Thursday, January 29, 2009

Market Scares Again

Top Line: So, the market confuses everyone on Thursday. This seems to be the pullback we were calling for yesterday. That means the market should be read to roll ahead very soon.

The Dow gave back everything from Wednesday's up move. These kinds of moves scare stock traders and cause them to sell. They will be looking at the large drop and thinking it's time to sell some more of my stock...Oh wait a minute, they are Out of stock to sell. So, they will be sitting there hoping the market goes down so they can get back in. Maybe hoping for a decline is a little strong, we should probably say they are out because they are afraid stocks are going down.

Yes, fear it is and it will keep people out of the market until they are convinced it's safe to get back in. When will that be? We predict that as the Dow approaches the 10K level, people will get more confidence...Guess what we will be thinking. Right, we will be getting nervous about staying in too long.

Today's decline didn't hurt our portfolio much. In fact with GDX up, our top holding by far, we had a positive day. After our missed trade on Monday morning, we are looking for an excuse to sell some of our over weighted position in GDX. The reason it's over weighted is because it has gone up while the other parts of our portfolio have not. They will move up in time.

Today was GDX's highest closing price since its low back in October. There are a few reasons why we should sell, not many are worthy except for the one that says we should hold some cash for opportunities and the one that says we are about to overstay our welcome. We should relax but it is bad not to have at least some cash around. Selling at a high relative price means we can be prepared to buy something else that presents itself.

Seriously, we do have other plays in the energy and other commodity sectors that look compelling but we are fairly pleased with what we have at the moment. The only thing is that we have let the GDX get to be too high a percentage of our portfolio. We consider this somewhat dangerous, even if we are confident in the direction it is traveling...yes, up.

The news from yesterday was that the House passed the so called "stimulus" package and is sending it over to the Senate for their approval. We think that the Senate doesn't like the bill and part of us thinks that the President doesn't fully like it either. Plus, there don't seem to be many people who think it is a stimulus package. We don't want to debate that.

What we do want to consider is how this package affects the stock market. For that, we go back and review the way the TARP funds were passed. The House voted it down and the people sold stocks the next day. Then the Senate took the bill and added some...extra spending...passed it and sent it back to the House. The stock market seemed to like it that the Senate passed it.

We think that we will see the same type of thing this time. The House passage was not given the best of receptions in the stock market with this drop of 225 points. But, we expect that the Senate will "fix" that problem and give the people more of what they think is worth buying stocks for. So, we expect a fresh start as the Senate starts explaining what they are going to do.

The bond market is beginning to understand that there is some debt coming to market. The US Treasury 5 year auction didn't go too well on Thursday with a higher rate than expected. The entire bond market dropped hard all afternoon. Since the first of the year, the long bonds as measured by the TLT have dropped from 123 to 104 or about 15%. We think there is a lot more to go. This drop in the Treasuries is a big hint that the stock market is about to jump.

If you need a further confirmation of the impending stock market rally, we suggest you take a look at the corporate bonds, investment grade that is. We finally found a way to keep track of them. There is an ETF that tracks them, LQD. Go to our link for bigcharts and look at the one year chart for the LQD. You will see that the index traded around 105 early last year and collapsed to 80 in the October 10th timeframe. From there we see it rally back to about 100 in the past month. This is part of our argument for the market's imminent rally.

Wednesday, January 28, 2009

A Nice 200 Point Rally

Top Line: We are still bullish but a pullback may be inevitable after several up days in a row. Any pullback would be a good buying opportunity.

The stock market followed through on late Tuesday's "bad bank" talk. On the back of that the banks led a 200 point rally. The non-news out of the Fed in the afternoon didn't slow the move down. The Fed did say they might be willing to buy long dated Treasury bonds...maybe that's the reason they fell out of bed right after that announcement.

The news of the economic stimulus package getting through the House provided some additional fuel to the stock rally. Tonight the House did pass the bill and will be sending it on to the Senate even without one Republican voting for much for bipartisanship. Again, we don't want to get into what happens, just how the market reacts or will react. We think the market likes the idea of this news, that being the anticipation of the final news and will sell the actual news.

This fits with what we have been thinking...that the market wants to jump over the next couple of weeks. As we said earlier, the market will have some pullbacks in the next few weeks which we think are buying opportunities.

The end of the month is upon us and the next ten days of trading should give us a pretty strong rally. Company earnings' reports are nearly done and this is time when stocks can be doing whatever they want because no earnings reports are coming out for three months.

The Treasury selloff today does create the possibility of a sharp drop of a couple of points on the TLT which may be the end of the first down move. What comes after that? Right, a corrective move back up part way. With that rally expected in the next few trading days, and with the volatility indexes matching their lows of a couple weeks ago, the possibility of a pull back in stocks is right in front of us. The nice rounded bottom of this last few weeks should give us a solid footing for a good rally but in order to scare some of these late bulls the market may have to take a quick dive in the pool to shake some of them off.

Tuesday, January 27, 2009

Strong Reaction to the Bad Bank Concept After Hours

Top Line: Yes, we are still bullish nearterm...

The stock market tried to go up on Tuesday and it did manage to squeak out a 50 point gain in the Dow. This is not the kind of rally we are looking for...

Tonight the futures are up on the back of a couple of news items. The first is some "bad" news from YHOO but the market decided it actually wanted to give their new CEO a chance to make a difference. The other is the progress being made on the stimulus package. Oh, well, the market finally thinks there will be a stimulus package.

The rally we expected near the inauguration is now going to kick into gear with the expectation of a grand stimulus package. Sure, the market may not jump on Wednesday but the delayed rally is coming. Looking at the areas of strength, we think those are energy related and we do like the GDX. Today, Peabody Energy (we like their symbol, BTU) announced earnings that were $1.10 versus the 74 cents expected. The coal industry was the best performing on Tuesday at over 8%. Peabody (BTU) was up 12% by itself.

Part of the stimulus package seems to be directed at the Bad Bank concept. The bad bank idea is gaining momentum and has been around for a while. It will probably be the latest effort to "get the lending going again'. The article discusses a couple of issues and we recommend a quick read to get the highlights of the situation...this includes nationalization and the Fed meeting going on right now.

The rally in the after hours has to be looking specifically at the stimulus package progress. Banks were acting pretty well in the afterhours but so were many other groups. Whether you agree with what the government is doing or not doesn't matter. What matters is what the market is thinking. We expect that the news could rally the market at least as far as the "buy the rumor and sell the news" saying goes.

Last week we recommended SSO saying it "is a good buy near 21 with a good upside potential". With the Dow dropping below 8000 last week, the SSO traded below 21 a couple of times and was a great buy there. We think it has good potential in this rally. The target is 30 plus in the next several weeks.

Late last year, we warned you that we would be trading more than we had over the past several years. We have liked the GDX and have recommended it on many occasions. Right now, if you are buying something, we would probably not recommend GDX because there are better deals out there. We said we were buying (and adding to our positions) energy names last few weeks and those included natural gas and coal.

The stock market is about to go on a good run and the economy seems to be going no where but down. It is important to fade the news on the economy and focus on the opportunities in the market.

Monday, January 26, 2009

GDX Discussion

Top Line: The news continues to be bad and the market just keeps on hanging on. We continue to expect a rally. Most of the earnings are behind us and we do have the end of the month just ahead.

This morning gold was up and so was the GDX. We saw the goal line to be near the 200 day SMA and put in an order to trim some of our position. We set our prices too high and failed to sell any of our position. We are running into the situation where the GDX has gone up while other assets have just held their own, making the GDX a giant portion of our portfolio. Plus, as we mentioned, we have no cash left to take advantage of any opportunities that come along.

We do not want to sell our GDX at any price just to satisfy our need for cash or to rebalance our portfolio. We want to sell GDX, or any position for that matter, when it makes sense to do so. This morning with the GDX pushing up against its 200 day SMA seemed like a good time to sell into strength. We do think that higher prices are coming but sometimes we like to play around and try to do things that make sense to us at the time. This morning's peak at 36 preceded a severe drop in the stock back down to 33.50. That's a big reversal.

We think that GDX is still headed higher but we have been in it so long that we remember that it is no longer a value play like it was back in October. That's when we were shouting that GDX was a buy. The rally ahead of us should take GDX up through its 200 day SMA and then it will drop back along with the market. The GDX may drop through its 200 day SMA but if it does it should not stay there very long. Yes, we are getting ahead of ourselves but we have been waiting for a rally for a couple of weeks now.

In the news, existing home sales were up nearly 9% in December as mortgage rates and home prices dropped allowing buyers to get in on the cheap. The other "surprise" news was the leading economic indicators (LEI) were up rather than the down forecasted. As we mentioned in our last post, if the market expects bad news, how can it be a surprise? That would be, if the news wasn't as bad as feared.

Sunday, January 25, 2009

End of the Month Rally Due

Top Line: The stock market struggled to go down on Friday and that alone could lead to a strong rally coming up in the next few days.

After a valiant attempt to go lower and the lastest Bad news, the market rallied out of the depths. We have been watching the market trying to get below 8000 for four straight days. Every time we get under 8000, buyers come in to hold that line. We don't think 8000 is a particularly important number but the market does seem to be holding the line here.

The market had tried to go below 8000 back in October and November of last year and it couldn't stay there at that time either. We think the sellers are about done for now at least. After a three week decline in prices, the bears are out of selling power. Check this article from CNN Money. The whole article is bearish even though every possible item is "expected" to be bad. If the market expects it to be bad, then it's already been priced in.

Let's go back to Friday's action which seemed pretty commodity friendly, particularly in the precious metal arena, where gold exploded for 40 bucks. GDX got chased up over 8% to the low 34 range after getting as high as 34.67 during the day. That is the highest the stock has been on this up move that started back in late October, under 16. Back in our January 14th post, we mentioned GDX being around 28...a good buy then. Now, it's up 20% from there.

The 200 day SMA (simple moving average) for GDX is sitting right above it around 36 and that should be some resistance for it; but, with the 50 day SMA moving up it's only a matter of time before the stock breaks through the 200 day SMA and starts to pull it up. Looking at the 50 day SMA is one of the clues that the drop down to 28 was a good buy. That was just above the 50 day line and the 50 day line was moving up.

We think the stock market has the power to jump 20% in a couple of weeks, too, just like the GDX. It's true that the 50 day SMA for the Dow is still moving down and the Dow is under it. There are so many other signs that the market is ready to go up now. We have mentioned them in several of last week's posts but we mention our favorites here again, the drop off in the Treasury bonds prices and the height of the volatility indexes.

Happy New Year to our Chinese friends.

Thursday, January 22, 2009

MSFT Spoils the AAPL Rally

Top Line: The market is being very volatile up one day and down the next. This is the way bottoms are formed. The next few days could be volatile leading to a sharp up move.

Today, MSFT (yes, Microsoft) delivered news that they would release up to 5000 employees. We were expecting an early morning rally after AAPL's news last night but MSFT squashed that thought. Maybe we shouldn't even mention that GOOG's earnings were pretty well received after the market closed. In fact, GOOG rallied on the news at first but couldn't hold it.

This setback gave us another opportunity to use up the last of our cash to buy some more stock...yes, in the commodity category again, energy complex this time. We do Not like to be without cash, though, because we have enjoyed having the flexibility to take advantage of whatever opportunity showed up. We thought that we would be shorting into the inauguration rally which Still hasn't showed up. With that rally we would have lightened up on our long positions and had some cash for further opportunities. Instead, we found some intriguing buying opportunities in this decline.

We've had about enough for one week. Next week is the end of the month which normally brings the bulls back to the party. For now, we'll just wait until next week. Still, if the market goes Down any more on Friday or early next week, these may be good opportunities to buy some more...well, not us due to no cash. We can't let this happen again.

Have a good weekend...

Wednesday, January 21, 2009

Will the Market Go Down This Year?

Top Line: The stock market is in the early stages of the rally we have been waiting for the last two weeks...yes, finally. We expect a rally that will come as quite a surprise to most analysts or, for that matter, amateur traders like us.

In the last couple of days we have heard some comments and questions from a few sources. We thought this would be a good time to answer these questions. We're trying to let the market tell us what to do and the questions are all about whether to trade your cash in for stocks or keep the stocks you have.

How low can the Dow drop this year? We don't really think there is much reason to talk about what may occur in December because that's not what anyone cares about. What we all care about is Now. Let's be clear, we are generally bullish for the next several months with a few scary drops during that period. But, just for argument, we will consider a short term drop for discussion.

Elliott wave theory may need to be employed at this stage. There is a minor chance that the current downturn is a wave five like we mentioned in yesterday's post. If this is true, we can sort of estimate an area where the "low" may occur.

[Tutorial: For Elliott wave, the first wave and the fifth wave can have a similar length. You may remember that the first wave, the third wave, and the fifth wave travel in the direction of the main trend while the two wave and the four wave are countertrend waves and move in the opposite direction of the main trend.]

So, how long Is wave one? Well, the high was back in October of 2007, and the first wave down was about 2500 points from 14K down to 11,500. This would imply that the fifth wave could be 2500 points also. Now, when did wave five start? That's a big question for the Elliott wave stance. Some may say that it has not started just yet but if it has, we could argue that the start of wave five was around 9500 or a little higher than that. That means that A target for the end of the fifth wave would be around 7000.

We could argue that the November low right around 7400 Could be the fifth wave low and we are now in the countertrend move to correct those five waves down from the 14K top. Here's where Elliott wave can help us again. Those five waves down we have been talking about are the essence of Wave One of the big down move that we expect to last for a long time. The important thing to know is that the countertrend usually has a minimum target of 38.2% and a maximum target of 61.8%. Those would be about 2500 and 4000 points off the low. Just an estimate as to targets for the Dow would be a range of about 10K to 11.5K based on these numbers. These are approximate numbers and just give us an idea where we could go. The one issue here is that a wave two is notorious in that it likes to go much further than 61.8%. This excess movement is driven by people who will think the worst is behind us and it's off to the races again.

Our position is that the market has seen the lows but there could be slightly lower 2009 lows. We don't think it's enough to stop you from buying. Over the past week, we have moved out of cash and into the market. We had sold some of our positions in late December to prepare to short into the strength we would have by the inauguration...well, no that didn't happen but with that cash we got a nice present from the stock market in the past few trading sessions when the Dow dropped below 8000. We bought a couple of stocks that are near their lows of the last couple of years. Plus, the leftover cash we had in our 401(k) was moved into the market on Tuesday. We have very little cash left, maybe about 3% of total assets. We are fully long and bullish in case you are wondering.

Today's market was just what the doctor ordered based on that VXO high we saw in Tuesday's trading, not to mention that drop below 8000 again. These prices are hard to ignore and represent good entry points for this Bear Market rally.

During the day, Jamie Dimon of JPMorgan decided his company was cheap enough and bought 500,000 shares, an $11 million purchase. This is a guy who is not going to get a bonus this year and he had to pull this out of his saving's account in order to buy these shares. Ok, maybe that's not what he did. Also, Ken Lewis over at Bank of America bought some stock. So, if you think the bank stocks are going to zero, Why are these guys buying their own stock? To us, this is the one thing that should make Everyone realize that the financials may have found a bottom...

The Treasury bonds spent the day dropping over 3%. When these T-bonds go down, we get more bullish on the stock market because a lot of this money being taken out of bonds will go into the stock market. Even the dollar reversed course on Wednesday.

Also, after the market closed, AAPL brought us a little bullish present just like IBM did on Tuesday evening. AAPL's earnings were better than expected giving the market another excuse to go up. This evening the US futures are up strongly with a nice pop scheduled for the opening bell. Asia is trading up about a percent. Since Europe was down on Tuesday, they have some catching up to do so there should be a "spin around the globe" least at the US, not the golf open, the Stock open.

Tuesday, January 20, 2009

Wall Street Drops Hard Even With Washington Events

Top Line: Stocks were on sale on Tuesday. Did you buy any? Tough to buy weakness.

Tuesday's trading included about a 20% drop in the banks, including our employer, ING. The top four volume leaders were Bank of America, Citigroup, Wells Fargo, and JP Morgan, all down 20% or more on the day. Their total volume exceeded 1.1 billion shares or about 65% of all volume on the NYSE.

The Dow dropped below 8000 once again on Tuesday so the reversal the other day from under 8000 was not the key reversal. But, here we are again. Is this a reason to sell??? What happened today that we think is important? Is the Dow under 8000 an important event today or not?

The selling was aggressive on Tuesday and the fear grew all day with the volatility indexes rising all day. In fact the VXO rose over 10 points to 56.25. A 300 point drop in the Dow was enough to push the VXO up over 20%. What else?

To us, the biggest sign is the GDX. GDX was the first to turn down which gave us a clue that the market would probably follow suit. Now, GDX looks to have put in a bottom last Thursday. That is a big hint/clue on what should happen to the rest of the market. GDX moved from its Thursday low of 27.15 to today's high at 32.51, nearly 20% in three trading sessions. This may be a little more than what the whole market may do but the direction should be correct.

The last few trading sessions, we have put our cash back into the market on the long side. Even though we suggested that the SSO may be attractive under 22 in our last post, we didn't buy it today. We decided to buy something else. We still think the SSO is a good buy near 21 with a good upside potential. We also moved the remaining cash in our 401(k) into the market.

So, after the close, IBM announced earnings that were surprisingly better than estimates. The market liked this news and pushed IBM up over 4%. This news persuaded the futures to pop a little and are still up right now as we write. The Asian markets are down some, likely in sympathy to the Dow's 300 point loss.

We don't want to waste any time on the banks this evening but you can go read about the nationalization of the banks starting with the RBS (Royal Bank of Scotland).

But, we do want to consider the possibility of a rally off these lows, maybe spurred by the IBM news this evening. When so many people just sell without much thinking, as happened today, the time to think about buying is at hand. Those people that just sell in panic or buy puts in panic or in speculation should not get rewarded for this activity after a 1000 point move down in the Dow. We say that the bears are so prevalent now that the market will have difficulty following through on the downside.

If you want to pay attention to Elliott wave, the market is trying to put in a fifth wave low of the first wave down someplace between here and zero; so, whenever the fifth wave low is in, that is a final move and suggests a strong wave 2 rally which would correct the down move from the 14k high to the 7500 low. Just a 50% correction would take the Dow back to 10,700 or so, with a normal retracement of 61.8% which would take us back to near 12K.

What we're trying to suggest is that a 300 point down day is a good buy especially considering the possibilities. Can the market go down another 1000 points or more? Of course, it can do whatever it wants to but we think a year long "bear" move deserves some recovery. When a lot of bearishness prevails seems to be a good time to think that will happen. With a VXO of 56, it's a really good time.

Monday, January 19, 2009

All Eyes on Washington...Bears on the Street

Top Line: The over night futures are weak this evening which may lead to a lower opening on Tuesday. The low prices are shaking many out of the market in order to prepare for a good rally.

Options expired on Friday with some minor drama. The Dow opened up about 100 points and then sold off about 200 points from there before rallying back those 200 points into the close. With a little selling just before the close, the Dow managed a 68 point gain for the day...but, that's all so "last week".

Tuesday marks the beginning of a new Presidency and should have been enough to rally the stock market over the early weeks of the new year. That has just not happened so will the next few weeks start that rally or not?

The US market was closed on Monday (which is why there was no post from the Update on Sunday evening...we only publish on the evening before trading days). The other global markets were mostly open and largely lower so the US is making up some ground to the downside this evening. We'll see how trading goes here on Tuesday.

The market seems to be making a run at lower prices but this should be a buying opportunity for those of you with some cash left. We have some left and will probably be looking seriously at purchasing more this week. We have been heavily leaning toward commodity type positions including commodity producers over the past several months. Our top holding is GDX which had a solid advance from Thursday's lows around 27.25 to Friday's close of near 31. Gold itself rallied 4% on Friday to encourage the GDX. We think we own enough of GDX, so we probably won't be purchasing anymore this week plus after a giant rally this is not a good time to buy it.

We have been thinking about getting back into the long index ETF's and they now may be getting cheap enough to consider again. However, the commodities look so cheap and seem to have a lot more upside to them so we would like to see a further drop in the stock indexes or we would buy more commodities that are cheaper.

Looking specifically at the SSO, it traded up to near 29 a couple of weeks ago and fell below 22 last Thursday. Friday it traded up near 24 and closed just above 23. We think the near term potential of this is about 34 so if we can buy it back down under 22 we may consider it. The QLD doesn't seem to have dropped quite as much over the past couple of weeks so doesn't look as attractive but we will keep an open mind about it in case it does give us another opportunity down around 24 or less.

Tuesday's trading will give us a good idea what will happen in the near term so we want to keep a close eye on trading. Given good opportunities we may take advantage of them.

We are doing more trading than we normally would but given the market's volatility, we think trading will need to be done more over the next few years. There may be long periods where trading is not needed but in the short run the market has given us plenty of trading type situations.

Right now we are getting close to a large rally and we don't want to miss it. Thursday's turn around may have given us a good indication for that rally but the market wants to hold that obvious until the last possible moment. That serves to confuse as many as possible.

We see the volatility indexes as far to high to consider selling our positions. The VXO should get into the 20's before we think about selling and it's still in the high 40's. The bears are out in full numbers according to these high levels so we think the market should rally strongly to shake out these bears.

Thursday, January 15, 2009

Important Reversal From Just Under Dow 8000

Top Line: The stock market staged a pretty good turn around during the day. After being down 200, a 300 point rally erupted over a two hour period before closing up just a bit. This could be the turn we have been looking for or it might just be that options expire tomorrow (Friday).

With all of the news from AAPL on Wednesday evening to Citi and Bank of America on Thursday. The entire market fell out of bed at the opening bell and couldn't mount a rally until midday when the 300 point rally came out of nowhere. If you would have purchased AAPL in the after-hours on Wednesday, you could have bought it for around 75 and on Thursday it traded up to 84. This is the emotional sell-off we mentioned in our last post.

The Update has been focusing most of its portfolio in commodities which have led the market down over the past couple of weeks. But, we had moved into some cash late last year so that we could have some more flexibility. We didn't think that we would be using it the way we have the last few days. We thought we'd be shorting into the rally by now but that has not happened.

That is what is nice about having some cash, you can take advantage of opportunities that avail themselves like we have seen over the past couple of days. We paid very nice prices for these stocks and should have good upside potential. Well, we think they're good prices. Only time will tell. We don't think we'll have too long to wait.

One of the problems with trying to predict the day to day market movements is that you can't always know exactly how the moves will develop. Based on Elliot wave, there are several possibilities at the moment but we were pretty confident that the market would go up before it went down. Now that it has moved down, first, we are more confident in the rally.

Our position is that the market will have a surprisingly strong rally this year. We still don't like the position the market is in but with the recent sell-off, we think the market will have strong rally going into the next few weeks. If the market bottomed today, with the Dow dropping briefly below 8000, then we could make it back to 10K by early February.

Why do we think the market may have bottomed today? The more oversold it gets the closer we are getting to a bottom and today's reversal seems important in that process. In our last post, we mentioned the volatility indexes. Tonight, we bring you a couple more. Even with the break of 8000 in the Dow, the number of new lows on the NYSE was 81. So, there are very few stocks leading this decline. In fact, many stocks we look at are no where near their October or November lows. Yes, you're right, we're really not all that close to the actual intraday lows of November 21st.

We have previously mentioned the Treasury bonds and tonight we want to bring in the high yield bonds as well. These bonds act very similar to stocks. By comparing these bonds to the movements to stocks, you may be able to learn something if they aren't moving now. The stock market has dropped over 10% in the last two weeks and the high yield bonds have hardly moved. So, what does that mean? Taken by itself, it probably wouldn't mean that much but taken with the other items, it gives us more ammunition to think the rally may be starting right now.

Wednesday, January 14, 2009

Steve Jobs Takes a Leave and Market Follows

Top Line: The stock market is getting closer to a low and tonight's Steve Jobs announcement encourages some emotional selling...a perfect recipe for going the other way.

No, that was Not an immediate rally. So, what now? The market is in the process of putting in a bottom and the headlines are scaring people again. Tonight's headline about Jobs took AAPL (Apple) down about 15% right after the news. Not only that, the futures dropped about a percent along with it.

We want to keep the focus in the right place. Our forecast has been that the market would rally into the inauguration which of course has not happened. Well, we still think the 10K Dow is coming pretty soon but will not quite make it by next Tuesday. When does the Dow bottom?

Today's market seemed extremely bearish and topped off with the Jobs' news after hours. The technicians want you to think the sellers were out in force and for one particular stock, C, they were. C sat at the top of the volume pack with over 500 million shares trading. That was more than a third of all shares traded on the NYSE. And, yes, C was down on the day, over 20%.

The technicians tell us that Wednesday was a 90% down day which means that down volume was more than 90% of the volume was on the downside. We like the idea that the huge down day gets us closer to a low. The biggest indicator is the fear factor which leads us back to the volatility index.

The VXO traded around 50 all day. We haven't talked about the VXO much lately so let's review. The VXO measures the premium in options and when people get scared they buy puts and will pay a huge premium for them. These levels have now pushed the VXO over 50 again. Normally, the VXO trades around 20 and Rarely trades up to 50. So, here we sit with the VXO at 50 and people wonder what to do...

So, with prices down again and the volatility numbers high, the time to buy is now. GDX is trading around 28 and there are many other cheap stocks out there. How are your favorite stocks trading? Are they urging you to sell? Please resist that urge. The first rally we get off these lows will be strong. We don't want to miss that.

Tuesday, January 13, 2009

Near Term Low At Hand?

Top Line: The market is now struggling to go down. The immediate result should be a rally.

This evening we must emphasize that the media can be persuasive in their incessant chatter about what the market is doing currently. The selloff in the last week has now overdone. We purchased some stock this morning because of compelling prices. We'll see how it works out because we think we will be selling most of our positions within a month.

Yes, we don't think the Dow can jump 2000 points in a's possible but the odds are against it seeing as how Monday is a stock market holiday. With the current selloff going into extra innings over the last few days, we have missed on the timing so what about our 10K price target?

As far as the price target, it does seem outlandish to think the Dow could make it to 10K or above. We don't really think the price matters, what matters is that we make sure that we do the right thing as prices go up...which is? Correct, Sell. We will be watching our positions very closely over the next two to three weeks to find a good exit point.

We are not feeling too well this evening so we are going to put the post and us to bed...more tomorrow.

Monday, January 12, 2009

Market Drop Scaring Investors

Top Line: Probably the most important items right now are the headlines pointing to how bad the earnings are going to be. Do you think the market really is thinking about the earnings that represent something that happened last quarter?

The stock market dropped again today putting our inauguration day call for a short term top in jeopardy. We are not backing down from the price level over 10K before we see another drop into March or April.

The "tells" include those news items we mentioned in the top line creating doom and gloom in the market. Stocks are cheap again so with some available cash we will be most likely be buying in preparation for the rally that has to be right around the corner. Yes, we have been pretty much ready for it by now but since prices are so low the cash should be put back to work. GDX, for example, dropped below 29 on Monday. That's down from over 34 just about a week ago.

If you did some homework this past weekend, you may be ready for something that won't happen for two weeks but you will be ready. The main issue is that you start looking for good exit points. We'll spend some time on reviewing homework the next week or so.

Remember that next Monday is a stock market holiday and Tuesday is the inauguration. Back tomorrow...

Sunday, January 11, 2009

Employment Report was Dismal

Top Line: The stock market may start out the week with some downside but we should get a powerful rally starting in the next couple of days.

Friday's employment report was dismal but that had been expected as we mentioned last week. The market's early response was to put on a brave face but by the time the market opened sellers had arrived. From there the market traded in a fairly narrow range but fell out of bed again near the end of the day. Apparently, no one wanted to hold their long positions over the weekend.

Nothing is for certain, but we still maintain that the best course of the stock market is up and up strong for the next week or two. We have options' expiration this Friday, a stock market holiday on Monday the 19th, the inauguaration on Tuesday the 20th, and then we get to view a bailout package from the new congress and the new administration. There is the matter of the earnings' reports due starting Monday which probably has been part of the market's reluctance to rally over the past few trading days. We'll see how that develops.

As we mentioned in the past few posts, we will be selling into any rally that occurs in the next couple of weeks. Without a rally now, we would need to revise our current strategy slightly. If that happens we can discuss it then. For now, we are busy trying to decide how to exit some of the positions we have.

One of the things we briefly mentioned last week was taxable accounts. Trading strategies in these accounts can be a little different depending on if you are close to getting long term capital gains treatment. For example, if you purchased something in a taxable account, you get favorable tax treatment, called long term capital gains, if you hold the security for over a year.

Let's say you bought GDX in your taxable account in the fourth quarter of 2008. If you want to hold out until this fall when you've held it for a year, you would get much better tax rates if you do that. We're pretty sure about this but it is possible that there may be a change in the tax law this year so that is something we need to keep an eye on.

There are a couple of things to consider if you want to hold until you have held GDX for over a year. We do expect a selloff in these shares in February and/or March. If you have the courage to hold through that drop, you might be able to make it a year. If you want to hedge that position during the drop, then you can purchase some protective puts or sell some covered calls. These strategies can be difficult to understand so we will try to explain them over the next couple of days and then probably again later in the year when GDX is peaking. If, at that time, we are close enough to getting long term capital gains, we may want to implement one of these strategies.

Another strategy would be to buy something that moves in the opposite direction of gold which could be Treasury bonds or the US dollar. We can discuss some of these strategies, which aren't nearly as optimal as covered calls or protective puts.

Thursday, January 08, 2009

How to Sell Your Positions

Top Line: Stock market is about ready for the rally we have been expecting in front of the Presidential inauguration.

The stock market tried to go down early on Thursday but couldn't stay down. It seems the huge job losses that are due to be reported on Friday morning didn't scare anyone off near the end of the day. The report Should generate some selling but it is released an hour before the opening a sudden drop could turn around before the opening bell. It's difficult to know.

What we Think is the time to sell will come up quickly in the next few weeks and we should be getting ready for those sales. As for us, we have several different accounts and several different holdings. How do we get out of all of these positions when we want to? We can't really wait until the point where we can sell them because we can't put all of the orders at the same time. Plus, we may be at work.

One of the things we have to decide is the price. How do we do this? The only thing that matters is the place we can sell. What we should Not consider is what we paid for it although that's a difficult thing to avoid. So, what do you own? About what price do you think you can get for it if the market moves up about 15% in the next ten days? Where is the stock/ETF in relation to its 200 day SMA (simple moving average).

Let's get specific and talk directly about GDX. Before we forget, let's talk about tax consequences. If you own GDX in an after tax account, you may want to do some things differently than we are going to explain tonight. Depending on when you bought a stock, you could hold it for the long term capital gains tax. But, that's for a different day. Back to the tax deferred sale.

We think that GDX can get to 37 in the next week or two. What should we do? Should we put in a good till canceled (GTC) order to sell all of it at 37? If you have 100 shares, that may be an ok thing to do but even at that level, 37 may not be the right price. The round 37 doesn't seem like the right number, we like to look just over that number, say 37.13 or 37.19.

But, maybe you have 1000 shares and what do you do then? Let's say you are willing to layer five or six trades into the stock runup. If you think the price should go to 37, then what you can do is put in a 100 share order in around 36.83 and then another 100 share order at 36.96 and then maybe a 200 share order at 37.13 and another one at 37.33 and another at 37.57 and then one more at 37.91. Or, if you think you may get higher prices, you could start with a 100 share order at 36.87 and then other orders, like five or six, up to 39.97.

We are now wondering when we should start putting these orders in. Could we do it tonight? Yes, we could but we don't like to put in orders that far in advance. We would wait until next week to see what GDX is doing. This can be a dangerous choice because it could pop up there and then come back down before we get our orders in so we will be putting orders in early next week.

You might be wondering how this works in real life. If you have 1000 shares you may want to just go ahead and put in orders for about 600 shares, a 100 at each level. We wouldn't use these prices but here we want to indicate how this works.

Let's say you put in 100 shares orders at 36.50, 37, 37.50, 38, 38.50, 39. Let's say one day GDX moves up to 37.75 and then falls back below 37 by the end of the day. That would mean that you sold 300 shares, 100 at 36.50, 100 at 37 and 100 at 37.50, and you would still have orders for 300 shares in place.

You remember that you have 400 shares with no orders. Maybe you would put in two more orders of 100 shares apiece back in the 37 and 37.50 levels leaving 200 shares without orders. So, if the next day GDX moves up to 38.25, then you will have sold another 300 shares, 100 at
37 and 37.50 and 38. Now we would have 200 shares with orders and 200 shares without; but, you have done a pretty good job of getting good prices. Maybe that 39 order is too high.

This system works pretty well and you can do your setups in the evening when the market is closed and you have no emotions involved. Plus, it's fun. Selling into strength is something that feels pretty good.

One nice thing about this is there will be funds to start going the other way. We'll talk about that next week as well.

Do your homework this weekend and find out what your exit points will be. Then next week we can get specific.

Wednesday, January 07, 2009

ADP and INTC Scare the Street

Top Line: The price drop we were expecting seems to have at least started. The prices of some of the commodity stocks, like GDX, have come into lows that start to look attractive...the problem will be that we can't hold them very long.

On Wednesday, the stock market got hit with two news items that put a little scare into the traders. ADP, the payroll company, said that job losses amounted to 693K in December, much worse than expected. This news comes a couple of days in front of the Real jobs' report out this Friday just before the market opens. Consensus for the Real jobs' report had been around 500K but this number started to get bigger right after the ADP report came out.

About the same time, INTC announced that they were not going to make their already lowered revenue estimates. The brand spanking new estimate is 23% below last year's number. This news hit INTC for about 6%.

There was another bomb that hit the street...Satyam Computer Services Ltd., a computer software services provider, said they had falsified earnings and assets. Satyam apparently means "truth" in Sanskrit. This brought memories of the Madoff scandal and sent shivers through the street.

Why do we bother telling you all this News? Well, other then the fact that the jobs' report was obviously coming on Friday, we didn't know about these other stories. Still, we had a notion that the market would come down. Now, the media has discovered the reason for it. Now that you know why the market went down, how do you use that information? Tough to do anything after the fact...

Ok, what do we do, Really? Since the gold miners were the first to indicate a possible break in the market, they may be the first to rally. The rest of the market could still be in a down mode until Friday morning when we get the real jobs' report. Do these new items surprise anyone? Would job losses of 500K or 1 million surprise you? No, the market Expects this news and will take it in stride. The fear this week may be the earnings reports beginning soon.

Whatever is causing the selling this week is giving us a buying opportunity but this is not a long term buying situation. The sell date for our long positions is coming up in the next couple of weeks so any buying we do will not be in our portfolio for long. We are expecting much higher prices in the next week or two. Pick a point to get in on your favorite stocks and then get ready to sell...we'll be looking for that point as early as next Friday, the 16th.

We like the commodities like gold and the miners. There are several others available. Oil took a 12% hit today after a big 40% run up over the past couple of weeks. This kind of move clears out some of the late arrivers. Now, it may be free to move back up again. There are several others. Speaking of late arrivers, that's what we would be if we are getting into GDX now here around 30. With GDX, we see the 200 day moving average is right around 37 and we see this stock getting very near that price in the next two weeks. We do Not guarantee anything. We will be Selling our GDX around those levels unless we get an even higher price. Enter at your own risk...this stock has doubled from its lows late last year.

On a final note, we received a very nice email from one of our readers. Thanks for the good word, DT. Your taking control of your savings and that is a great thing. We are pleased that you were able to take action. Buy low and Sell high. These rules are hard to follow but Very profitable. This game never ends so keep on playing even if things go the wrong way for a time. Just make sure you learn what you are doing right and wrong.

Tuesday, January 06, 2009

The Fed Targets Inflation

Top Line: The stock market still has the possibility of a drop in the next few days. Two spikes higher during the day took the Dow up to about the same level, just under 9090.

The stock market's decline that we envision, whether it happens or not, does not change our thinking on the rally over the next few weeks. When the decline is over, again, if it occurs, we should get a powerful rally for several days. The deeper the decline, the higher the market can go. Our current price target is above 10K in the Dow.

One of the items that took the market down in the afternoon was the Fed's news that it wanted to target inflation. The Fed wants to target a positive rate of inflation so that people are more inclined to "buy now" rather than wait for cheaper prices. But, the idea that they would actually write it down and tell the world that they will Force inflation to a higher level tells you just how scared they are or deflation.

For those of you who think that deflation is a current concern, you need look no further than deflation's enemy, the Fed. This revelation should also provide ample ammunition to buy gold or the mining stocks. Yes, we have been pushing these stocks for several months now and continue to think they will provide good returns this year. Now, we are probably going to be selling them in the next few weeks but we will be looking to buy them back in March or April.

More tomorrow...

Monday, January 05, 2009

Weak Start to the Week

Top Line: We are waiting for a high in the market later in the month or possibly into February.

The market pulled back a little on Monday, not exactly what the bulls expected. After last week's rally, they wanted more this week. That is still possible but we think the best run up will happen next week just prior to the inauguration. We'll see about that.

The big moves in the market today were in banks, T-bonds, gold and oil. The stock market's moves by itself were mostly unremarkable. That's one of the reasons we have been trying to pay attention to several markets...for opportunities. As for the drop in banks on Monday, we have no position on them but since they were down about 4% we thought we should mention them.

As for the other three, we would like to comment on them. As for T-bonds, we are extremely bearish on them and they have not disappointed the past few days. As measured by the TLT, since last Wednesday morning the price has dropped from 122 to 113, about 7.5%. We think there is much more down side to come.

Gold fell about $20 causing a corresponding drop in the gold mining stocks but we will view this as a buying opportunity, certainly if they dropped even more this week. Since the gold stocks have been the leaders in this rally phase, a decline in them would probably mean the broader market will fall. Meanwhile, the oil price has rallied pretty much steadily since Christmas Eve.

The main movers in this market have been the commodities and their shares. Yes, we watch the stock market indexes but the main event is the commodities. We'll keep an eye on them over the next few days to see if there may be an opportunity.

Otherwise, we are looking to be sellers in the next few weeks.

Sunday, January 04, 2009

Road Map for 2009 and Beyond

Top Line: The new year has begun and with it the market probably will continue in its volatile ways. We expect January to provide a wild ride of ups and downs that may continue into February.

The stock market has been rallying over the last few trading days setting us up for a possible drop in the coming week. This drop would be a good time to add to your long positions in almost any investment...except Treasury securities and the US dollar.

With the inauguration of the new President on tap for January 20th, about two weeks from now, the market should be headed up into that date. We will be looking to sell some of our long positions during that week. Last week, we sold some of our long positions and plan to add them back this week.

We have a generally bullish stance this year but the next couple months could present some problems with that theory. The near term volatility will cause people to continue to make mistakes in their portfolios. We'll get a little selling this week and people will want to sell and the following week we should get some buying and by the time people are convinced we are going up again and buy, they should be selling.

If you are not prepared to trade this market, you should take appropriate measures to get the most out of the year. We would recommend holding your long positions (including any new purchases you make if the market drops this week) until right around the inauguration. At that time, we would recommend you take at least some of your long positions off. Then, if we get a higher high in early February, you should sell the rest of your positions at that time.

Our position remains that the Dow should push above 10,000 sometime in January, around the inauguration or early in February. This should be marked with a significantly lower Treasury bond and a corresponding low volatility index, VXO. Speaking of VXO, it has come down quite a bit in the last few weeks as the market has calmed down a little.

Anyway, for most of you, the cash position should be a good one for a couple of months until we see a nice low forming sometime in the spring. At that time we will be screaming at you to buy again for a large move up that will take you into the highs of 2009. We would see the Dow back up to between 11,500 and 12,500 at this time, if not higher.

From there we would again recommend you get into cash and let the market continue its bearish ways, we are in a bear market after all.

That's what we recommend for most of you. For the rest of us, we are going to go into trading mode with about half our portfolio or more depending on the position of the market and whether you are trading in a tax deferred account or a taxable account.

Let's get a little more specific about the Dow in our forecast...this is a free blog so it's worth what you are paying for it...

We think the Dow wants to go up to 10,500 in the next month or so, with our best guess being sometime around the inauguration, possibly early February. From there, we see the Dow testing the November lows again. Yes, the Dow may want to go back down into the 7500 range which is exactly why we would be recommending exiting long positions into this January rally.

From whatever low is established in the spring, we would see the Dow rallying to 12,500 going into the fall. This will be a huge rally, possibly four or five thousand points depending on where it starts, that you will not want to miss. We will be looking at opportunities as the time comes closer.

From those highs, we will be looking for a devastating decline in the Dow that will last 18 months or more. This decline will take the Dow down well below the 7500 level for a 50% decline. We will want to be extremely careful during this period that we don't get too bullish, even though sharp rallies will occur. But this is going into 2010 and beyond so we can't see that far into the future.

For those of you who are Elliott wave followers, the top in the market back in October of 2007 was probably the beginning of a crushing wave C that will have five large waves to it. We are currently in the first large wave which is a down wave which should end in March or April as we test those November 2008 lows. From there, the second wave, which is a countertrend wave, will correct the entire decline from October 2007 to the spring lows. This is about 7000 points and a normal retracement would be about 60% (61.8% to be exact) or nearly 4200 points as we indicated above.

After that comes the third wave which is typically the strongest wave. This is the Papa bear and will be very destructive to values leading to great bargain prices for stocks. That's way too far for us to venture guessing where and when it will be ending but it will only lead to a fourth wave which will again be countertrend, followed by the fifth and final wave. There is a long ways to go in this bear market.

We're not sure how to manage this blog in times of extreme trading, which is why we outlined a less than crazy plan above, which you could consider crazy. What we are concerned about over the next several months is the ability to trade and let you know exactly what we are doing so we don't think we can. We will try to guide you through the maze and fog but we plan to be trading much more this year than we had to last year. You can choose the path we outlined above or follow our lead as we dare to tread on the moves that present themselves to us.

We trust you had a good couple of weeks while we were off.

One last thing: We have started our own little "hedge fund" that we will be reporting on as the year progresses. What that means is that we can invest in whatever we want, it won't be diversified, and we will use normal margin leverage at times as well as options strategies that we think are appropriate.

We decided to start it on the Close of trading on December 24th. It's a small fund and we are only doing it to provide some information on how we are trading this market. We will not share specifically what we are doing in that fund, just our results, it represents just a small portion of our funds and does not provide enough diversification for anyone but us. No, you can't participate but you can compete with us.

We call it the JGWS Fund...