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.

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