Monday, May 11, 2009

Conflicting Indexes May Mean More Downside

Top Line: Stocks trade heavy and seem to want to go down at least a little. The downside leadership in the NASDAQ indexes was not evident on Monday as the NDX (NASDAQ 100) was up on the day.

The bullishness is pretty thick these last few days which should be a lid on this rally we've had for two months. That's how it works. The market is disdained and then it rallies without much notice. Now that it's up over 30% in a couple of months, everyone is bullish or nearly so. These are dangerous times to invest new funds. When the media convinces people that the rally is for real then the public can come in and buy stocks from the professionals. It's an age old tradition.

Right now we are walking a fine line between selling and holding our positions. The drop we expect doesn't have to be much but it should substantially reduce the current bullishness that has popped up. With the Dow down 155 today the volatility indexes didn't go up very much which is somewhat disappointing but it probably means that more pressure, in terms of lower prices, will need to be put on the new bulls who just bought.

We would be looking for bargains in the next few weeks to a month. The drop here should be enough to make people scared again but we don't think the prices will go much more than maybe 10%. This could be our drop that we were thinking about a while back. We thought the Dow would get up to 10K before bullishness would pick up but it may be now.

Our play will be to not touch our long term holdings for now. We do like to trade a little so we may do some of that over the next few weeks, both long and short. Stocks should give us plenty of opportunity for volatility trades where whipsaw action is likely to steal some money from many traders. Surprises are currently to the Upside and will be until later this summer or early fall.

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