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.

5 comments:

Anonymous said...

Top Line (3 hours into Friday's trading day):
This morning's employment report seemed to be the right timing for the "top" to be put in. While the market has certainly held up here today we notice that the NASDAQ indexes have not broken above the previous highs for this move. The generals are out in front of the troops. Not a good prospect for continuation of the up move.

For what it's worth, the SP500 just now broke above the election day high back in November. While the other indexes don't sport the same pattern, the SP500 is providing what I would call a brief throw over to a new high. This causes a lot of speculation about much higher prices but we think it's a head fake rather than a break out move. This is especially the case since the NASDAQ indexes are lagging. If this move is legit, they would be leading the charge just like they have done the past month.

Other factors include: Our market leader GDX is down today, T bonds are down but not nearly to where they where last month, and the dollar is strong. These three points also fly in the face of a further up move. In fact the dollar has built a very substantial base and could easily move much higher which should corerespond to a flight to safety and away from risk.

Our positions remain very bearish at the moment. We would be, and are, sellers here.

Glenn

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QUALITY STOCKS UNDER FIVE DOLLARS said...

Its dropping like a rock alright.