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.

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