Wednesday, May 20, 2009

GDX Breaks the 40 Barrier

Top Line: The market is ready to complete the pause we have been talking about. The final move here should bring the market down about 10%. Don't forget, some of that drop has already occurred.

[We are taking an extended weekend and with Memorial Day on Monday, we don't plan another post until Monday evening for your reading pleasure on Tuesday morning.]

It seems like we've been talking about a pause in the market's advance for a long time. The SP500 is the same level as it was about three weeks ago. That's a good kind of pause, one that doesn't have much of a price drop. The problem is that some price drop has to happen or does it?

We have been patiently waiting for an opportunity to buy some of our favorite stocks on the cheap, at least cheap at this time. If prices do go down a little we may have some desire to buy but we need to be patient and stingy.

Today we actually decided to take a short position in our trading account. This is not a recommendation to you but we do have our reasons for taking this position for a few days or weeks. We have been watching a few things over the past few weeks. The first red flag we talked about was the obvious bullishness. When you read headlines that indicate the coast is clear for buying, well, you know how we think...start heading for the exits.

The volatility indexes are the next red flag. VXO, the main index we follow, has been dropping hard for the last few days and still the market has failed to find its way to higher prices. The May 8th high of 930 in the SP500 came with a VXO of about 33 and today VXO dropped to 26.5 even as the SP500 could only manage 924. We even hear from the media that a drop in volatility indexes is a good sign that people have put some fear behind them...where are those exits again?

Of course, the red flags wouldn't have been complete without the last one...Treasury bonds were up on the day moving up with the stock market. Taking all of these things into account, as well as looking at the technical picture, we decided the rally today was a good one to short into...so we did. We don't expect to be in these shorts to long but we thought we would disclose just how much we think this market is going down.

In the meantime, however, the market opened on Wednesday with a commodity blast. With our portfolio full of commodity type assets, we enjoyed a surge in values, especially GDX which blasted up to 41 within the first trading hour. GDX has been trading mostly in the 30's since the beginning of the year and has not been over 40 since last year before the drop. Now that it has broken the 40 barrier, we expect that the 40's should be GDX's home for a little while. If we do happen to get back down into the 30's, we don't think it will stay there long.

Have a great holiday weekend.

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