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.