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.

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