Wednesday, April 29, 2009

Treasury Bonds Are the News

Top Line: The stock market moved higher in line with our thoughts and should continue going higher.

[Editor's note: Reminder that there will be no post tomorrow. The next post will be on Sunday evening for your reading pleasure on Monday morning.]

After the last few days of the swine flu scare the market was tired of waiting to rally and it jumped out of the gates this morning. After moving up about 2%, the market tread water for a few hours waiting for the Fed's announcement. When that Non-Event occurred the market went up about another per cent but then spent the rest of the day going back down. The final tally put the Dow up about 2% with a little up tick right during the last few minutes. All in all a strong performance. The major indexes all moved to bullish new highs for the move.

Meanwhile, over in the Treasury bond market, the yield on the 30 year bond closed above 4%. That's the first time the long bond has been over 4% since last November. As we keep saying, the long bond traded down near 2.5% late in December so the big December bond rally has come and gone. There is most likely quite a long ways to go from here. We expect rates to move up quickly to 4.5% on the long bond and maybe get up to 6% later this year. We think the bond rally that started in the early 1980's ended at the end of December and rates are now in a secular uptrend that will eventually get them over 10%.

The news before the market opened included a sharply worse GDP result than was expected. The annualized rate was negative 6.1% on expectations of negative 4.7%. Tonight we need to spend a little time discussing the GDP and interest rates generally.

First, the GDP number sounds bad but it looks bad because of the price deflator which came in at a high 2.9%. So, the economy contracted And inflation was higher. This is not a good combination. Second, this inflation number has the potential to push up interest rates as we have been mentioning recently, such as we did back a couple of paragraphs.

Tuesday, April 28, 2009

Long Treasury Bond Nearly Back to 4%

Top Line: The stock market should be nearly ready for a strong run up.

[Editor's note: There will be no Thursday evening post this week. We will post on Wednesday evening but not again until Sunday evening.]

The media would have us believe that the swine flu and some bad news on the banks is the cause of the weak performance the last few days. We say, "What weak performance?" The Dow is down just about 60 points in the last two days and the news is being pumped up to fit a 600 point drop.

Consumer confidence jumped in April to 39.2 compared to a revised 26.9 last month. The expectation was for the number to rise to only 29.5. The world isn't sure what to make of some of the "positive" reports. We expect them and so does the market.

Normally, we are talking about the jobs' report since May 1st is Friday, but not this month. The jobs' report is coming out next week Friday, the 8th of May.

One subtle shift in the past few days is being almost totally ignored by the media and that is the break down in the Treasury bond market. Today the long bond nearly pushed above 4%. If you recall, that rate was about 2.5% at the end of December. The reason the media is ignoring it is because they don't understand or realize the significance of the news.

We have discussed the bubble in the bond market that occurred back in December. The consequences of a bubble are normally a severe correction or worse. With the Treasury bonds, we did see a large drop in prices during January but since then prices have stabilized until the past few days. This break seems to open the door for higher interest rates shortly.

As you know, we follow TLT, an ETF of long dated Treasury bonds. TLT has been bouncing off the 100 line since February but today it broke through it and closed below it. When it hit 100 this afternoon, there were several sell stops that must have been sitting there because it dropped from 100 to 99.5 in about ten minutes. TLT traded above 123 in late December. So, even the Treasury bonds are risky, you can lose 20% in about a quarter with more losses to come.

The significance of this event is that as money is coming out of "risk free" assets, it probably will be going into "risky-er" assets like stocks. At the very least, Treasury bonds are falling in value. There seems to be an enormous amount of cash on the sidelines with everyone selling in the past six months and now they are selling the Treasuries as well. That cash needs to find a better home than money market funds. Stocks would be the logical choice.

(What's a sell stop? If you buy a stock or other asset, you can ask your broker to sell it if the price drops to a certain level. This is known as a sell stop, because you are selling your position and stopping the losses. Sell stops come in two forms, market sell stops and limit sell stops. When your stock goes down to your pain point it will either trigger a market order or it will put a limit sell order out there. Sometimes a limit sell stop never actually gets you off the position because the selling is so harsh that it "blows by you" on its way to much lower levels. Either way, we think sell stops are a good way to lose money because you automatically sell for a loss on the way down. We like to sell into Strength not weakness.)

Monday, April 27, 2009

Down Monday But Not By Much

Top Line: Selling continues to be met with buying. The weekend news of swine flu and banks going under brought in some selling but the Dow is still above 8000.

The worst news over the weekend caused some minor selling in the market but in the end the Dow was only off about 50 points. The sellers are just not strong enough to take this market down...yes, for a short period of time they can but the new owners of stock are not weak hands. They bought stock for a good rally.

As we look at the last few weeks, the market has very much marked time. We have called the flat action a correction and we still think the possibility for a strong rally is high. The futures were down on Sunday evening and they are down again this evening as swine flu is giving traders a reason to be cautious.

What ever selloff occurs in the next few days, it will be another, in a long line of buying opportunities. The swine flu victims (stocks that have sold off due to the scare, that is) may be good buys, if you are looking to add to your stocks. We bought some more natural gas in the past few trading sessions as that commodity continues to put in new multi-year lows. This has been our worst performer since we started buying it back in January as we started buying just a bit early it seems.

Our advice at the moment is to relax. We have had an intense market over the past six months with all manner of selling going on. We were taking that opportunity to buy and this takes some time and effort. Now that we are fully invested or nearly so, the effort level has settled down and we are now getting our sights trained on the selling opportunity that is coming.

As we have mentioned on several occasions, we will know when the selling opportunity hits because we will start hearing the media talk about the new bull market or your neighbor is telling you what a great stock he bought last week or last month that you should consider buying.

Our other clue will be when the volatilitiy indexes settle down a lot from here. They remain stubbornly high so any market sentiment indicators that tell us that people are mostly bullish need to be measured against these indexes. Right now the VXO is still near 40 and relaxation is the order of the day.

Stocks go down and stocks go up. Right now they are trending up and will have bull scaring moments along the way. We are going to relax and pay strict attention to the items above. In that regard, we may be trimming back our posts to reflect the lower intensity of the market. We are doing some trading but we don't think it's appropriate to discuss those trades in this blog. We are only trading in our small trading account. The main portfolios have not been touched for months and we plan to keep it that way until such time as the market tells us to sell.

Sunday, April 26, 2009

Fed to Meet This Week

Top Line: The market direction is still up, in spite of a lot of efforts to hold it back.

The stock market continues to defy its critics. Every day the sellers come in and, it seems, that everyday the buyers come in behind them. Tonight's crisis du jour is the government proclaiming that there is at least one bank out there that "failed" the stress test. This news has brought some selling into the overnight markets. Is this really shocking news?

After last Friday's rally, the technicians are trying to figure out what happened. You see the market wasn't supposed to break above the highs of the week but it did. Hmm, what to do oh what to do?

As the market was getting ready to close on Friday, according to Fleck, the SP announced that there would about 14% in corporate defaults by 2010. That caused a very quick sell off in the final few moments of trading and now there is follow through on that "news". We put the "news" in quotes because this is the same organization that said that CDO's and CMO's of all kinds were rated AAA, including some subprime mortgage backed securities. So now, all of a sudden, they are certain that we will have huge default rates. It could happen but the market really doesn't care right now. It wants to go up.

You see, the market doesn't really think about today's news all that much. It is more concerned about the state of the world in six months or so. Yes, the market will "react" to news of the day but that is because there are those out there who really think that this stuff is not already known by the market. They read the headlines and think they are the only ones who know this information. Since the media is now reporting the news it must just be happening now so you can still make money off that news. It really can't be that easy and it isn't.

We'll see what happens this week. The quarterly earnings reports are still coming in and the Fed has a two day meeting this week. What do you suppose the Fed will say on Wednesday? The economy is slowing its descent and still needs monetary stimulus but soon it will be doing ok and we will need to pull some liquidity out of the market place to keep inflation at not a bad guess. They certainly won't be raising rates.

One item of interest from Friday's trading that we thought to be noteworthy was the trading in the TLT, an ETF that tracks the long end of the Treasury bond market. TLT made a new low for 2009; this, after the Fed is buying bonds like crazy. A bad breakdown of the TLT which would mean that the bonds themselves were breaking down would mean that there may be more money coming out of bonds and into the stock market. Just a thought. What do you think?

Thursday, April 23, 2009

Market Still Marking Time

Top Line: The stock market tried to come back Thursday and did manage to put in an up day. There is some weakness overnight (again?) which could spill over into Friday's trading.

The stock market has had some difficulty over the past few weeks and the main stated reason from the media is the "bank stress tests". Traders are worried that these tests may show that a bank or two might have some trouble. There's a shocker. We would say, it's a classic sell on the rumor and buy on the news but we'll wait for confirmation.

The headlines didn't read too well today with existing homes down 3%, Chrysler possibly headed into bankruptcy, the Fed's losses on its Bear Stearns adventure last year (Maiden Lane), all on top of the uncertainty surrounding the stress tests. After hours the news on earnings was from Microsoft (MSFT) and Amazon (AMZN). MSFT's results were down but about what was expected and the stock rose 3% in afterhours trading while AMZN managed to beat expectations and rallied, too.

Still, in overnight trading, the US futures are down even with MSFT and AMZN being up. The stress tests are getting a lot of attention this evening due to the headlines that say, "Bank Stress Tests Will Enter Critical Phase on Friday".

Meanwhile, gold decided to pick up its head today and get back over $900. That had some positive influence on GDX but it didn't hold up very well going into the close. This evening gold is up some more. The $900 level seems important to the gold market so we will watch to see if it falls below it again. It may not.

Wednesday, April 22, 2009

Top is a Long Ways Off

Top Line: The stock market dropped hard in the final hour of trading after a nice rally during the day. Short term the market seems to want to drop some more but the selling should be contained to a few percent or so. Again, surprises to the Up side.

The vertical descent in the final hour was sharp and took a lot of steam out of the earlier trading. We watched prices drop on many different stocks. As an example, GDX traded around 32.20 about a half hour before the close but closed at 31.60.

This steep drop may indicate there is something negative about to hit the market in the way of selling pressure. Then, after the market closed, Apple (AAPL) announce positive news on the sales (iPhones) and pushed up the after hours tech market. AAPL made a nice up move after that news hit, about 4 points.

As always, there are cross currents causing difficult visibility for stocks. To us, the important idea revolves around public sentiment in stocks. If we had some information about the way the public was trading we would know more about how we should trade so here's our thought...

The stock market has tried to convince investors that they should put there money elsewhere. Until we have some convincing signs that the public is back into the market, we plan to stick with our long positions. When ever the public is not concerned about another decline, which we think will happen during the summer, then we will be looking to sell our stocks. For clues on this, we offer the VXO and other volatility measures, but another useful tool is your neighbor telling you it's time to get back in the market because stocks are going up "again".

When we get to the top of this current rally, the only question on people's minds will be, "How much money can I make in the market, again?" People will have forgotten how bad this October thru April period has been. Sentiment is extremely negative in the short term and the long term. When the sentiment becomes positive again, we will be sellers. Since the sentiment (volatility) has not improved, we remain firmly bullish.

Tuesday, April 21, 2009

Geithner Spurs Bank Stock Rally

Top Line: The stock market staged an unexpected rally on Tuesday. Most thought the market was going to head back down to test the lows immediately. Whatever selloff occurs should not deter us from the greater goal of much higher prices later in the year.

Some news turned stocks around this morning. The Treasury Secretary said that most banks were well capitalized which spurred buying in banks and stocks in general. This talk is in the midst of the bank "stress tests" that have everyone worried that banks will get F's on the Test.

The media still thinks the story is the bearish one where stocks are on the verge of collapse. Our primary focus is to try to get an idea when the public is getting back into the market. The bear market caused a lot of emotional selling because people thought prices would go to zero. There was much bad news associated with the timing of the market drop which gave people added incentive to "trust" their emotions and sell.

We think the public's fear is measured in the volatility indexes. VXO stands near 40 and will surely drop substantially as the market advances. What we are looking for is public conviction that the market is going up once more. The mood was decidedly negative over the past six months or so which drove the public to sell. We think that mood will go 180 degrees in the other direction.

This first snap back rally after the long bear market drop from October 2007 to March 2009 should provide enough euphoria for us contrarians to feel confident selling our positions and start to think about going short again. From where we sit, it looks as though people think there is too much risk in the stock market. That doesn't fit with our sell point so we will not sell (except for some fun trading).

Monday, April 20, 2009

Big Down Monday

Top Line: A down day provides a scare to the new bulls out there and gives us another chance to buy. If we get more downside in the coming few days, we may do some more buying.

On Monday, the market decided it was time to go down. We do Not believe any news item drove this behavior in spite of the headlines which indicated that the world was worried about the banks. It's true that the banks sold off strongly but other stocks were down as well. We think the bullish trade was a little crowded so the market went down.

How long will this last? Our opinion is that it won't last very long at all. The selling was pretty strong today and we don't need too many days like this to get prices to attractive levels. Several of the stocks we follow seem to be at buying opportunities now...not as attractive as they were over the past several months but good enough.

As we mentioned, we purchased GDX on Friday which turned out to be a good move at least for today as it was one of the only ports in the storm in the stock market. Gold and silver were up today on what the media called flight to safety. Platinum and palladium were down hard though so we're not sure what the real story is. The dollar was strong today which should have hurt all of the precious metals.

The biggest mover seemed to be oil, down almost 10%. The volatility in oil has given many opportunities to fail or to make a lot of money. Trading has been the only thing to do in that market with violent swings. Still, the lows down in the mid-30's still seem to be solid.

The volatility indexes were up strongly today just as we expected with the market down sharply. The fear picked up today as the sellers dumped stocks or bought puts to protect their positions. The VXO jumped but failed to stay over 40. Our confidence level in the rally gets a boost as these volatility indexes move higher. Eventually they will come back down and this will be caused by a rising stock market, therefore confidence will replace fear. Or maybe the fear will change to fear of missing the rally.

Sunday, April 19, 2009

Can the Market Hold Its Gains?

Top Line: Possible interpretations of the market in the short term are conflicting but we see a strong market through much of the summer. There will be pullbacks but by the end of summer the market will have surprised to the upside.

This evening the US futures are down but we have seen this before. The market does Feel like it is resting, not preparing to drop. From our perspective, the market is correcting the huge advance from the lows of March 6th. That correction is playing out in the form of no advance.

There are other interpretations, of course. With GDX dropping about 20% over the past few weeks, the possibility exists that the broader market could experience a strong drop as well. We're not convinced but will keep our attention focused on these possibilities.

Friday had a positive bias to it as April options expired. Some of our stocks were up fairly strong while others didn't move too much. GDX was the strongest downside performer so we decided to buy just a little more. We had sold a piece of it back in February and now we replaced that part we sold so we're back to the level we want to be for the summer. We might trade it again a couple of times but only a small portion of it. We had sold about 15% of our position in February.

We read many stock market related items and are having trouble figuring out what the public sentiment really is. We see so many conflicting reports but still think that the main notion for the public is that they are sellers into the strength. What seems reasonable is that people are still shell shocked by the huge drop and they don't even want to know what has happened in their accounts.

That brings us to the volatility indexes. The one we follow in the blog is the VXO which, in April, has dropped from about 46 to about 35, the lowest level since September. This drop has come from a little fear flowing out of the market and maybe people have become a little complacent, relatively speaking, over the past few weeks. We think this indicator is one of the most important we can be watching, especially if the market does decide to go down. If so, the behavior of the volatility indexes could give us good clues as to the public's sentiment toward stocks.

Thursday, April 16, 2009

Market Keeps Going Up

Top Line: The stock market continues to defy gravity with the Dow up another 100 points on Thursday.

Jamie Dimon of JP Morgan had a good time announcing earnings this morning. The market still had a little trouble in the early going but from the morning lows there was mostly upside. Early selling and late buying means the uptrend is continuing.

The problem today for us was that gold was down and GDX was down as well. We were considering making some moves to buy some more GDX today but we didn't. If you are looking for something to buy, GDX looks like a good one here in the low 30's. These gold mining stocks are so under priced relative to the price of gold and will have a spring loaded effect once gold gets back over the thousand dollar mark.

The Treasury bonds were somewhat weak today but they have been coasting in a fairly narrow range for nearly three months. The little spike they had on the Fed's announcement that they would buy long dated Treasuries quickly retreated. We don't think these bonds can continue in this narrow pattern for much longer and we think they will break to the downside (price...yields will go up) soon. This break should allow stocks to move up accordingly.

We wanted to mention something we have been watching for the last few days. We like the NASDAQ 100 (NDX, if you want to look at it with as an index. NDX is the basis for QQQQ...but we digress. The NDX closed at 1352 today and we are watching the election day high that it reached on November 4th which was 1378. The NDX is 2% away from that important high. Other indexes have more to go but once we do get over that November high, there should be a further strong move. We'll keep this simmering.

We have been watching the volatility indexes which have been coming down the last few days. We're not sure if that has anything to do with the options' expiration tomorrow, but the drop means some of the fear is coming out of the market. There is a long ways to go to get to our exit point but as these indexes come down, the possibility remains that there will be stock market pullbacks to push them back up again.

Wednesday, April 15, 2009

Tax Day is Here

Top Line: The stock market did open lower on Wednesday and then rallied, especially the last hour, with the Dow starting out down about 60 and finishing up about 110. Was it a good buying opportunity or not? It sure didn't feel like it.

Our position about the market advance from last month has been that the market will not let most investors back in without paying higher prices. Even this corrective phase we've been in has been mostly sideways with little downside. That could change but for now, the market still reserves the right to go straight up from here.

All of this talk about whether the Economy is out of the woods or not has very little to do with the stock market. In fact the stock market should be giving us clues as to what the economy is going to be doing several months from now, not the other way around. So, you can listen to Roubini or any other economic bears but remember they are not talking about the stock market. They are gloom and doom about the economy.

All of this negative talk allows the stock market to continue to press higher. As long as skepticism is ruling the media, we will continue to hold our long positions. We are finally starting to see the volatility indexes drop into the 30's but these levels are still very high and need to come down quite a bit before we start thinking of selling.

Wednesday was mostly a dull day with the exception of the final hour in which the Dow gained about 120 points. To us, that's not too convincing although the Dow did retake the 8K level.

The financial markets are all struggling with the "turn". Treasury bonds are holding up ok for now but we think that won't be the case very long in spite of the Fed's purchases of Treasury securities. The Fed doesn't think it's a problem to print money and buy Treasury securities because inflation is not a threat. Today's CPI number mostly confirmed that in their minds. To us, the days of low inflation are quickly turning into inflationary pressure which should be very good for gold and the miners. So far, though, gold has fallen through the $900 level and is having trouble with it. We will keep our eyes open for developments.

Tuesday, April 14, 2009

Did You Get Your Taxes Done???

Top Line: The stock market dropped on Tuesday as the Dow fell through the 8K mark once again. With INTC's (Intel) reaction to their earning's news after the close, Wednesday morning could be a bit of a challenge.

The market seemed to be thinking about the Goldman Sachs stock offering which dropped that stock about 10% today. There was the news that retail sales fell in March after some gains in the prior two months. The market is being very cautious about rallying. Once the market goes up another couple 1000 points no one will be cautious.

Last Tuesday, we thought the market was in a short downtrend that we said might end on Wednesday, April 15th down around 7400. Well, the market has had some backing and filling but today was only able to get down to the 7920 level. We don't think the market will actually drop into the 7400 level anymore but Wednesday could give us a nice trading low. We'll see.

After the market dropped on the GS/retail sales news today, INTC announced their earnings which beat expectations both in earnings and in revenues, as well as margins. That news did not inspire the market and INTC fell about 5% after the announcement. So, it looks like Tuesday was the financial stocks turn to go down and Wednesday could be the tech's chance to go down.

We need to remind you, in case you were wondering, we think this would be a buying opportunity.

Monday, April 13, 2009

Goldman Sachs Sends Mixed Message

Top Line: Earnings are on the minds of investors for several weeks. There may be some surprises but, all in all, the market should focus on the good reports. If we get a good pullback, we would recommend buying, as we have done for several months.

After the bell, Goldman Sachs announced a $1.8 billion profit. GS (we like their symbol) has also announced a $5 billion stock offering to raise funds to pay off the TARP money. Tonight's earnings were initially bought but ultimately succumbed to the weight of the stock offering. We should point out that the price increase during the trading day was 5.82 while the selloff amounted to only 1.94 so it was a positive day for GS.

The news before the bell was that the government wants GM (as they say Government Motors) to file for bankruptcy protection. That seemed to be the reason the market opened down hard this morning but over the course of the day the market mostly rallied. Still, the Dow managed to hold onto the 8K level. Why do you think that is?

Most of the opinions out there seem to think that the market is now overbought and should be sold. The most bullish opinions have the market correcting the huge gains we have seen over the past several weeks. We have said it would be appropriate for the market Not to let people back in with a selloff. We know a selloff can occur at any time but we would say that it is a buying opportunity and it will be bought.

We direct your attention to our favorite tells. The first one is the VXO, which traded back above 40 today. After a 25% rally, the VXO is stubbornly near 40, we think this is bullish.

Second, as bearish as the world has been in the past six months, there will be a bounce that clears that thinking process out. By the time this rally is over, we should have market sentiment that is wildly bullish. Do you really think that the bearishness can be eliminated by a one month move that took the Dow up 25% but represents only 1600 points out of the 7500 or so that we dropped.

Third, the money keeps on coming and where will it go? Right, it will go straight into the market. There is so much fear out there that cash is now definitely King. We heard about this Bloomberg article describing the cash levels: "Investors had a record 45 percent of assets in cash, including money-market investments, and a record-low equity allocation of 41 percent in March, according to the survey data. Historical averages are 25 percent and 60 percent, respectively." You can see a graphical version on the GRAPH tab on that website. People have their money in money market funds earning, what, less than one percent just because they fear the market??? As soon as the market shows them that it's going up "for Real", they will want to own stocks again and this 45% figure will drop as money goes back into the stock market.

As we write, the US futures are down a little which could indicate another down opening on Tuesday. With prices where they are, will the broader market sell off enough to encourage more buyers to come in? We still think there is some buying pressure under the market with "Surprises to the Upside" always possible.

Sunday, April 12, 2009

Option Expiration Week Starts

Top Line: Dow closed above 8K again on the back of the Wells Fargo earnings forecast. These bursts of power are suspect because of their current news basis. However, if a pullback occurs, this would be another buying opportunity.

The Thursday morning news from Wells Fargo created a buying frenzy on Wall Street and not just in the banking industry. Many sectors benefited from the news. As we have said, when we are in a bullish pattern, surprises are to the upside. That's what we had on Thursday, a surprise to the upside.

The market is trying to decide what to do and when that happens there generally are a few back and forth moves to establish who is in charge, the bulls or the bears. We also though that the deep slump in prices would be followed by a sharp rally catching many off guard and not allowing many to buy.

This 1600 point move in the Dow creates a lot of skeptics. There are those that think the market has gone way to far and now must test the recent lows. There are a few who say that the strong move we've seen may have a little further to go but it's on it's last legs. We know that there will be several opportunities for these folks to be "right" over the next few months but in about six months the move will be much more than people currently think.

As soon as the market gets to the fall highs, then everyone will be saying they predicted it and that it now has a Lot more to go on the upside. When everyone believes it, then we will be ready to sell to them.

As we look forward to the week, we notice that the week contains an option expiration. The April options normally don't have a large influence on stocks but that may not be the case this month. We will keep you posted as the week progresses.

Wednesday, April 08, 2009

Long Easter Weekend Coming Up

Top Line: The market Seems to be in a down move right now but the holiday and the bullish position in the pattern is holding it up. We'll see if our target of next Wednesday being the low really happens. Surprises, at this time, are definitely to the upside.

This is a brief post to let you know that with the market being closed for Good Friday, our next post will be Sunday evening.

Today's rally seems to be based somewhat on the Micron news. Micron said they would be raising capital and that they had funding for it. Ok, Micron isn't known for their stable income statement so the mere fact that they are able to raise funding in this environment may be a good sign that risk taking is alive and well.

We still think the market wants to go down a little but the next move up may be pulling it up already. In any event, the market is getting ready for a big up move. We think that the Dow will jump about 2000 points in the next month or so.

We wish you a blessed Easter.

Tuesday, April 07, 2009

Patience Grasshopper

Top Line: A new down phase has hit the market but it should not last more than a week or more than 400 points.

Tuesday's action was not what we were hoping for but it isn't the worst news either. It is a nice test for the new bulls. Do they have what it takes to hold onto their stocks?

After the market makes a strong move in any direction, we should always expect a correction. Strong moves are normally pretty straightforward in their path. Corrections don't have the nice pattern to them and this latest pattern has turned into something stronger than we expected.

We thought the market wouldn't let anyone into the market, that it would make them pay higher prices. What we found out is that there is a lot of fear out there still and a selloff at this point allows more selling from those that now feel like they've had a good run and it's time to get out.

This downtrend has the ability to go down another 300-400 Dow points. That should scare a lot of bulls right there. So, let's review our situation. The Dow put in a low at 6470 and then rallied strongly to the March 26th high near 8000. Let's call that 1500 points. From there we are having a correction that will likely take us back down to the 7400 level in the next few days, let's say next week Wednesday (we pick that day because of options' expiration that week on the 17th). The move out of that low should be a very strong one and lift us to the 10K mark in several weeks.

Anyway, 7400ish in the Dow will feel like a very big selloff indeed which it's supposed to feel that way. We can't say for sure that 7400 will happen but after today's drop, it is a likely outcome. In the scheme of things, though, the low formed will be a solid low and be followed by an explosive rally. It will make the rally from the 6470 low look weak.

The reason is that this selloff will convince most that the rally is over for sure and that new lows will be forthcoming. When the market turns around, there will be a collective head scratch and then they will all change their minds and buy. This buying will persist for a couple of weeks and the Dow should run into some "round number" resistance at 10K and then fall back for a few weeks or trade in a range for that time. We expect a drop from the 10K level to about 8500 before we get the final push which should correspond to the first run which will have gone from 6470 to 10K or about 3500 points. That would take the Dow up to the 12K level which is how we arrive at this number.

When we get to the Labor Day period of time and if stocks have gone up as much as we think, there will be no more worries about buying stocks. All systems will be go and the green light to buy will be blazing. Memories of last fall will have vanished mysteriously and the New prosperity will be predicted. That will be the time for us to vanish--well, maybe just sell our stocks.

Monday, April 06, 2009

We Were Hoping Michigan State Would Win, Big Ten

Top Line: The market sold off in early trading on Monday but then rallied the rest of the day. This action is what we like to see...except for GDX which seems to keep going down every day. It will come back soon and zoom higher in a few months.

Monday didn't offer us much in the way of new information but it did look like we were going to have a crushing down day. It ended stronger than most thought it would. We are still looking for a very strong rally in the not too distant future with the Dow jumping to near 10K. This rally will be accompanied by a chorus of naysayers who will tell you every step of the way that the market is overbought and should be sold.

As we mentioned in our last post, we are keeping our eyes on the volatility indexes and they should provide valuable clues as to when these naysayers will finally be correct. In the meantime, the VXO is still over 40 today.

We thought we should mention GDX due to its percipitace fall in the last few trading sessions. We were strongly recommending buying GDX last month when it fell below 30 and now it is getting close to that mark again. Certainly, if you have some funds available, GDX is starting to look very attractive again. Always remember that mining stocks, which GDX is a fund of mining stocks, are extremely volatile.

If you don't think you can handle that volatility, you may want to try something else, like maybe skydiving or base jumping. When dealing with some of these sector stocks/funds, they do tend to be volatile but that gives us the best upside potential, too. But, you need to be able to withstand the likes of GDX when it drops from 38 to 33 in a couple of trading days. Fortunately, our entry price is quite a bit less than that so it doesn't feel too bad.

We are so bullish on GDX that these buying opportunities seem unfair because people shouldn't be allowed to get in at such low prices. We worked hard to get it down in the teens last fall. They aren't going to be able to get those prices again for a very long time. We remind you that you should never chase these stocks or any others for that matter.

We watched Michigan State lose to UNC and the Twins lose their home opener to the Seattle Mariners. It wasn't our night, but we did watch it at Home.

Sunday, April 05, 2009

This One's For You, DT

Top Line: The Dow managed to push ahead on Friday to above that 8K mark. With so many analysts making statements that the market can't go much higher and the volatility indexes holding pretty steady in the face of this powerful rally, we must conclude there is quite a bit of rally to go.

DT, this post's for you. Thank you for your comment last week. This evening we would like to explore your thought process on the market and see if we can provide a different look at the market like we try to do in every post. Before we do, we wanted to say that we appreciate your kind words and hope that you will continue your diligence in your investing...and we really enjoy being grandparents.

In that regard, we thought we would add a recent picture of Jackson...walking, not in Memphis, but in our house. Jackson came to visit Grampa and Gramma on Friday evening for a few hours and we took a picture (or maybe two) of him walking...

And, one of him playing...
Did you make it down here? Good, we'll get into our Sunday evening post...

This Game, as you say, is a dangerous one, especially in a bear market. The thing about secular (long term) bear markets is they give us great opportunities to make good percentage gains. Granted, a bear market is not for the buy and hold investor but the opportunities are there if you are willing to look for them.

Last summer, DT said she was worried that she was losing money and didn't want to lose any more. That is the first step in taking control of your retirement funds. Don't let the market run you over. She could feel the fear and wanted to do something about it. She acted before the market collapsed and preserved a lot of her assets.

We are in a bear market and prices generally go down in bear markets, dotted with significant up moves, of course. Once you are willing to make some trades on your own, you realize that this is not so bad...but you do have to watch what's going on.

If you don't like watching what's going on, then you maybe should get out for a few years until we've hit bottom and then you can ride the new, and mostly boring, bull market that should start about ten years from now. Then you can go back to your "normal" buy and hold strategy, with periodic sharp pullbacks...

Of course, there is a problem with that, too. We are trying to retire in the next ten years. How do we retire without building some wealth in order to do that?

Let's get back to the real subject, fear. The wonderful media is continuing to provide plenty of opportunity for us to fear another plunge into the financial abyss. Why should we listen to them? After all, weren't they telling us a year ago that oil was going to $200 a barrel and gas to $10 a gallon? Now, they're experts on the stock market.

The main place to get your fear measured is in the volatility indexes. We like the VXO, but there are others you can watch, too, the VIX and the VXN. All of them are elevated but what does that mean? When the stock market goes down, the media says there's a lot of "volatility" in the market. When it goes up, they say we are in a positive trend or a bull market. To us, volatility means up and down but that doesn't really matter.

The volatility indexes measure the premium that is built into the puts. When people are afraid that their stocks are going down, they want to protect the downside and they will do it by buying puts. If their stocks go down, their newly acquired puts will go up and offset the losses in their stocks. This can be done at any time and is done all the time; but, when people get scared, more and more people take this approach and it drives put prices up causing some premium to be built into them...and in turn the volatility indexes go up as well because they measure the premium in options. The higher the premium, the higher the level of fear, and the higher the volatility indexes go.

When times are "normal" meaning people think we're in a bull market, put premiums are still there but just not very high. The VXO would "normally" run around 20 but in times of fear, the VXO can jump to much higher levels. Last fall when you could fell the fear, the VXO traded as high as 103.41, that's fear. We normally think that if the VXO gets higher than 40 we should be buying stocks which was one reason we were buying stocks last fall.

What's going on today? We have just had a 20% plus rally in stocks in about a month, the largest rally in that time since the 30's and the VXO is around 40. To us, there is still plenty of fear lingering in the market if the VXO is 40. Translation: Do Not Sell. Yes, there will be some scary down days but we are in the midst of a strong rally inside of a major bear market. On top of that, the drop we experienced last fall and even this year into March 6th was harsh and fast. The rally out of that low should be violent and fast.

We think the Dow will go to 12K (SP500 to 1,234) and our target date is 9-9-09. If you feel the need to sell into some strength before then, of course you can, it's your money; but, before you do, you should come back here (everyday) and find out what we think...but more importantly, you should listen to what the market is saying. One of the best places to do that is in the volatility indexes. They tell the truth about the fear. The media can only tell you what is going on Now, not what will be.

So, rather than looking at the Dow to see if it's at 9000 or 9500 or even 10K, look at the VXO and see if it's near 20. If so, you may be able to sell some stocks. If it's 15, make sure you sell quickly and maybe go short or buy T bonds. Otherwise, if the Dow is at 10K and the VXO is at 30, we might suggest holding out for higher prices.

One last thought, we do think there will be two major up moves this year with a modest pullback in between. The first large wave may just go to 10K and the VXO may go to 20 or 25. This may be a good time to look at our stocks to see which ones could be trimmed back. Then if we get a good selloff back to 8500 or so, we can jump back in. That will be known in the fullness of time. For now, the VXO is at 40, so don't worry too much.

Thursday, April 02, 2009

Dow Crosses 8000 Briefly

Top Line: The Dow jumped over the 8000 mark on Thursday but couldn't hold it. 22 points away. So, you have seen it, do you believe it? The Dow closed 1500 points above its March 6th low.

Media coverage suggested that there were some important news items that drove the market up today. The big one is that the FASB relaxing the mark to market rules. We thought we wanted More transparency from our financial companies. Those assets that are difficult to value because there really isn't a market for them can be valued at any amount the company thinks is appropriate.

The other idea was the G-20's promise of nirvana coming. Maybe they didn't say nirvana, just an important inflection point, but the media gave them some credit for the rally. Really.

No media source gave us the Elliott Wave 3 argument that we suggested ??? That's ok, we don't want them to know everything, do we?

After hours Research in Motion (RIMM), one of the members of our FSI (four horsemen fame) announced good news and popped the stock as well as the futures. News like this shouldn't give us much in the way of solid price movement but good news from these tech firms does surprise the markets a little.

Oil was up quite a bit and the dollar and T bonds were down. This makes good sense. That gold was down hard is a head scratcher??? We had heard on Wednesday that the ECB (European Central Bank) sold 35 tons of gold in the recent past which could be a reason that gold has had a rough go of it recently. Then today (Thursday) the G-20 made some comments on selling gold which did some more damage to the market.
In terms of our portfolio, GDX was a drag today and we are getting tired of seeing this stock in the 30's. No, we don't want to see the 20's again but we are waiting patiently for the 40's. GDX traded in the 30's in December. The chart does look like it wants to make a run up very soon.

One item of interest on today's stunning rally was that the VXO closed Up on the day. That means that traders were bidding up puts as the market moved up, a very unusual event. This is very encouraging to us that the market is going to continue its rally.

And, last but probably least, is the jobs' report that is due out on Friday morning. The expectations are that over 670K jobs were lost last month and that the unemployment rate jumped to 8.5% (from 8.1%). Will this have any effect on the market? If it does it will be short lived because the market is definitely Expecting bad news.

Wednesday, April 01, 2009

A Nice Pop For April Fools Like Us

Top Line: Wednesday started with a giant thud as predicted by the futures action on Tuesday evening. The opening bell was the low of the day and the market quietly moved up most of the day. Probably more to come.

In our last post, we suggested that the market might drop in the next day or two. That seemed to be completed this morning with the huge down opening. The market failed to break through the lows of the past few days.

These shallow selloffs is what the Update expects for the most part as we rally this spring. The market doesn't want to let anyone in and will probably not give us a meaningful selloff until we have many more participants who are convinced the market is going up. Then we can have a good selloff.

This evening the futures are firm and the Asian markets are up again, enjoying the strength on Wall Street today. The last two days, Japan has rallied 6%. We know that the trading session is not over this evening in Japan so anything can still happen but a 6% move in two days isn't too bad.

Turning to the gold mining complex, we were interested in the higher GDX price today without much movement in gold. We have been saying that the gold miners are very cheap compared to the price of gold. The relationship of miners to gold is simple. The higher the price of gold, the higher the value of the miners. It's like the miners have the gold mines and the amount of gold in those mines fluctuates with the price of gold. Assuming extraction costs don't change too much from day to day, the value of the miners should go up with the price of gold. Ok, it's maybe not quite that simple, but you get the idea.

The other thought is that the miners generally foreshadow the price of gold. If miners are rising, then gold the metal should follow suit. Today gold didn't move much but GDX jumped nearly 5%. GDX closed at the highest level since last fall and gold is now modestly under its highest price. Going back a year or so, when GDX was over 50, gold was about where it is now. This doesn't really bolster our position over periods of time but it does indicate that GDX is well undervalued. It would be nice if we had a few more days like today to get us back to better balance between gold and GDX.

And, we know why you come here...yes, Jackson pictures. We learned that Jackson took his first steps on March 31st so we went to see for ourselves this evening. There are no pictures of the event but we did see him walk. He is pretty confident in his walking. The first we saw him walk, his mom stood him up and he walked from the kitchen through the dining room into the living room and into the hall and then into mom and dad's bedroom and into their closet. Unbelievable.

Anyway, here are some older pictures of him, from a few weeks ago before he could walk???

Having a bath and shampoo after dinner with Gramma.

Examining Gramma's doll to see if her eyes and nose worked properly.
Chillin' with Cali at Grampa and Gramma's house.