownership program that just started today. (Did you forget about this one?) Then there is the Fed's attempts to inject liquidity into the market place with all of their term lending facilities as well as facilitating the Bear Stearns bailout and the $85 billion to prop up AIG. That's the financial side of the world. Let's talk about the economic side of the world, the place where most of us live

Today's housing news took a turn for the worse. The Case-Shiller index told us that home prices dropped 16.3% in the last year. Oh yeah, housing has bottomed...right. Then the ISM Manufacturing index that we sometimes mention here dropped much more than expected. Plus, it was well below the magic 50 level, the level which is the line between expansion and contraction. For several months this index has been bouncing around 50 giving observers a little hope that things may bottom out. This index could easily have been held up over recent months by the rebate package, although we don't think the manufacturers adjusted their expectations due to a little $160 billion. Now that the money has been spent this index dropped.

There are so many expectations associated with the bill from the Senate especially in the stock market. Even though the money is not available right now and won't be for a little while anyway, the stock market is expecting it to solve the problem and is providing confidence to traders to be buying stocks. We are not sure that the passage of this bill is bullish at all. Most conventional wisdom suggests that the market will pop on the news. If you're a contrarian that begs for a little more perspective. We really don't care if the market pops, in fact we would like that because we could take advantage of it.

The problem tonight is that right after the Senate passed the bill, the futures dropped about a percent. No, that's not much but it is a drop, much different than most were expecting. Time will tell as the market opens on Thursday morning, but for now the market is not giving the bulls what they expected.

Whatever happens, we expect a 10% plus selloff between now and the end of the month.

Our Position (from 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)
Bullish on GDX, target 50
Bullish on BGEIX, target about 25
Still Bearish on US Residential Real Estate, no real target
Bullish on US Dollar, target 90 (back to rallying, now near 80 again)

Bearish on Oil, target of $100. (Target Acquired)
Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)
Bullish on Volatility, VXO to 50 (Target Acquired)

GDX 33.77 (may get another chance at this)
BGEIX 16.82
HUI: 316.60

FSI: 63.83 (a bounce from the annual low)

VXO: 45.27 (probably will go higher than the 55 set on Monday)

SDS: 69.77 -0.53
QID: 55.41 +0.69

Dow Industrials: 10,831.07 -19.59