Wednesday, September 30, 2009

September is Over

Top Line: Since last Wednesday's reversal, stocks have stayed under the high set that day. We will look to that September 23rd high as our ceiling.

Today's action gave us more questions than answers due to the early freefall followed by a churn higher. That up move took stocks back to where they were in the morning.

The market is struggling with several items this week. The Big one is the jobs' report on Friday but today's end of quarter probably had something to do with the somewhat wild ride. The quarter was very strong and the big money needed to do their final adjustments to show they managed to participate in the big rally. The morning's news provided the media with enough reasons to be confused and you can read their accounts for yourself.

Last week's highs should hold. We have seen a continued rally for the entire third quarter. No, it hasn't been studded with a lot of big days but just a steady churn higher. This gives people a sense of security and gets them to buy. The media have been calling for a high for a long time and we have been bearish for most of this rally, too. This has not been a good quarter for the Update. Maybe fourth quarter will be better.

Let's take a look at two of our indicators, GDX and TLT. GDX seems to have topped two weeks ago while the broader market seems to have topped a week ago. This is very compatible with the leading nature of GDX. As for TLT, it continues to be strong, putting in new highs for the move around 99. This action means the TLT has rallied over 10% from its lows. Higher prices for TLT, our long bond proxy, means that the safety play is still happening. That implies that the smart money is probably moving out of the stock market and into safe positions.

These two indicators are still lined up with our thinking process that we are in the early stages of a stock selloff. The next two days should be interesting. The first day of the quarter may give us clues to the rest of the quarter but the second day will provide some hesitation as we get the September jobs' report. What would you want to get into tomorrow. We generally say that the jobs' report marks an important point in the month. This month could continue that tradition. We expect October to have a down trend so Friday morning could give us an effort to best last week' highs and fail...or, it could give us something else. We prefer the former.

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

Wednesday, September 23, 2009

What Do You Know, a Reversal

Top Line: Huge Downside Reversal. Well, maybe not So huge but still it is a step in the right direction for the market, that would be down.

[Editor's note: We will Not post on Sunday evening but will be back Next Wednesday evening. We apologize for continuing on our Summer schedule but the market has been tough to read over the past month, at least for us. We were out of sync as you know from reading our posts. Since the July lows, which we were predicting and didn't buy, we have been struggling. Today's move puts us back insynch so to speak, at least we think so. We are thinking of adding a emoticon to indicate if we Feel insync or out of sync but haven't decided for sure. Maybe we will be insync for the rest of time...Right.]

Going into the Fed's announcement this afternoon, the market was holding onto modest gains, especially in the NASDAQ 100. After the announcement, stocks exploded to the upside for about a half hour and then it happened...finally...a Reversal which took stocks down the rest of the day. The decline was about 2% from top to bottom which isn't a lot and may not be convincing to some but it did give us some indication that the turn may have happened.

Today's trading represents an outside down day which is a good reversal day. Outside down means that compared to the day before the trading was both higher and lower and then finishing down below the previous day's low. With the market signalling its turn today, many were expecting something a lot different right after the announcement, but the market couldn't support the earlier buyers leading to significant selling in the final hour.

Things have been coming to this point for quite some time and the Fed announcement gave us the ideal reversal situation. First, with ever continuing zero interest rates, the dollar has been getting punished. Then today there seemed to be no relief and it plunged to new lows for the move. The sellers were then exhausted and the dollar rallied, basically leading the stock market but in the opposite direction. (See DXY on the bigcharts for a reverse image of the stock market move today.)

The telltale leader was GDX. As gold moved higher and higher GDX moved up too until a couple of days ago when both started to find trouble rallying to relative highs. Today's high in gold was near last week's high but was just too much to hold onto. Gold and GDX fell along with the market which should make some sense to readers.

What else should make sense is that the Treasury bonds moved with the dollar and opposite the stock market. TLT, our proxy for the long bond, has been trading in the 95.5 to 96.5 ranger for about a week and today it started to drop through 95.5 going to 95.2, again scaring the bulls a little. What is missed in the analysis is that TLT traded in the high 80's back in early June when the SP500 was 950. Today the SP500 was at 1080 before reversing.

The last piece of the pie is the volatility indexes which really traded with the dollar and Treasury bonds...also making sense to long time readers. The VIX found a new 52 week low today at 22.19 before reversing Up to close at 23.49. We expect a 3 handle on the VIX before this selloff is over. (For those of you who read this "handle" stuff and wonder what that means, we use it to indicate the Front number on the price, in this case that would be 3 if it was in the 30's.)

We sold the rest of our long positions except for a large quantity of UNG, we did sell some UNG today as well but only part of our position. With commodities about to drop due to dollar strength, we expect we can sit out of our long positions for at least a while.

We want to emphasize our long standing position that we don't want to ride this next wave down and there is a greater than zero probability that today's high was The high so we want to be out of our longs. We are strictly short (except for some UNG) and now we have a little cash to take advantage of the opportunities that present themselves.

We do have it in the back of our minds that public sentiment for stocks is still not giddy enough and we expect people to come back into the market full force before this rally completes itself. This Could happen after we see a good sized correction in the current rally. That's a while off but we want to be clear that we still think GDX will have a good run which will come when inflation worries hit the market.

We say inflation worries because the Fed, no matter what they may have implied today, will Not pull the punch bowl of easy liquidity because they do Not believe the worst is behind us. They want to Make Sure that the economy has survived this test well before they do anything to jeopardize the recovery. Again, we think this is a major possibility but we will assess this position as we find out how much the market can actually go down now...that should be a lot. Yes, it's a technical term. We will know more when we see how the first wave presents itself. Then we can at least take a guess. For now, we would say that the September move from just under 1000 in the SP500 should be completely erased and then it's just a question of how deep we get to the July lows around 870.

While we wait, here are some new pictures of Jackson. It was grandparents' day last week so we had frosted doughnuts with Jackson at his school. He enjoyed them as much as the grandparents did :-)

Great Gramma was here for a couple of weeks and she enjoyed some time with Jackson, too.

Of course, new pj's are always good, especially if they come from Gramma and have a monster on the front. At least you know where the monster is and it's not under the bed.

Remember, our next post will be next Wednesday, September 30th.

Sunday, September 20, 2009

Market Trying to Continue Advance

Top Line: With options' expiration behind us, the stock market should be free to trade with some normalcy...ok, maybe with the Fed's announcement on Wednesday the market still can be a little temperamental.

The market has had a pretty good September and it seems that we have been waiting and waiting for a break. Our position is that as the market goes up, we think it is becoming more and more dangerous. Meanwhile, there seems to be some complacency and outright bullishness.

We see that the overnight markets are a little skittish with the stock futures down just a little and gold down about $6. There are so many reasons for the market to go down but as long as it is continuing its run we have to respect it. Pullbacks have been opportunities to buy, not the start of a down move. With this uptrend in place, it does have an end and we will be waiting to see the trend switch from up to down.

With that in mind, we remind you that we are still looking for some more upside but we can not be Sure about that. We are pretty sure but, with stocks in a more and more precarious position, this could be the actual top. That is why we are so cautious and getting more cautious by the day.

As for the Fed, we think they don't carry the same weight as they once did. With short term rates virtually zero, what can they say to move the market? We don't think there is anything they can say. The market has given them the benefit of the doubt as to whether their money policies are the right thing to do or not. Only time will tell but the market seems to believe that what they are doing is ok.

We will reassess after the Fed's announcement on Wednesday.

Thursday, September 17, 2009

Market Tried to Reverse Today

Top Line: Stocks are moving ahead but the pace of the advance is labored at best. There are so many reasons for the market to stall and turn down, at least for a small correction.

The trading over the past few days has included the effects of options' expiration coming up Friday, the 18th. As we move into next week, a more normal trading pattern should emerge. That's not to say that the market will be easier to figure out, just that the multiple personality of the market will be reduced by one.

Let's take a look at the usual suspects, starting with GDX. Trading in GDX has become wild with huge volume and big moves, up, that is. We have seen this stock jump over the past couple of weeks from 38 to 48, a pretty healthy move. The move in GDX is not surprising because the broad market has gone up and GDX has been leading it for about a year now. The move in GDX gives you some idea how this stock can move if it wants to. We still expect a modest pullback in gold itself and GDX. Depending on how deep these corrections are, we will be buyers.

The volatility indexes have not done much of anything for the last week and have only modestly moved even as the indexes have run up 10% over the last couple of weeks. We don't believe the options' players are reading this correctly because the VXX has been dropping with the advance in the stock market. VXX is basically a volatility futures proxy while the volatility indexes we follow, VIX and VXO, are based on the options values.

Our constant companion, TLT, has stayed strong over the past several weeks, too, even though the market has gone straight up. Some have suggested that, at least on the front end of the curve, you know, the one to three month rates, with the expiration of some of the Fed programs, investors want to stay in the safety of Treasuries.

We see the dollar has also dropped to a significant low amid much dollar bashing in the media. This is indicative of a near term low being put into place.

The higher prices go, the more dangerous it becomes to be long stocks. We can't say that we have played this right at all over the past couple of months but the market is starting to become very overbought. The prices in some of these stocks have moved plenty far. Confidence is briming and very little fear remains. This fact alone is enough to drive a market in the other direction.

Confidence and the stock market should not be present in the same sentence. Every trade is a way to lose money and fear is a very good thing to have when your hard earned cash is on the table so to speak. Of course, we like to take advantage of good prices both on the entry point and the exit point but patience has never been a strong suite for us.

We are "confident" that we will be wrong in the future but we also think the market will have some struggles as we move into 2010 and beyond, with a possible low sometime in late 2011 or 2012. So, even though we think that the market will pull back here, we are much more likely to see it go down hard during the next two years. The market is doing much as we have said it would do...and didn't pay attention to our own words. Now, we think prices are just Too High to own them.

On Thursday the market did manage to reverse lower after a little bit of a run early on, which took the market to new highs for the move. The final couple of hours did manage to cut those losses but the market closed off its highs for the day, something new for a change.

Wednesday, September 16, 2009

Delay This Evening

Top Line: Stocks continued their upward movement with steady progress.

We have been out of internet access this evening so we will need to postpone our post until Thursday evening.

Lucky for you, there are some pictures of Jackson with his Sponge Bob Square Pants pillow and his Grampa and his stuffed chocolate Lab that stays at Grampa and Gramma's house.

Sunday, September 13, 2009

Down Monday Morning?

Top Line: The stock market continues to try to hold up with ever diminishing power. Tonight's futures and the Asian markets are down with the possibility that a down start to Monday may occur.

The main idea tonight is that the market is ready to take a breather. We have been waiting for that since, well, a long time. Our portfolio has gradually moved from extremely long to its current nearly completely short position.

With the volatility indexes barely breaking below their earlier lows, the market is set up for a good drop. When the volatility indexes are low that indicates some investor complacency, in other words, No fear. With prices drifting higher and volatility slightly lower, we expect a reversal in both of these directions.

Stocks, in terms of the SP500, should drop back down about 10% or down to about 900. If a selloff does occur, we sort of expect a sharp decline but we will be watching closely for a tradable bottom.

We still think the public is not sure about the market and a selloff would scare them off even more. What this tells us is that the market is not at its top but we can not be sure. With the market, you need to be careful about making predictions about what happens after the current move...but we seem to be disregarding that recommendation.

We think the public will find some optimism later in the year as prices take out the current highs and move a bit higher, yes, to SP500 1234 level. When this occurs, we will be watching to see if the public truly is buying heavily. If so, we will have more confidence that a high is at hand.

Right now, there is some exaggerated insider selling and the market feels overbought so we remain heavily short getting ready for a sizable pullback.

Wednesday, September 09, 2009

09-09-09 Update Failure, One of Many

Top Line: The stock market seems to have some strong buying interest on dips the last few weeks. The has been little net progress in the indexes but a pop to finish the move is possible.

We have been saying for months that the SP500 would go up to 1234 on this day, 9-9-09. Well, we missed by about 20% but we did get the direction right. We went back to our March posts to see when we were suggesting this level. It was on Sunday evening, March 22, go check the archives at the left for yourself. In fact, take a look at how bullish we were back then during the weeks surrounding the low on 3-6-09, SP500 of 666.

But, that was then and this is now. We have become much more bearish in our thinking over the past few weeks and have moved to a net short position which has just been painful as the market continues to defy gravity. What does the market tell us now?

The market has done very little in the way of net gain for several weeks. It has frustrated the bulls and the bears but maybe it has opened the door for some resolution now that full September trading is here. We say that but we realize that trading is not very strong in general. Citigroup continues to dominate trading (day trading probably) as it contributes greatly to the daily volume every day, at a price around 4 dollars. This is what the volume on the NYSE has come to, one stock trading around 4 bucks. This isn't something for stock technicians to be hanging their bullish hats on day after day.

But, we digress. The stock market may have some upside left. We thought that the market would take a breather when it got to an overbought position and it did but it was more like a shallow breath. The NASDAQ indexes as well as some other broader indexes did break their August highs today even though the SP500 and the Dow did not. We think it shows the wrong message if you are bearish. For bearish thinking you want the generals to be leading not the troops. So, we are again on the wrong side of this move. We can't say how far it will go from here but there certainly doesn't seem to be any real selling in sight.

From a contrarian's viewpoint, that is one of the most important considerations, complacency in sentiment. There seems to be no fear in the market as the volatility indexes hang around here in the low 20's. The other interesting event has been the GDX. We recommend a quick look at a ten day chart of GDX. You will see it sitting around 38-39 for the early part of that period and then a rally that culminated on Tuesday morning on a jump to nearly 47.50 and now followed by a close around 44 today.

One of the hedged gold miners, ABX, (American) Barrick Gold, one of the largest miners, announced that it would be unwinding its downside hedge. These miners like to protect themselves from a drop in the price of gold which is why they hedge. ABX has said it thinks the price of gold is going up. It is so strong in its belief that it is willing to unwind its downside hedge. In fact ABX is selling stock to pay for the unwind. This story seems to be part of the craziness in the gold mining stocks over the past seven days or so. Fascinating story for the contrarians. So bullish because gold can't go down...sounds like gold may be nearing a top.

We hope you enjoyed your 9-9-09 even though the SP500 did not reach our target for that day. We are still cautious and will be watching for more signals from the market.

Wednesday, September 02, 2009

GDX Screams

Top Line: The market did decide to slide on Tuesday after all the "good" news on the economy earlier that day. Now what? The stock market still needs to go down to get rid of some of the bullishness.

Yes, the switch from hugely bullish on Tuesday morning with a reversal from the down open to the positive situation an hour after the open. Then we see the Real reversal going from the 50 plus to the 200 minus. People are fickle and change their minds easily. It's a trader's mentality. The way a person decides what to do can't be something that happens with a 200 point swing in the Dow Jones Industrial average. Going from bullish to bearish in a couple of hours. Please.

The stock market seems to have put in a top on Tuesday morning. We won't be sure until we see some more selling but the idea that the market should go down is still in effect for the Update. As we patiently wait for the market to continue what it started on Tuesday, we will probably see a few days of upside going into the holiday weekend. This, of course, is Not guaranteed.

There is this one other Thing that we need to discuss, GDX. Did you notice that GDX was up nearly 10% today? We are not that happy about it since we don't own very much of it anymore. We were hoping to get most of it back in the area of 36 but that will now need to wait and possibly need to be raised. Gold itself jumped as it looked like it wanted to break out of its recent tight range. Gold mining stocks usually signal the move but actually followed this move today which doesn't confirm this move...still, the 10% move is convincing.

Treasury bonds have had a good few days and now are getting to a place where we might be willing to start thinking about selling them. We have been watching the TLT and have seen about 10% rally in the last couple of months with possibly some more to go. We will be looking to sell them as the market goes down. We'll keep you posted.

Meanwhile, the market continues to keep people guessing. That's the way it works, keep most of the people losing money.

This weekend is Labor Day and the Update will not be posting on Sunday evening as usual. We will post on Wednesday evening next week. We are not sure when we'll get back to a normal daily schedule or if we should. We'll keep you informed and if you have any thoughts, let us know in comments. Have a great weekend.