Tuesday, June 30, 2009

The End of June Has Finally Arrived

Top Line: The market could have turned the corner today. The stock market tried to start out the day higher but reversed and ended down on the day. Meanwhile the volatility indexes that have been lower day after day also reversed to the upside as stocks reversed to the downside setting us up for some more downside.

We do have to mention some pervasive talk about a head and shoulders top formation. We have read about this formation for the past few days and it has some merit except when it is so widely expected.

Normally, the head and shoulders pattern can indicate a strong failure at the neckline with a measured move after that which is about equal to the distance from the top of the head to the neckline. TRANSLATION: Looking at the SP500, the head is around 950-955 and the neckline is around 875-890 so if the market chooses to break through the neckline over the next few weeks the target would be a distance of about 75 points from the neckline...meaning the SP500 could drop to around 800.

We don't find this very satisfying since so many people are aware of it. We do favor a break of the neckline to alleviate the overbought condition indicated by the volatility indexes but we don't like the move all the way down to 800. It's just too far. We have said that the SP500 would go to around 850 and we are sticking to it. The avalanche of selling could take the SP500 down from 875 to 850 in about two heartbeats with the second one being enough to stop your heart, but we still think much below 850 is wishing for something you can't have.

As a reminder, the market is closed on Friday and we will post on Sunday evening.

More Jackson pics tonight and there should be more tomorrow evening as well. With the market closed we may still put more pictures of Jackson up over the next few days.

Monday, June 29, 2009

Just Some Pics

Top Line: For some reason the stock market just wants to hold up into the end of the quarter. With the volatility indexes dropping again, stocks should be vulnerable to a major decline coming up pretty soon.

We said we would put up a quick post so that was it, the Top Line. We hope you enjoyed it :-)

But, here are some pictures for the past couple of months. We realized we haven't had a picture of Jackson since early April. No wonder our readership has declined...it can't be the market analysis, can it?

Jeff's 30th Birthday Party at the Dome.

More pictures tomorrow...

Sunday, June 28, 2009

Market Taking It's Sweet Time

Top Line: The stock market still wants to go down but it also wants as many bulls to go down with it. Beware the volatility indexes...

The volatility indexes seem to be collapsing, meaning the fear in the market is diminishing. The latest check on the volatility indexes is that they are the lowest of the move which is a warning since the stock indexes are not new highs. Last Thursday's strong 2.5% up move gave plenty of confidence to the new bulls driving volatility indexes down. At the very least this is a bold statement that stocks are in need of a pullback to correct this bullishness. The market will have a tough time moving up if we don't get rid of some of this bullishness.

As our title indicates, the market is taking it's sweet time about going down. We're the only impatient ones. We need to enjoy this as much as possible since a strong up move will be coming as soon as we can eliminate the enthusiasm.

We say enjoy because there is still money to be made on the downside over the next couple of weeks. We are Not encouraging you to trade that way but we do think better prices are coming for those of you who still have money sitting on the sidelines. Two important indicators are the volatility indexes and the SP500 price level. We expect the VXO to go to near 40 and the SP500 to go to near 850. If one or both of these occur, we will be extremely bullish once again.

GDX popped above 40 last week and seemed to have left all of us in the dust. But, we think more buying opportunities exist for GDX, too, although maybe not as low as we saw it last week. We will continue to buy it if it drops back into the 37's and hopefully back into the 36's. That would be a good time to buy. Of course, it is possible it could break below last week's low near 35.50 but we don't think there's a very good chance for that. We would like to see that because we would like to buy more as cheap as possible.

Our other fund, the TLT, a basket of long dated Treasury bonds, traded up strongly on Thursday along with the stock market. This is not a common thing and we expect that the stock market was in the wrong last week with the bond market making a corrective up move starting a couple of weeks ago about the same time as the stock high. This occurred back on June 11th. The SP500 hit its high for the move, so far, and the TLT hit its low on about the same day. When they move together one of them is probably acting wrong and that is probably the stock market.

We promised a few people some pictures of Jackson but they will need to wait until tomorrow, so we'll put a up a quick post tomorrow with some pics.

Wednesday, June 24, 2009

GDX Continues to Lead

Top Line: Stocks failed to generate much in the way of buying this week with the Dow dropping for the fourth day in a row. The position in the market should provide further downside over the next couple of weeks.

[Next post should be Sunday evening.]

The stock market was hoping for good news from the Fed (???) on Wednesday but the Merry men at the Fed didn't deliver much in the way of good buying news. After their announcement, the market struggled to hold its gains. Boeing (BA) was down 5% which kept the Dow from staying positive but the other major indexes did manage to hold gains going into the close.

GDX is the major news of the week. After trading just above 45 early in the month, GDX broke below 36 both Monday and Tuesday this week for a great buying opportunity. We bought some, did you? On Tuesday morning, a gold mining analyst turned bearish on the sector and GDX put in a low around 35.50 before starting a two day run that has taken it back up into the 38's. Apparently, this analyst has Not been reading the Update. We have been suggesting buying GDX under 38 for the past couple of weeks.

If you take a look at a chart of GDX (use BigCharts.com in our links to the left), you will see a steady pattern of lower highs and lower lows since early in June...until today. Today, GDX broke out of that trend but is it a true breakout? Normally, we would like to see a little more volume to confirm the breakout but we didn't get it. This could mean there may be more buying opportunities in the near future.

We still think that today's move in GDX may not allow for a new low for the move because GDX should bottom before the broader market. Tuesday's low near 35.50 may be the low of the move which is about 20% off the 45 high earlier in the month. This 20% down move has given us a clear picture for what the stock market wants to do. We don't think that the stock market will manage to drop 20% from its highs...GDX is much more volatile than the broader market so we expect the market to only drop about 10%. Using our SP500 estimate of 850 from a high of around 955 gives about a 11% estimate.

Taking the comparison one more step, we want to look at the time from the GDX high to yesterday's possible low. That was 16 trading days from June 1st to the 23rd. So, if we go to the SP500 high back on June 11th, today was the 9th trading day since then. That would put us at a low on a projected July 2nd, just the perfect day for a low in our opinion as that is the date of the employment report. Of course, this all speculation, and the way it all plays out Will be different; but, we will be here to pinpoint the low as best we can.

A late addition: We want to emphasize that the end of the quarter could bring some strength to the market over the next few days but we still think the market needs to head down one more time before it can go on a solid run. Nothing is certain, but probabilities are high. Check out the True Contrarian in our links. He has a new post.

Sunday, June 21, 2009

More of the Same Ahead

Top Line: The options expiration last week (quadruple witching, as some call it) provided some support for stocks late last week...but that's over and the next few days should see the sell off reassert itself.

[Our next post should be on Wednesday evening...summer schedule.]

There's not much to add to our comments of last Tuesday because not much has changed since then. The only change is that it's a few days later and the sell off is much closer. We are expecting a strong down move here in the next week to ten days and we are prepared for it.

We have put on some shorts to protect our long positions that we have had for a while. We started buying GDX back but still think that it can go lower. When it does, we will buy more. In the mean time, we are going to continue buying back what we sold. So far we have been buying GDX back in the 37's and hope to get it cheaper than that in the coming days.

For those of you who have not sold anything, this next week may scare you but don't let it scare you out of your positions. If you have additional cash, focus on how to invest that as prices get cheaper and you can afford more stock.

The week ahead includes some more Treasury auctions, about $104 Billion, as well as a Fed meeting. The possibility exists for some volatility.

We normally think the end of the month is a period of strength. If that's true this month, we would expect more selling early in the week with a slight rally into the last few days of the month and quarter. This may not be a normal time due to the position of the market. Still, the market could drop very hard for a few days and then recover some into month end with further selling out of the employment report next month.

The June employment report is scheduled to be released next week on Thursday, July 2nd, because the Fourth of July holiday is observed on Friday the 3rd and the markets are closed. This means we could pack quite a few moves into the next two weeks. Volatility should return.

Tuesday, June 16, 2009

Two Triple Digit Dow Drops In A Row

Top Line: The stock market suffered two triple digit declines this week while the T-bonds were strong. Expect similar action to continue for a couple of weeks, with some intermittent rallies to throw the bears off course.

[We are on a Summer schedule and plan to post twice a week, normally on Wednesday and Sunday evening. We have a conflict on Wednesday this week so we are posting on Tuesday instead. Our next post, unless something noteworthy happens, will be Sunday evening.]

TLT, our favorite long dated T-bond equivalent roared higher today. From last week's low in the mid 87's, TLT rallied to close at 92.36 near the high of the day. This gave us more confidence that the stock market would continue down both today and for the near term.

GDX has dropped about 15% and traded in the high 37's the last two days and we bought some of our position back. We don't know how low GDX will go but we thought a 15% down move was enough to justify getting back into it. We didn't get the absolute high a couple of weeks ago but we did sell half of what we sold very near 45 with the other half around 43. Purchasing below 38 makes some sense and if it gets below 37 or 36 or even 35 we will be adding more to our holdings. GDX's slide has given us some more confidence in the continued stock market slide since it has been leading the market in recent months.

The volatility indexes have started their trek up to the 40 range at which point we will be aggressively buying back the stocks we sold, other than GDX. We plan to be buying GDX back first since we expect it will bottom first. The volatility indexes may not get back to 40 but there should be some fear in this decline due to the bullishness out there over the past few weeks.

We have talked to a few people over the past week about trading their accounts. Apparently, there are some people who are getting eager to sell since the market seems to have topped. Our advise has been to stay put and try not to worry about this pullback because you don't want to be out when the market gets going again. That could happen in a very short time and you don't want to miss the initial rally phase.

As of today's close, the time to sell is nearly over since we have almost dropped half of the distance we expect to see. The continued drop is almost assured but trading in retirement accounts like 401(k)'s and 403(b)'s can only done at the end of the day so you may not be able to get out and back in with perfection in your timing.

We have been telling you what we are doing and on some days we can't get the information to you fast enough to act. We have been doing some wholesale moves over the past week in order to step aside for about a 10% down move. Since our ETF's are mostly based on commodities, they tend to move more than an SP500 index fund. They provide much greater percentage moves than a standard index fund. Like we mentioned above, GDX has dropped 15% already while the SP500 has only dropped about 5%. We can more easily trade GDX at that kind of volatility where trading the SP500 is much tighter. Plus, in the retirement accounts you can't trade during the day.

By the way, good job for those of you who contacted us. We are glad to hear from you, yes, but more than that, it shows you are starting to watch your portfolios and have a greater interest in what happens. You're taking control of what happens. This is a good thing.

We are a little crazy with our trading in this time period due to the opportunities that are created. We are trying to maintain a level balance in our portfolio while bettering our position. This is a delicate balancing act but we are hoping to own more of the stocks we used to own. As things are today, the stocks we sold have dropped about 10%-15% including our GDX.

Sunday, June 14, 2009

Market Appears Ready to Roll Over

Top Line: The stock market seems to be on the edge of a downturn. The bond market seems to be ready for a rally.

[We are on a Summer schedule and only posting twice a week and if conditions warrant an extra post. We have a conflict on Wednesday evening so our next post should be Tuesday evening.]

In our last post we mentioned that the long dated T-bonds may be set for a rally coming out of the 30 year T-bond auction on Thursday. Last week the Treasury conducted three auctions culminating in the 30 year auction on Thursday. After Wednesday's presumably disastrous auction, the long bonds were set up for a reversal on Thursday. Our proxy for the long dated bonds is the TLT, an ETF. On Thursday morning TLT traded at 87.45, a year and a half low and then rallied strongly into Friday's high of 90.65 before closing Friday just under 90.

We mentioned that the stock market would react in a little different fashion by doing pretty much the opposite of the long bonds. We said we would consider selling some of our long term holdings if the stock market could make a new high which did happen on Thursday just as the long bond auction was finishing up. We took that opportunity to sell into the strength and sold out of our 401(k) positions as well as a few of our long term stock holdings from purchases made over the past nine months. We did hold some of our positions and we kept our short positions in anticipation of a return to a SP500 level of around 850. From the middle of the day on Thursday to early Friday, the SP500 traded down about 20 points from 956 to 936.

During the past couple of weeks we have sold about 40% of our GDX hoping for a good reentry point in the next few weeks. GDX has been leading the market and should continue to do so. On Friday GDX traded down to 39.28 after trading above 45 earlier in June. We are hoping to buy it back in the 37's or lower. Over the next few days we will start looking at putting in some orders below the market to see if we can get some good prices. We certainly don't want to miss the move into the fall, that would not be good.

The volatility indexes have been weakening somewhat and could start a rebound if stocks fall a little here in the next few weeks. This move up would give us more confidence that a buying opportunity is at hand. Buying stocks right here would be ill advised and we would not recommend it. There are just too many indications that better stock prices are coming in the not to distant future. We will be monitoring the situation closely.

Wednesday, June 10, 2009

T-Bonds Smacked Again

Top Line: Market is ready for a significant drop, but first we may see a quick pop.

The market has been treading water since we had that spurt last week Monday, June 1st. During this time the SP500 has traded between 930 and 950. This type of trading is like coiling up some power and it normally releases in a thrust. In this case, we do expect a quick pop to the upside in order to complete this leg of the upside.

We are giving some serious thought to lightening up on some of our long positions, especially in our 401(k) where we are forced to be in index funds. This pop may be an opportunity to do some selling, especially if the prices get high enough. Of course, for our funds (ETF's), we can take full advantage of the intraday moves whereas with the 401(k) we are forced to trade at the end of the day.

GDX has been giving us some guidance to sell other positions. GDX topped out just over 45 last week Monday and we did sell about a quarter of our position just under 45. We almost bought some back when it dipped into the 30's in the last few days but decided to wait. That's beside the point...which is really that GDX leads the market and it dropped about 10% in a week and probably has some more to go. Yes, GDX is probably more volatile than the broader market but we are more concerned about the direction at this point.

The other two major indicators we have been mentioning here at the Update are the T-bonds and the volatility indexes. Let's start with the T-bonds. This week the Treasury is selling more bonds and today's 10 year auction seemed to be a bit of a dog.

Just to give you some perspective, our proxy for the long bond is TLT, an ETF. TLT dropped to 87.56, the lowest price for a year and a half. And, TLT traded at 123.15 back in late December. Yes, that's a big drop, nearly 30%. Ouch.

Thursday (today for you) the 30 year bonds are being offered. The question is, "What will the long bond do after the auction?" Since the long bond has been trashed by most media outlets, we expect that the sellers are about done. So, with the possibility of further selloff going into the auction, the stock market could actually pop in the morning. We can't be sure about this timing or if the market will actually pop but the bonds are in a good position to support such a move.

Looking at the volatility indexes, they are in the high 20's and represent a good place to turn around and head back up to near 40. This indicator can't help us much on Thursday with timing the market move but we do think that the number is bound to go back up in any market decline. We certainly would like to be in a position to buy stocks when these indexes get near 40.

Ok, what to do? We think there are many different ideas going on here. We do think that the "stay put" or the "stand pat" philosophy is a mighty fine one since we do think that there is a lot more upside going into the fall. None of this changes our position that the SP500 will be 1234 around 9-9-09.

If you want to Do something, you could sell some of your positions like in your 401(k) but not all of them. That way, you can do a maybe we get a decline and if so buy some good bargains as they show up in the next few weeks.

You can sell out your entire position and just wait for good prices...we don't prefer this approach because of the obvious difficulty to get back in at better prices. You can never know what will really happen. You'll need to be more aggressive about getting back in and we do not want anyone to Chase stocks when they are buying them.

For us, we have already taken some short positions as well as having sold some of our holdings to raise some cash. If we do get some more rally in the near future, we will attempt to sell some more of our long term holdings. This would be in the hope that we can buy them back at better prices. The only difference tonight is that we are seriously considering moving some/most/all of our 401(k) assets to bonds for a while. These assets are at a high and could be purchased later if and when the SP500 drops.

Our position states that the SP500 will drop to around 850 in the next down move before rallying into the fall. Any drop will bring in some buyers so there will be a choppy drop speckled with a few hard down days to reinforce the bears argument. When the bears get mentioned in the media again, we will start looking to buy. Sounds easy enough. Right...

Remember we are on a summer schedule and will be posting Wednesday and Sunday evenings. If something special happens, we might post on other evenings as well. If we get this pop tomorrow we may put up a short post tomorrow, otherwise we'll be back on Sunday evening.

Sunday, June 07, 2009

Birth/Death Model Provides Lift to Jobs

Top Line: We still expect a quick selloff (SP500 to 850) before we see much more buying. Our expectation for higher prices later this year remains in tact, that is, the SP500 going to 1234 on 9-9-09.

The employment report caused a burst of buying at the opening of trade of Friday. This was quickly swamped with sell orders but eventually the flat line of the past few days kicked in and the stocks idled the rest of the day. We don't think fundamentals are too important in this market but the lower lost jobs for May were created out of thin air in the birth/death model. This is something that estimates the creation of new small businesses or the dissolution of same and this past month it was responsible for over 200K jobs. We're not so sure about that number.

The real action has been in gold and T-bonds, both of which were down on Friday. Gold was down about $20 with GDX down in tandem. The TLT, a long dated T-bond ETF, was down under 90 for the first time since last fall. We have purchased a small position in TLT for a quick trade...possibly for a week or two. This is conjunction with our thought that the bonds have just gone down too hard, too fast.

Since our last post, we also were able to purchase some more UNG (see last post for details) with its breathtaking plunge below 13.50 on Thursday morning. We scrambled to get a trade in but had to pay more than 13.50. The price low was a good entry point. We think that UNG is so oversold that the upcoming correction should leave UNG pretty much unscathed.

The employment report may stand as the high point for the next few weeks. If we exceed that top, then our correction theory may have already happened or it may not happen. We fully expect the correction due to the bullishness that exists in the media and among traders generally. The public has become interested in the market again which is a sign of being overbought.

We expect that there will be a great buying opportunity, the last one for some time, coming up in the month of June for those of you who have not purchased enough stocks. We will watch carefully and try to provide timely information for you. We have decided to post twice a week, on Sunday evening and Wednesday evening, but if something like a buying opportunity shows up in between those days, we will likely post something.

Wednesday, June 03, 2009

Drop May Have Started Today

Top Line: The stock market did a major head fake over the past week and today reality started to creep back in. Expect more downside directly ahead.

The most dramatic downside moves on Wednesday were in the commodities, which of course is what makes up most of our portfolio. We have some downside protection with our short positions but they can't make up for the huge down moves in commodities. Still, the commodities have been leading the broad market and this time they are leading it lower.

As you all know, our largest holding is GDX, a gold mining ETF, and it dropped from near 45 this week to 41.30 on its low today. For those of you who have missed out on GDX, we hope you did not buy it at 45 over the past few days. There may be an entry point coming up as the market drop continues. We would suggest that GDX will bottom first, maybe even ahead of gold itself. When GDX starts to make a positive move, in a week or two, that will give us a great early indication that the stock market is about to turn around.

Over the next few weeks, we (still) expect the SP500 to drop to the 850 range, which ia still a ways away from today's close of 931. This drop needs to happen because of all the recent bullishness that came out of just the latest week of the rally. General Public confidence of upside is a sure sign of price drops. When someone says, "I think stocks are going up", we would think that meant stocks Have Already gone up.

The bulls have taken over the sentiment and this attitude needs an adjustment. That will come as the market drops about 10% creating the same type of panic that people felt over the past year only in a mini version. We here at the Update will be watching our two favorite indicators at this time, the Treasury bonds and the volatility indexes, particularly the VXO which we have mentioned several times.

The T-bonds seem to have found a short term bottom. Our proxy for long dated Treasuries is TLT and that has been trading in the 90 to 92 range for several days. Should this pattern hold, we would expect that the TLT could move back up to near 100 or about 10%. From there the prices should drop to a much lower level as the stock market moves up.

Right now the VXO is around 30 and we would like to see this move up to 40 before we try to start buying our favorite stocks. As time goes by this month, these opportunities will only be available for a short period of time. Why? There are recent buyers that have come into the party very late in the price move and they need to feel some pain. Where were they in March when prices bottomed? At the same time, there are many entities that are looking to buy on a pullback. These people can't be given much of a chance either. The market won't give them much of an opportunity.

Our main goal will be to buy before prices go up which means that we will be paying higher prices and watch prices drop to the lows. We don't want to be too early but likewise we won't want to be too late. If you see these three leading indicators then you will probably see some good prices in your favorite stocks. We will be watching GDX to see if we can get in below 40 since we think the 30's will be a great support area.

We had a question off line today and would like to present the concept here. The question revolved around nat gas (natural gas) specifically whether it's a good buy right now. UNG is an ETF that corresponds to the price of natural gas. Today nat gas dropped by 10% during the day and represents a good value. If prices come down in the next few weeks from here, we would certainly buy some more. We actually bought some today. We had sold some on Monday near 16 in our trading account and decided to replace it here in the 14's again. If it goes down some more, we will buy more.

The question related to whether the fundamentals were strong enough to justify higher nat gas prices. Would economic contraction cause nat gas to decline further rather than go up? Our answer is that the economic contraction doesn't induce much real decline in usage of the product. Think of last year's price of oil near $145 a barrel. When the price dropped to $35, it wasn't because demand dropped by 60%, it was because of the herd mentality. Likewise, nat gas demand isn't driven by price too much. Yes, some will turn to nat gas to heat their homes or their water because it's now cheaper than other forms of energy for the same BTUs.

We recommend that if you are buying this or any stock over the next few weeks, please buy a small portion at a time and buy at Lower prices than your last. So, we paid 14.75 today and then bought some more at 14.32 and then bought more at 14.02. These prices now average much better than if we had purchased our entire position at 14.75. If you want more info on how to do this...leave a question in the comment section or contact me directly if you know how.