Tuesday, May 26, 2009

Strength Could Be a Good Opportunity

Top Line: The stock market liked the news on consumer confidence and pretty much ignored the 20% drop in home prices year over year. The Dow may now be ready to drop but with the end of the month this week, we may have to wait until next week.

Today's rally of nearly 200 Dow points gave investors plenty to cheer about. These are the things that send chils up our back. The public is bullish and a day like this encourages such thinking. The volatility indexes were down again suggesting this move was accompanied by a reduction in fear.

All of these point to a rally that is unsustainable in the short run. We still expect some more selloff as we go into June. The market is free to make it look good by rallying strongly but not being able to best the highs of the last couple of weeks. Yes, it could get higher over the coming days but today's move is just an attempt to get back to the May highs.

With today's rally, the opportunity to sell something is available but we still don't think it's the best course of action. Even with some more downside, who knows if you stocks are going to go down even if the market goes down? We prefer the selling be done around Labor Day not Memorial Day.

The commodities were not very strong today so most of our portfolio was average in performance plus we still have our short position which we considered exiting that position this morning but work got in the way. Hindsight says we would have been better off or we could have reinstated it later in the day. We are considering a couple of ideas for Wednesday.

Those ideas include the TLT, which is a fund of long dated Treasury bonds. The True Contrarian mentions them in his update for the week. The price is even cheaper at the end of trading today than it was when he mentioned it a few days ago. We might take a run at it for a quick trade, say a couple of weeks or so.

The other idea is to short the NDX by buying QID, which is the two times short equivalent of QQQQ. This would also be a short term trade and would be used to hedge our long positions in case of a down move which we think is almost inevitable. We are playing with a little fire because the market could jump here in spite of it being the center of the bulls attention. Plus, we don't really think there is much downside to be had so this trade would necessarily be quick.

Our recommendation to you is to stay fully invested and enjoy your summer by doing all the things you like to do which of course includes reading the Wednesday Update. Then if the market does come down, you can buy more of your favorite stocks. If it doesn't you can just smile and wait until it's the right time to sell.

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