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


Anonymous said...

I have closed most of my positions in QID and SDS late today...Will now be looking for good entry points for longs--so, let me know some of your ideas...


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