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.


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