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.

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