Top Line: Will the stock market take a quick break from its torrid rally? Any breaks should be short lived and probably should be bought.
The Dow managed another up day on Friday, probably because it's so undervalued. We're not sure that we'd buy all of the stocks in the Dow but we do like the prospects from here. The market should find its way higher over the next several months and we will be patiently waiting Some More for a good exit point.
As you can tell, we here at the Update are traders at heart and waiting for rallies is just not our style. But, the stocks/funds we own have a good possibility to double from here or from recent prices. It didn't take SSO long to go up 25% from its low at 14.16 back on Friday afternoon of March 6th. That's a pretty good annual return for some and it happened in a week.
Last week we said the easiest thing to do now is to relax. Well, that may not be so easy to do. We have watched the market drop 30% in the very recent past and now we just saw a 10% up move in about a week. Volatility seems to be high and it is reflected in the volatility indexes. We normally follow the VXO which is settled in around 45 on Friday.
The VXO traded as high as 103 last October and more recently has traded in a 40 to 55 range. These numbers are abnormally high and indicate major stress on the traders. People are willing to pay up for put protection on their stocks. The VXO should be a good indicator for us as we decide when to stop "relaxing" and figure out what we should be doing with our portfolios. The main idea would be that we don't want to think about exiting long positions until the VXO gets at least under 40 and more likely under 20.
For the crazy traders, like we are, a drop below 40 may be an opportunity to take some profits but it really depends on whether you think you will get back in if prices drop and the VXO can climb above 40 again. We don't think this is a satisfying style so we will have to say relax until VXO gets at least into the 20's. Then we'll start thinking about what to do.
Right now, we just want to see small pullbacks and large advances. Since we're already into March, the Ides to be specific, the final run up in prices is getting closer. We have suffered through the past six months so now the corrective phase of the bear market should give us some stellar gains. Bear market rallies are normally intense and, since we've seen such a selloff, there will be an intense rally to work off the pessimism that the selloff created.