Top Line: After last Monday's 500 point jump, the Dow has managed to keep most of that gain even after last Friday's selloff. The Dow can now proceed higher if it wants to.
As we sit down to write this post, the world markets are pulling back a bit and the US futures are following suit. The news from the auto makers might be the problem, with the CEO of GM stepping down (Wagoner). The government isn't sure if they deserve more taxpayer funds. This could lead to a drop at Monday's opening.
We think that for the most part the world is pretty bearish generally, with the main thought being that rallies should be sold. About the most bullish being that the Dow may be able to get back to 10K but most reports argue for about a 10% continuation in the rally before we head down again.
Even after the stunning 20% rally in two weeks, the world is questioning the rally. We would say that's exactly what we want to hear. That tells us the public is uncertain about the direction of the market and they have been so badly burned that they probably were selling into the final lows and Never want to have anything to the stock market again. We think they will be changing their minds as soon as the Dow hits some of our targets for around September, just, we might add, as we are getting ready to sell.
Looking at the volatility indexes, particularly the VXO, we noticed that it dropped to a low near 40 on the 18th and during last Monday's 500 point advance only managed to drop back to about 42. These are the types of things that make us smile at the same time we are scratching our head. How can option premiums be staying so high when the market is climbing so fast. We don't ask questions and just feel confident that the market can still go up a long ways...at least as far as the volatility indexes are concerned, and they are pretty strong indicators.
The stock market is again looking to Friday's jobs' report with suspicion. So far the consensus is about the same as last month, around a 650K loss in payrolls. We don't think the market has to wait for the number but there could be a slight cloud over it until the report comes out. Last week's performance was particularly strong in light of the huge runup on Monday and a pretty strong selloff into Wednesday afternoon...which reversed itself into the close.
One of the areas we have been buying in the past several weeks is natural gas and late last week natural gas sold off to new lows for the move. Meanwhile, the natural gas produces did Not selloff to new lows. This combination should be bullish over the next few months for natural gas itself and the producers should continue ot outperform as well. We only mention this because there are so few places to get a truly good bargain anymore so here is one.
In the period just before the lows of the market in early March, we were saying that a low as coming and that you should take advantage of the low prices to buy some of your favorite stocks. Our guess is that you probably can't buy them nearly as cheaply as you could back then. Some of these stocks have jumped quite a bit and will not look back, meaning they will not give you another Good chance to buy them. We hope you bought them when the opportunity was available.
We're already getting excited about a selling opportunity. The market has been so gloomy for six months and is now finally coming out of that phase so we are looking at the next possible selling point. Yes, we are a little early in our thought process but we do want to be prepared. We think there will be an early opportunity to sell into some strength. From there we will have a pullback that will give us another opportunity to buy even though those prices will not be very cheap. Then we will get a really strong run into Labor Day. You remember our target of 1234 on 9-9-09 for the SP500.
We will be notified of the opportunity to sell by the volatility indexes and possibly some other indicators. If we decide to take some off the table for a pullback it will be because of some compelling evidence. We certainly don't want to miss the final runup of prices later in the summer. By selling, we run the risk of missing out on a good run. So, we will need very strong evidence to sell. Otherwise, we will just hold out until the highs of the year in late summer or early fall.