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.

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