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...

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