Sunday, November 30, 2008

And December Starts

Top Line: The stock market continues to drift higher. There will be setbacks, mostly to confuse the participants, but we think the market is headed higher.

Not much has happened since we last wrote except for moderately higher prices. Stocks were up strongly on Monday and continued to push higher the rest of the week. As stocks were moving up, skepticism remained that prices could continue higher. This is exactly the result we are looking for.

The news seems to be bad based on the way the media reports it. Check out this article from CNN Money. The news is that Black Friday's sales were higher than last year but the subtitle and the first paragraph are still showing negative thinking.

What should you do? There are going to be sharp pullbacks in the market so if you're still sitting on cash these selloffs will be opportunities to put it to work for you. If you are in already, as we are, these selloffs could be sharp and scary, but they should be buying opportunities not a reason to sell.

What are we looking for? The news should be tainted to the negative side especially in the early going of this rally. The Dow should move to 10,500 at a minimum sometime in the next six to nine months. Gold should attempt to cross back above the $1000 level. These are our two guiding lights.

Since we think the Dow should rise at a minimum of 20%, there will be several stocks that will move up strongly. The Gold moving up above $1000 means that we think the mining stocks will get back to the highs of last summer. They are way oversold and should make a major comeback as gold slides over the $1000 level.

The week before Thanksgiving gave you a great opportunity to buy some of those heavily sold technology stocks if that's the sector you like. Our own FSI put in a new low at 40.46 on Thursday November 20th. That day AAPL closed at 80.49 and AMZN closed at 35.03, there lows for the year. GOOG put in a new closing low on Monday the 24th at 257.44. These prices are compared to the closing highs of 199.83 for AAPL, 100.82 for AMZN, and 741.79 for GOOG.

The week before Thanksgiving contained a blowoff move in the Treasury bonds which managed to hold up into last Friday. We see this as a "terminal" move for the Treasury securities. There has been a tremendous flight to safety, that being the Treasury securities. If you look at the short T-bills, you will see rates that hardly make any sense at all. The one month bill is sitting at 0.036% and the three month bill is even lower at 0.030%. This means that players are more interested in getting their money back than getting any interest on it.

To us, that means the end of the flight to safety should be here. What does that mean? That means the stock market has some room to move and corporate bonds will make a comeback. The bonds with the most room to move up are those that are called junk bonds since they follow, or maybe lead, the stock market.

The lows in place from the week before Thanksgiving should hold. From there we just have to wait for the market to tell us when it wants us to get out. We are going back to our tells that have been keeping us in good stead, those being the Treasuries and the volatility indexes. We've already discussed the Treasuries so let's talk about the VXO. We think that the VXO has a long ways to drop. Yes, it's come down from 100 to 60 but we're probably headed for 30 or lower.

If we hadn't have been through the past two months and we told you the VXO was at 6o, you would say that it was a major buying opportunity. Well, that's what it is...a major buying opportunity, late for most securities, but still good.

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