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.