Wednesday, July 29, 2009

To REIT or Not To REIT

Top Line: The stock market continues to cling to the high prices. With a possible burst up to fresh highs, the market would be free to go back down. Or, it could just go down from here.

The past few days have seen the SP500 trade in a very tight 15 point range, about 967 to 982. This type of action sometimes leads to a pop and then a good sized drop should follow. If not, the market is ready to drop about 10% over the next month or so.

Yes, we know we missed the rally over the past couple of weeks because we didn't heed our own advice, but the current message is fairly clear...down move ahead. The bullishness in the media is too strong to think anything else, in our contrarian opinion.

GDX continues to go down signalling a drop for the market. The volatility indexes are refusing to go down anymore. The dollar is close to a low and Treasury bonds are holding or even getting stronger.

The Treasury auctions of the past couple of days did not go as well as they thought Monday's auction went but still the long bond is stronger. The Treasury is trying to sell a mountain of debt this week and still the long bond holds its price.

We had a question in an email today that related to a 7-9 year time horizon and what we think would be a good investment for this period. Please understand that the best advice we can offer at the moment, or at any time really, is to buy value and sell strength. Over the next 7-9 years, or 10 years as we expect, the market will be in a roller coaster ride with the ultimate lows to be registered in the 7-9 year period probably with a higher low in about 10 years.

In this environment, we think that buy and hold is a poor strategy no matter who the buyer is. The next 10 years will present several opportunities to make very high percentage moves such as have been made in the past year or two. Buy and hold will come back as soon as the media and your friends start telling you they will never put another dollar into the market again. That should happen after they've lost a lot of money and be in about 2019.

For now, if you think a particular stock looks good, because it is cheap and it has the potential to run up a long ways, then by all means buy it. We don't see many stocks like that now because we think the market is going down for the next few weeks.

The stock that was mentioned was a real estate investment trust (REIT) which as you might imagine invests in real estate. Our particular position is that real estate is to be avoided in this market but we do Not follow REIT's, although we've heard of the one mentioned. In this case the dividend is near 15% which seems too good to be true. Like we said, we don't follow these vehicles and can not give you good advice on them.

What we can do is to advise you to be nimble with those funds. Assume that the T-bonds will perform in the opposite direction as stocks and trade back and forth between the two investments as conditions warrant. Or, come back here and we'll try to nail down the timing for you...or maybe we'll just try do that and you can take or leave our advice. Right now, we're headed down in our opinion so holding TLT may be an ok idea for about a month. Then we might switch to GDX or some other commodity for the wild ride we expect from August to October or November.

Sunday, July 26, 2009

Bulls Are Out In Big Numbers

Top Line: The market didn't take long to jump with the Dow jumping up over 9000. We are looking for a pullback. When it occurs, we will estimate the distance it can travel.

The stock market jumped with the SP500 going from about 870 to last week's 980 about 13% in just two weeks. We are not happy to have missed this. Now we need to know if there is some downside and how much. We do think the downside is more possible than apparent. We have our reasons for this thinking...

The first is that the volatility indexes are having trouble dropping much more as the market jumped. With the SP500 jumping up 30 points last week while the volatility indexes hardly moved.

Our favorite stock for the 2009 is GDX and it has been our leader since October. With GDX not participating in the rally, as in, not making it back to 45, we think the market needs to back off a little to allow GDX to get back into its lead role.

Also, there seems to be a lot of bullishness. No one is really considering that the market can go down from here. If it does, the prices won't go down much at all, or so they think. These things raise the hair on the back of our contrarian necks.

Lastly, we don't think that the T-bond market is giving a clear signal of lower prices. They bottomed back about a month ago and even with the stock market continuing to march higher, the T-bonds have not been inclined to decline.

We will keep an eye on this market over the next few days.

Wednesday, July 22, 2009

Rally is Getting Very Tired

Top Line: Unbelievable...NASDAQ is up eleven days in a row. There is an end to such moves.

Yes, the Dow was down on the day after its own seven day up move. Is it possible that the market could turn down for a few days?

You may be feeling it, too, all the bullishness after a big up move. Where is that bullishness before the up move? Normally, people don't get bullish until After the move. Complacency is at a peak as well as measured by the volatility indexes. Maybe we should say Fear is at a low point as people now believe the market will go up some more.

We don't believe that the market has much upside in the short term but now the question is more about how low can it go. The answer is that the market can go down just like it went up. As people notice the market has gone down, they will get more bearish...amazing how this works.

We look back over the past couple of weeks and notice our own advice about how the market would go down to about 850 and probably lower. Then there was the talk about how the world was expecting a break down from the supposed head and shoulders top and were setting up for such an event. We thought that as the market dropped below 880, people would start anticipating such a move down to 800 in the SP500. We also mentioned that these short sellers would not be rewarded for their thought process because the market would not fulfill the normal head and shoulders pattern. We should read what we write and take that advice.

But, what to do now after a 10% up move in two weeks? We believe that the path of least resistance really is down with so many bullish, or should we say relieved, stock owners. The volatility indexes have struggled to go down although they have dropped a little over the past few sessions. This summer rally is almost over and we'll have to wait and see what kind of down move we can get. The next two days should be revealing.

Back on Sunday.

Sunday, July 19, 2009

Option Expiration Punishes Shorts/Puts

Top Line: The market should be close to a high with some selling coming back into the market this week.

We have not been doing too well calling this market the last week or two. We look back on our comments about the anticipated head and shoulders top formation and wonder why we didn't pay more attention to ourselves. We said that some would go short around 880 or 870 in the SP500 and the market would not give them what they wanted, a quick drop to 800. Instead, the market did drop to just below 870 and then it jumped to where it is now, about 935.

So, what is going on? The volatility indexes are trying to tell us that the market is overbought. This means that we should not be considering buying at this time, unless it is something that will go up if the market goes down. The last few days, the volatility indexes have gone down but there doesn't seem be much in the way of further progress. The volatility indexes by themselves would say the market is heading down.

Last Friday was options' expiration which the market seemed to think needed to punish the puts that were expecting to have a quick 10% drop after that head and shoulders top.

Our attitude is that the market still needs to go down, at least a little from here. We will continue to monitor just how much downside there may be. It still is possible to get this market back down to that 850 we've been talking about for a while now but we will stay focused to see just how far any downside will take us.

Wednesday, July 15, 2009

Volatility Puzzle

Top Line: A lot can happen in a couple days. The market has certainly denied the head and shoulders top so many were predicting with a resounding rally. The rally shouldn't have too much more to go if any.

We only have time to discuss the volatility index puzzle. With the market running up about 3% across the board on Wednesday, why did the VIX move up by the end of the day? That's a good question and one we are not sure that we have a good answer for but we will give it shot.

INTC (Intel) announced what the market thought was the news of the century so there was a huge rally right away in the morning trade. This caused the VIX to drop from about 26 just before the INTC announcement on Tuesday to just under 24 as the market opened. The last time the VIX was that low was back in early September when the SP500 was right around 1250. This is an extreme condition with bullishness very high.

Some amount of realism needed to come back into the options market and as the day wore on and stocks continued to grind higher and higher, the options traders were pushing premiums up causing the volatility indexes to move higher as well. This is an odd event by itself except that taken in the context of the sheer low level of the index is enough to convince us that the market has not finished its work on the downside.

Taken by itself, the volatility index increase could be very bullish but we now need to see what other indications are going to turn. We expect the market to actually head lower on Thursday morning and we think the Treasury bonds will turn higher after a thorough pounding the last few days. As the rest of the players in the game make up their minds as to what to do, we will then have a clear picture of what's going on.

More on Sunday evening.

PS Elliott Wave is having their famous "free week". Take advantage of that.
Go to to get started.

Sunday, July 12, 2009

Getting Close to a Short Term Low in Terms of Time

Top Line: Stock prices could potentially be putting in their lows in the next several trading days, let's say about ten days.

We received a question in last week's comment section which we have not answered. We thought it deserves a couple of paragraphs in tonight's post.

The question is, "What should we do if the SP500 drops below 850?"

The first answer is that we Expect the SP500 to drop below 850 and that's where we want to do our buying. The question is more like what if the SP500 drops to, say, 750, which of course it could but we think that is for the "next" time down. That seems like a long ways to go but we can't say that it can't because the market is always capable of multiple personalities.

The amateur chartists are telling us that the SP500 has just experienced a head and shoulders top which should lead to a "measured move" down to about 800. Right now, we are trading near the neckline around 880 and a good break of that should, in these technicians minds at least, produce a sharp move down to just under 800.

What this thinking causes them to do is to short stocks right after the market makes a solid move below 880 or maybe 870. This selling could lead to a quick drop just below 850 but we don't think these new chartists will be able to capitalize on the "great" short idea because the market will not accommodate their analysis. When too many expect something, it is likely Not to happen.

Should you "hold off" until we get down to another support level? We would say that anything under the SP500 850 level should represent good buying opportunities. If a drop like that is accompanied by a surge in the volatility indexes, say VXO goes to 38 or 42, then we would say it is a great time to buy.

Here's what we expect will happen over the next two to three weeks. We have been well served by Elliott wave in the past and now we think it appropriate to go back to that model. We assume that the market will put in a bottom in the next three weeks and it will go something like a reverse head and shoulders with a sharp move down with a rally following. Then another sharp plunge to a new low and then a rally. This would be followed by another drop to a low similar to the first low.

In Elliott wave terms we are probably coming into a third wave low which will lead to a fourth wave bounce and then a fifth wave low, The low for the move. This would then be followed by a strong rally which would be a wave one up which would be followed by a wave two back down. From there we would expect you had better be in or you will miss the biggest rally in the shortest period of your life.

We will guess that the third wave would spike down below 850 and then the fourth would rally back above 850 but stay below 875 and then fall in a fifth wave to about 835 or so. Then we will have a rally back to about 880 or maybe 900 indicating that maybe something different is going on to those savvy few. This spike needs to be sold and we expect it to be sold down just about to 850 but maybe not.

The way to trade this is to simply figure out What you want to buy and how much you want to buy and then of course picking your prices. With the potential of three good buying opportunities coming up, we should be taking full advantage of them. For the stocks you want to buy, it seems likely that they will put in their bottoms in or near one of those three lows. You won't know which until after the fact. That means you have to take a shot at buying for the right price by being bold and entering orders that are GTC (good till canceled).

We have a difficult time doing that because we always think we can get better prices than just guessing in the evening when you are putting in your orders. We do think if you are buying a stock, you should only pick up part of your position on the first decline and more on the second decline and maybe more on the third, if they all develop.

As we view the overnight markets, they are mostly down including the US futures. The Japanese have just announced that deflation is still going on there, wholesale prices dropped 6.6% in June. There are other news items out of Japan and other Asian countries, perceived as bad for the stock market. Here in the US, the second quarter earnings are starting to be released which is giving some pause for concern. We think that will be part of the driver for low prices coming up but that after a while the market will begin to look past them to brighter days ahead.

We think it is time to start getting ready for a great buying opportunity for stocks. This could be the last good time to buy until after we go down next year. And, we think it is essential to financial success to be long coming out of these July lows.

Wednesday, July 08, 2009

Serious Planning Needs to Start

Top Line: We are starting to see the market drop into the area we have been waiting for...that would be the 850 level in the SP500. What to do now???

Since the market is finally dropping, we want to start looking at what we need to do. For those of you who left your portfolios alone for the past couple of months, you don't have to do anything. You simply want to stay with your positions. Don't get scared out of them as prices drop into the July lows. In fact if you have come into some addition cash, you would be able to buy some good prices during this period. That would keep your mind off the fact that your other positions are losing a little money.

For those of you who did sell into last month's strength, like we did, you will now need to decide what to buy in this great opportunity. If you sold your 401(k), you could just go back and buy what you sold. If you sold some individual stocks or funds, you can simply find a good price to buy them back. If you're like us, you have been watching them get cheaper over the past few weeks.

Then, if you were as crazy as we were and went short, you have a complicated situation on your hands. How do you time the short unwind with the long purchase. With our margin account, as soon as you sell one position you can buy another. In a cash account, you will need to wait for a day or two.

We do think that the market will give us some good signals as it already has so let's take a look at what they are. Let's see if you remember the big ones. Our target is 850 in the SP500 and volatility indexes getting near 40. The other one is weaker Treasury bond prices...remember that these prices have been rallying recently.

Today's action had the SP500 slipping under the 870 level briefly. That's not too far from where we would like to start getting back into the market. It's possible our 850 target is a bit higher than the ultimate July low but that's what we want. We want to buy as prices drop and buy weakness by putting orders in Under the market.

Today's action had our favorite volatility index, VXO, moving back up near the 34 range. This is after dropping under 24 about a week ago which was a great Sell signal for stocks. That's a big change and we expect higher "fear" levels as prices drop in the market.

The long Treasury bond was up strongly today (Wednesday) giving no indication that the end of the stock drop is here. Keep your eye on TLT for a good proxy. Today it closed at 96.50 after being below 88 about three weeks ago. Everything is on track...

Today offered a great opportunity to purchase both GDX and UNG. We tried to buy both but only ended up getting into GDX. We were pretty aggressive with our purchases today but the range on GDX was a couple of points, about 34.5 to 36.5, the lower price due to the gold price coming down near the $900 level with a $20+ drop during the day. We replaced our original position that we had sold last month. The price dropped from 45 last month to 35 this month which is about what we wanted to see. Now, we are prepared to buy more if the price goes down even more. Here again, the price of GDX making a new low for the move gives us another clue that the market has not found its bottom just yet because we expect GDX to Lead the market and if it's not done going down, neither is the market.

The market does seem like it wants to drop below 850 that we have been targeting for several weeks. Now that we've replaced our GDX position, we can start concentrating on our other stocks that we sold. They have all dropped by over 15% so we are going to need to figure out how to buy them back. We have been trying to set some prices to buy but we are still waiting for the market to drop to find out what those might be. Well, now we need to make some serious decisions. It's important to put in some orders below the market and let it come down to us. It is possible that some of our stocks have already bottomed so we may need to be a little more aggressive to buy them back.

Finally, we are pretty sure that the market will put in a bottom in the next two weeks so the time to act is over the next few days. Since next week is options expiration for July, we expect the lows to show up sometime near Wednesday next week, that would be the 15th. For now, that is our target date to have executed a plan to be back in the market. As our primary clues show up, we will need to hurry up our plan.

We are considering moving our 401(k) money back into the market over a period of about a week or ten days, buying heavier on weak days. If you have questions, leave them in the comment section and we'll try to get to them as soon as we can. For those of you who know how to send me emails, that would certainly work, too. Good luck.

Monday, July 06, 2009

Jackson Has Pictures

Top Line: We promised a few more pictures and here they are.
[Next Update on Wednesday evening.]
Batter Up...
The chick magnet is at it again, this time at the playground.
Crashing a graduation party...

Tough to hit a golf ball if you don't have your cool shades on...

Sunday, July 05, 2009

Jobs' Report Was a Bit of a Sell Trigger

Top Line: Market should continue to drop over the course of the next week or two.

Thursday's jobs' report released about an hour before the opening bell did seem to be a trigger for some selling as the market opened with a thud. The rest of the day wasn't much better although the damage was done early in the day. In the first 45 minutes of trading, the Dow was lower by 180 and managed to drop nearly 225 by the end of the day. So from Wednesday's high to Thursday's close the Dow dropped about 300 points. As for the NDX (NASDAQ 100), it dropped 35 points in the first 45 minutes and that's about where it closed.

As you might imagine the volatility indexes did climb strongly on Thursday after Wednesday's reversal. For example, the VXO traded down around 23.75 on Wednesday morning and then closed Thursday near 27.50. We expect this "rally" in fear to continue as the market puts in lower and lower prices over the next couple of weeks.

There has been too much bullishness since May and the buyers during that period of time should be pressured by now into reconsidering their positions. If, or as, the market drops in the next couple of weeks, there will be more and more urge to sell as people start believing in the continued recession theory. This week we should start seeing some second quarter earnings numbers which probably won't help the market out. In fact, this could generate more fear and therefore more selling pressure.

As we write this evening, the overnight US futures are down somewhat as the Asian markets are down a little, too. The Hang Seng (Hong Kong) index has recovered some of its lost ground but not the Nikkei (Japan). Monday morning should be pretty interesting as the US market opens on the back of the global markets lead.

We didn't provide any more pictures of Jackson but we will put some more up on Monday evening.

We hope you had a great weekend and now are ready for a couple of weeks of treacherous trading. Let's get back to it, shall we...

Wednesday, July 01, 2009

The Market WANTS To Go Down

Top Line: The early trade in the last "half" year was to buy 'em. That only lasted for about an hour as the market jumped about 1.5%. From there it was down the rest of the day. The market is ready to go down.

The next couple of weeks are going to be pretty exciting and scarey at the same time. We expect the market to go down giving some of us a chance to unload our shorts and buy some more stock. GDX moved up so much today, we are getting nervous that we'll not be able to buy for the prices that we want. Well, GDX should drop back with the market and we Will buy more of it.

The volatility indexes dropped to fresh lows today and then reversed. With new lows Again and stocks not near their relative highs from a few weeks back, this is extremely bearish.

Remember that Thursday morning we get the employment report which could be a problem for the market but maybe not...we'll see.

Here are some more pics for you.

Jason and his friends ran the half marathon again this year.