Thursday, May 28, 2009

Month End Strength is Waning

Top Line: The stock market is wanting to go down but the month end strength seems to be holding it up for now. Still, the early May highs near 8600 in the Dow are very much intact. We expect a couple of weeks of soft trading taking the Dow down near the 8000 level.

Today's highlight was the GDX which closed right at 43. We've been on this long journey through the 30's which seemed like forever although there were several trading opportunities if you chose to take them, which we did take a few. From it's low of 15.83 back in October, GDX crossed into the 30's in December for a quick double. Since December it's been trading mostly in the 30's until this past week as it finally jumped into the 40's. This long string of 30's should provide some significant support and has already served as a spring board to the 40's. What is next for GDX?

We think the gold will now show some strength following the GDX pop over 40. Right now gold is sitting just under some resistance around the $975 level. Once it gets through that there is some very tough resistance at the all time highs near $1033. That is not all that far away and we think that level is possible in the month of June. All of this action could take GDX up some more. We will keep a close eye on it since GDX represents nearly 50% of our portfolio now that it has outperformed the rest of the stocks we have.

The market was looking for the right direction all morning and most of the trading day. The Dow opened up strongly and ended pretty much where it started, up about 100. The market will not suffer much of a correction here over the next few weeks but some of this current bullishness needs to be eliminated. One way to do that would be for a brief drop below what is considered "safe" support say around 850 to 875 in the SP500. Look for that in the next couple of weeks.

The Treasury bonds were putting on a brave face today opening up but then dropping back to yesterday's lows once again. They did manage to pull themselves out of that low and close higher. Let's see what happens next. We think they are close to a short term low, if they didn't already see one today. The news is strongly bearish on bonds and this is causing us a moment to think like a contrarian. We would buy some if they would drop much more although we think the short positions we have are better...we could be wrong.

We considered the 2x funds and the new fangled 3x funds that are available. We do own a couple of 2x funds now, SDS and QID, but we know they are dangerous plus they do not work too well if the market goes against you while you hold them. Let's take a look at the way the 3x funds would trade versus just buying or shorting the underlying index on which these funds are based.

Let's say you wanted to get long and decided to buy a 3x vehicle. Let's say you're right and the underlying index goes up 10%. Your asset is a 3x vehicle and it should go up 30%. That's great and what you intended. But, if your index declines 10% first, you may have an issue. In this case your asset would decline 30%. Then let's say the index rallies 1o%, not back to the original but up 10%. The index had dropped from, say, 100 to 90 (10% loss) and now rallies to 99 (10% up from 90). What has happened to the 3x fund in the same period of time? Well, in the 10% drop turns into 30% so an asset would drop from 100 to 70 (30% loss) and then it rallies to 91 (a 30% increase over 70). Wow, the 3x fund lost money on the round trip where the basic index nearly recovered its loss??? Be Careful. See yesterday's post for the numbers on QID or take a look at the one year chart of the QQQQ's and the QID (use bigcharts.com to the left).

Finally, natural gas got a spurt today as UNG managed to go up over a dollar. That was a nice move off the lows. The recent lows in May are higher than the lows in April signalling some strength. This could be a good performer into winter this year, possibly back to 30.

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