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.

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