Tuesday, November 11, 2008

Patience is Required

Top Line: The stock market put on its unique version of scare the bulls. The global markets followed Monday's drop in the US market and the US continued the drop on Tuesday morning...well, it continued most of the day, actually. Is it going to be over soon?

Looking back over the past six weeks or so, the market has pretty much done one thing, be volatile. Tuesday was no exception with its over 300 point drop followed by a 300 point rally and then a 200 point drop. The volatility we have seen the past several weeks is enough to scare even the most steadfast bulls.

We have our eye on the way the market trades to see exactly what it wants to do. With these volatility figures (as measured by the VXO) are truly stunning given how complacent the players were about a year ago, even early this summer VXO was well under 20 versus over 60 these days.

Whatever the market does over the next few days or hours or weeks, when the VXO is over 60 after being well over 80 in October, it is Not time to sell, it's time to buy.

The main idea is that the market "feels" like it is always going down. The facts are still that the market bottomed back in October, mostly. There are still a few stocks making new lows in these down days but Most of them are done going down. We operate on the premise that the Dow bottomed for this move back on October 10th down around 7850 or so.

Back on election day the Dow closed over 9600, it's true, and it traded around 8600 today. That's a thousand points down from those highs. Yes, you could have taken profits on that day last week and now could be buying back in but that is simply too difficult to do unless you are willing to spend some time watching and trading.

Our position is that this is a trading market and will be a trading market for some time to come, but we have commited to the long side of the market. That means we would be buying on dips like this expecting an up move over the next several months.

This day was difficult for our portfolio due to our heavy allocation of commodities producers which fell hard today...but looking back to the lows of two weeks ago, we're much higher.

Take a look at Oil. Back on October 10th, oil traded down into the 77 range and today it traded down into the 58 range. Given this huge drop in the past month, what do you think happened to Exxon (XOM)? Right, it bottomed on October 10th down around 56 and a half. So, if you had the courage to Buy it then you would have made a great trade even if you sold it today at 72, something like 30%.

So, it "Feels" like it's bad but it really isn't. Yeah, we know, just a wait a few days...Please.

This brings us to the main point of this post...Fear and Greed. We have found over the years that people have the worst time selling at high prices. That's the greed factor at work. The other part of this theory is what we should call the "It'll come back" factor. We have been trained by the market over the past 25 years that the market always comes back.

Back in 1982, the Dow was in the 700's and last fall it was over 14K. It's easy to get the idea the market always comes back in that environment. Last time we looked, though, the Dow was under 9000. People are starting to get the idea that the market is Never coming back. That's exactly what we've been waiting for in order to be extremely bullish. This is the Fear factor at work.

Right now, the media is trying to convince you that the market is never coming back. Does that make you believe it or not? Last year, no one was inclined to sell because, "stocks are going to the moon" (thanks PH). There was no fear when the Dow was at 14K and no one was looking to sell. Now, with prices down 40% plus, everyone is interested in selling on Weakness. As prices drop, people want to sell. When stocks rally, people have a bit of a relief...

This prices are incredible and should be purchased on dips, Not sold.

Yes, we know why you come here...Jackson. So, here you go, finally another picture or two...
Who's the Goofball???
Or, is it a halloween Duck???

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