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.