Sunday, August 30, 2009

We Still Recommend Selling At Least Some Of Your Stocks

Top Line: Last Friday's action looked like the start of a downtrend as we mentioned in the comment section in our last post. The stock market should now retrace a great deal of the rally from the July lows down around 870 in the SP500.

The stock market's reversal on Friday didn't lead to much in the way of net selling but the opening blast followed by a cliff dive fits our definition of an important reversal. This reversal came at the right time and could be a harbinger of near term selling. The Asian markets, other than Japan, are down with China down over 5% as we write. The Chinese market has been the source of a lot of movement this year and that continues this evening.

We want to point out that the best course of action right now is to get out of at least some of your long stock positions. There will be lower prices in September to get back in. We sound like we know that will be the case and we Don't know for sure. The market's position Seems to be poised for a reversal. We are short and would certainly like there to be some selling.

What we do know is that sentiment has grown to a level that is too high to ignore. This sends chills down a contrarian's spine and keeps us firmly in the bearish camp. This message will be lost as the market drops over the next several weeks but for now it rings loud and clear...Sell.

What we do not see is full public buying of stocks. There may be some bullish sentiment in the press and among investment advisors but we still don't seem to see the public enamored with stocks. This would be the final piece in the puzzle for now but it just doesn't seem like there is much buzz about the market. This type of behavior will take more than a four digit Dow, which is one reason we are not convinced these current highs are the final ones for the countertrend move. This should start the chatter back up at work and in your family discussions. If bullishness is the conversation already, please let all of us know. That would definitely put us in a longer term bearish mood.

That thinking does not allow us to hold stocks here because the probability of a high here is just too high to ignore. As the market drops, or if it does, we will then see how the world reacts to lower prices. If there is a huge build up of negative sentiment, then we will get bullish again. If the volatility indexes go up very fast to levels of March, then we will probably get bullish again. But, if the market heads down and people continue to buy the dips and volatility does not go up, meaning there is no fear of a larger down move, we will have to conclude that the market will go into the abyss. We don't have to worry about that thinking just now but we will be watching it closely.

Right now we are watching the Treasury bonds, or our proxy for them, the TLT. We have seen a nice rally and this provides us with some confidence in the stock drop. Our other consideration is the GDX which popped over 40 on Friday but is well off its early June highs around 45. We continue to think its lows for the move are in down around 34 and will be looking to buy it back if it gets into the 36 range. We'll keep you posted.

Wednesday, August 26, 2009

Sell Into Whatever Strength the Market Gives

Top Line: There is significant lack of upward momentum but the stock market seems to float higher every day. The wind should be blowing in a different direction very soon.

We saw the big announcement that Bernanke is being allowed to run the Fed for another term. And, while that may not have been the reason for the early rally that day, it seemed like a good high profile news story to bring the last of the bulls in to buy. We don't always get a bell to ring signaling the high for the move so this may not be it.

The market started getting tired this week, no more tired than we are...waiting for the market to turn over. The first moves are not going to be big but the turn should be very close if not very noticeable. This is giving you a good chance to get out of your positions. We think there could be a significant drop, enough to warrant selling some of your holdings. We do think there will be a good chance to get back in a little later, say later in September.

If you want to hold onto your positions through this sell off, you can, but the odds of this recent move being a top are more than zero. We are pretty sure that the market will make new highs near our target of 1234 in the SP500 because the public is just now starting to get excited about the bull move. There needs to be a sell off to scare some of them off but then a large rally should spring out of the next low. This rally should get Everyone excited about the possibilities and that's when we will unequivocally sell our long stock positions. The point being that you can close your eyes for this drop especially if you are in taxable positions that could be long term gains if you hold them for another few months.

For now, we recommend selling at least some of your holdings, especially if they're in a retirement account where gains are not taxable right now.

Sunday, August 23, 2009

Is It Possible for the Market to Go Down?!?

Top Line: We didn't get any selling at all and the market seems like it wants to go even higher. The market may Feel like it wants to go higher but that's not an emotion that you should be paying attention together.

With the market moving higher, we deem the market to be ever more dangerous. We would recommend taking the opportunity to sell into this strength. We know that the most likely situation is that the market will resolve to the upside over the next few months but it is well overbought right now. So, if you decide to get off the risk for now, there may be a rush to get back in if we get an opportunity.

The possibilities are endless about how the market will move. This is the last week of the month and the market has been strong recently. Last Monday's big drop was severely bought and gave the market four days of straight up to make up for that loss and then some. This evening the futures are higher after the Japanese market jumped on the gun, up 3% as we write.

The end of the month is coming and the end of vacations is also over. The real traders will be back soon. Friday's volume was a little heavier than we've seen over the past few weeks but it was options' expiration which normally boosts trading. The next week or two should start to see some higher volume as people come back from the Hampton's or where ever they are. We have not been trading nearly as much over the past few weeks due either.

When the market dropped last Monday, many bears came out of hiding. This was a clue that the bullishness had dissipated at least little. We are surprised that this was enough to push the market up as much as it did and with possible more upside early this week. We are patiently waiting for a pullback that is worthy of the rally we have seen over the past week.

Our main focus is the level of the market. Last week we thought that 1018 in the SP500 would hold any rally but that obviously did not hold. Now, the market has thrown itself over that level and created a lot of extra bullishness...this Should be enought to get us a selloff. We'll see.

Wednesday, August 19, 2009

We Need Some Selling

Top Line: The best we can say this evening is that the SP500 still has that 1018 level overhead which should not be touched before we see lower prices.

Stocks opened lower on China's weakness overnight. That didn't last too long and buyers came in to bid up stocks. Halfway through the day another burst of buying occurred taking stocks positive on the day.

We follow and trade the NASDAQ 100 and various funds that are based on it like QQQQ. We have been patiently waiting for some movement in the market over the past month or so and noticed that the QQQQ has traded in a narrow range of about two points during that time. Monday saw that index drop but it stayed in that two point range.

There was some movement in some of the stocks/funds we watch. Even GDX had a wide range today with a start near 37 moving up to the 38.50 range. Ok, maybe it's not a huge range but it was a really good trade. We have been talking about buying GDX in the 36 range so we are very close to start our buying campaign, but we're not there just yet.

With options' expiration coming on Friday, there could be some volatility in prices just because there has been such a tight range over the past month. There is no obvious strong conviction on either call or put buyers so there may not be much in the way of options' driven trading.

But, the market has failed to move up over the past month and has just this week broke down a bit. The last couple of days have corrected the out-sized move on Monday. We say out-sized based on the trading of the past month.

Now, we are coming to the end of the earnings announcements and the market may be free to trade on its own. We think the market could be weak over the next a weak week on the horizon in our view. Going into September we should see a 8 handle on the SP500. It may not drop too far into the 800's but we think that a move down would at least put a scare into some of the bulls allowing for another run up into the fall.

We have thought there has been too much bullishness and now we have seen a flat market for a month. That is enough to relieve the bullishness but in order to see the price levels we are expecting there has to be some out and out bearishness which can only be generated by much lower prices. These small pullbacks like Monday are still buying opportunities to the players. This is Not bearishness...

Sunday, August 16, 2009

Back to Work, and BTW Tiger Lost

Top Line: The stock market should have topped back at the SP500 level of 1018 and so far the market has respected that line. The slow turn down has started. This move will be faster later in the move, in September.

The stock market showed some signs of price declines, especially on Friday. There was some bounce back late on Friday but we think that bounce was just a little countertrend correction of the down move. What that means is that a decline, or advance, will not go in a straight line. There will always be Corrections in the move that go against the main trend.

We just thought we would mention how GDX has been trading. Over the past ten days GDX tradeded up to nearly 42 and last week it broke 38.50. Back in mid-July GDX nearly got down to 34 which represented good value and now looks like it may be the low for the move. The stock will most likely suffer some further declines as the stock market drops but we do not think that the 34 low will be taken out. Another way to say that is GDX has probably put in its low for the move and will not go below it in the next month. Another way to look at it is that if it gets down to the 34's or so, BUY IT. We'll keep an eye on it, too.

We have been on vacation and have not been watching the market during the trading day. [We have been at the PGA Championship this week and no cell phones were allowed. Not only that, today Tiger Lost.] We hope to be more on top of it starting Monday. Any thoughts from you?

Wednesday, August 12, 2009

Short Update

Top Line: We are on vacation this the market is still trying to put in a top. Today's new relative high in the NASDAQ 100 was not confirmed by the other indexes. The market is struggling to stay up. Even with the Fed's announcement today and the real estate news, the market is still struggling. Full Update on Sunday.

Sunday, August 09, 2009

Just Waiting for Downside Confirmation

Top Line: The stock market seems to pivot on those employment reports and last week's report could be one of those pivots. We expect to see lower prices over the next few weeks, maybe into September.

The market failed to hold onto all of its gains late Friday and went out a little weak. The SP500 hit 1018 mid-day Friday and closed near 1010. The 1018 should represent extreme overhead resistance even though the market could rally Monday morning. The week end news was pretty bullish, meaning we would be very bearish, so most of the public is now confident in a market advance even though the market has already gone up 50% in a little over four months. Welcome to the party, but it's about over for now.

The message of the market is clear right now...tough sledding for the up move. More likely, the market is about to take all of those buyers down with it. The bullish consensus could bring more late buyers in after the weekend but there aren't many left, especially after Friday's capitulation buying.

Our comments on Friday morning still hold. The dollar has put in a pretty good bottom, it seems, and this gives us some confidence about the rest of the market. Strong dollar means weak stocks and commodities but strong Treasury bonds. We are looking for an increase in volatility due to falling stock prices.

GDX fell below 40 once again which should lead the way for stocks in general to follow lower. We are light on GDX after selling some of it last week so we are going to be looking to buy some more back here in the 30's, hopefully down in the 36 range. We'll keep an eye on it. We don't think it will punch through the low near 34 but it could give us another great buying opportunity down around that 36.

For now, we will continue to hold our bearish positions and expect the market to turn down from here. We say the turn will be subtle for a few days but it will eventually turn into serious selling. Too much bullishness will give way to selling and then Too much bearishness...which will be the time we want to get excited about the rally going into the fall or early winter.

We do need to see some downside to confirm our position that the market is going down. That would include a continued move in the indicators we mentioned above.

Wednesday, August 05, 2009

Market Ready to Drop

Top Line: The stock market needs to go down. The spike we saw last week was not the top as the market decided to push a little bit higher this week. Now, let's go down.

The main news item came after hours in the form of CSCO's earnings. The normally effervescent CSCO CEO John Chambers was less than sure about the bottom being in just yet. He wanted to see some more data before making a determination.

This revelation was not well received in the after hours as CSCO dropped about 3.5%. This move dragged down the overnight futures but only modestly. The bulls still think these little pullbacks are buying opportunities...which brings us to our post.

The stock market has been struggling to maintain the upside over the past week or more. Most bulls say that this means that the market can go higher right now. Well, yes it has gone higher for the past few days generally but it's not making progress. Today (Wednesday) it was down slightly and yesterday (Tuesday) was mostly flat.

As the market goes higher, the Update is continuing to sell its stocks. We have become very bearish in our positions. We do hold some modest long positions but we are mostly short right now. We were using our short position to hedge against a drop in the market and as the market went up, we started selling our stocks and buying more hedges until now we are heavily short.

We're not exactly sure how this happened which is a bad thing. But, we do feel like the market has a fair amount of downside over the next four to six weeks.

For those of you who held onto your stocks, good for you. Now you should have some pretty nice profits. We want to say you should lighten up for the downturn but, if you do, you will need to make sure to get back in later. We are looking for a nice pullback and then a good sized run up going into the fall.

For those of you who sold some of your stocks, you may want to sell the rest of them here. We assume you are agile enough to try to get back in as prices drop. We will need to be patient.

Today, the market is trying to put on a brave face rallying in spite of any and all bad news. This week's employment report coming out Friday morning is expected to show a modest improvement in the job losses but a little uptick in the unemployment rate, a number already very close to 10%.

Our perspective is that the market is ready for a pullback to correct this huge run-up over the past month or so. It will start slowly, like yesterday, with a little weakness and then it will get some legs. We expect the volatility indexes, our main fear gauge, to rally strongly, as people begin to wonder if the sell-off will test the March lows. We don't think that will happen but just having people talk about it will be enough for us.

We will be watching the volatility indexes for confirmation of the drop. We also expect the Treasury Bonds to go up along with the dollar. Commodities, such as gold and oil, may drop along with the stock market. We would not like to see UNG drop now that natural gas has reached $4 again but it could drop, too. We have sold much of our GDX holdings again but will aggressively buy it back if it drops back into the 38 range. We'll keep an eye on it to get as good of a price as we can.

Take care and we'll be back on Sunday evening.

Sunday, August 02, 2009

Intermediate Top May Be In

Top Line: As we mentioned in our comment last Thursday morning, we do think the market reached an intermediate high and will now "correct" the rally of the past several weeks.

As we have been repeating for the past few posts, the media has pumped up the bullishness in the marketplace. The contrarian in us generally gets the chills when bullishness gets so high. We have sold a bunch of our long positions but have kept a core position in most of our favorite stocks.

We point to our standard warning systems, as boring as it is, but they have told us nothing different over the past few sessions. Treasury bonds are showing some surprising strength. Our standard proxy for the long dated T-bonds is the ETF TLT. Last Monday, TLT traded near 90 and by Friday it was near 95. This is the boring T-bond, up 5% in a week.

Meanwhile the volatility indexes seem to have put their lows in about five or six trading days ago even as the market climbed to its peak on Thursday. This shows that relative increases in prices of stocks has not improved the volatility and should be showing that the a turn is now in the works. We expect the turn occurred on Thursday morning.

The market should turn down and trade lower over the next couple of weeks. Now we just need to see the turn develop and try to estimate the low. We would normally say that the minimum distance would be about 38.2% of the prior move. From the 869 low to the 996 high is about 127 points so roughly 50 points down would be our absolute minimum down move, about 950 (basis the SP500).

We think the drop may gather some steam and could possibly drop much more than that even to the extent of going below 869, although that would be an outside chance. We don't know where it will go but we do think the bullishness is too much for it to stay up here for now.

Ultimately, when this correction plays out, we expect that bullishness will wane dramatically and we will then see a huge rally that takes the SP500 up to our initial target around 1234. It looks like our date of 9-9-09 will be more like 11-10-09 but we still like the 1234 level.

We'll be back on Wednesday evening as we continue our summer schedule.