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.

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