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.


Anonymous said...

What if the S&P falls below 850? Do you see another number for resistance below that? Do you think we should hold off if it gets below that?



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