Wednesday, October 28, 2009

Is the Update Back In Sync?

Top Line: The stock market spent most of the day simply going down and we would say the trend has turned down. And, that we May finally be back in sync.

The news on new home sales was included in the "reasons" the market went down today but that doesn't really answer the question why sell stocks when new home sales aren't as expected? The market can think anything it wants and today it was in the mood to sell stocks regardless of the news.

Take a look at GDX and you will see that it has been on a mission lower the last week or so. Since Monday morning's spurt above 47 it has dropped to close at 41.87 today, a 10% move in three days. When we said we would consider buying it in 30's, we didn't think it might be this week. It's not in the 30's just yet but that's less than 2 points away.

You may have noticed the chatter about how the mining stocks have taken a beating when gold itself has only dropped a little. We say that the stocks move in front of the metal so we would expect the metal itself to drop following mining stocks down. We will see.

The catalyst for all of this is the strong dollar coming off its lows over the past few days. After the incredibly negative press on the dollar, the dollar refuses to go down anymore. The result is a sudden change in the playing field for commodities and the stock market. Even Treasury bonds have been strong the past few days, in spite of the huge supply coming to market this week.

It may be that GDX is too oversold to go down anymore but we don't recommend buying it at this time. We will take a look at it if we see a three handle (in the 30's) on it. Until then it's a falling knife and it should be avoided.

All we can say this evening is we are now glad to be short. A sudden drop is not out of the question. Take a look at our company, ING. They announced a restructure and the stock has lost 30% in three days. We wouldn't suggest that is how the overall market will trade but it is in the realm of possible. As we have noticed, there seems to be a lot of pent up selling.

The opinions we read today were quite bullish actually which we like. The headlines were that this is a buying opportunity not a correction??? This is different from what we have been hearing and should allow the sellers to continue their quest.

Monday, October 26, 2009

Another Downside Reversal

Top Line: Monday was Not up and that is something new...that we like. Monday showed yet another big reversal to the downside. These are bearish days and most likely are setting us up for a solid down move.

The market took off like a rocket this morning especially in the NASDAQ 100. In a half hour the NDX was up 1.5% and held there for about an hour when it fell out of bed suddenly. In the next hour, NDX fell 2% wiping out the early morning launch and then some. The rest of the day was spent just treading water. But, the action in NDX actually was an outside down day.

All of these downside reversals we have seen in the market the past few days should resolve to the downside. GDX is one of the confirming indicators. Maybe we should start with the dollar's rebound today.

The dollar was very strong today giving some deep knee bends for the commodities. What is kind of surprising was that the bonds were down today, too. We can rationalize that with the fact that the US Treasury is trying to sell a very large amount of debt this week. The dealers need to hold prices down so they can buy 'em cheap. Or, they are just going down. We are expecting the stock market to go down and some of that money should go into the dollar denominated US Treasury bond market. Just not this week.

Going back to GDX, gold was down about $15 dollars and GDX was down about 2 bucks at 44.69. This was after GDX was up about a buck in the early morning launch. GDX seems to have topped for the time being at the 49.74 high about two weeks back. So far, we've seen a 10% drop in GDX and we expect that it will lead the market down some more. We will be looking at buying GDX back under 40. We're not completely sure we will but we are keeping an eye on it.

Yes, Jackson likes swimming... Humpty Dumpty sat on a wall, Humpty Dumpty has a great fall. Now fall into the pool, Jackson.

Sunday, October 25, 2009

Strong Monday or Not?

Top Line: The market continues to exhibit topping action. Please see our comment in the last post for details on Friday morning's action.

The past several weeks have seen strong Monday's so maybe this week the market can break that pattern.

We have no time this evening for a post so will add more on Monday evening.

Wednesday, October 21, 2009

Another Important Reversal Day

Top Line: The stock market had a outside down day which is a bearish sign. We look for further confirmation of downside.

Outside down days are technically bearish due to what they imply. That being, early strength leading to late weakness, which is exactly what happened. Both ends of the day seemed to be driven by news about WFC (Wells Fargo). Early in the day, WFC announced blowout earnings and late in the day an important analyst downgraded the stock. So, news was a driver in this outside down day which doesn't sit well with us but we will definitely take the downside.

This action should be followed by further downside and it should come immediately. The technical picture is ripe with downside potential. Look at a chart and you can see that this vertical run looks very brittle. The possibility exists that the entire rise from the March lows is over today. Yes, we have said that before but that doesn't mean that it's wrong. In fact the next down move could be very destructive to stocks so to side step that move would be ok.

The volatility indexes were some of today's standout performers. The VXO dipped below 20 before blasting higher in the final hour. This is a meaningful reversal and gives us confirmation of the down move that happened in the stock market.

As for our gold mining stock proxy, GDX, it traded to 49 this morning just shy of last week's highs before dropping to close a little lower at 47.39. This reversal was strong but not as strong as the outside down day we saw in the major indexes. GDX started down in the early part of the day and could not get back below those opening lows, still, a strong reversal along with the stock market.

The dollar is the holdout in today's events. It too had a reversal but not as strong as we would have liked to have seen. There are so many dollar bears out there. Take a look at the news. It is unanimously negative. We can only ask why the dollar isn't much lower if all that is said is true.

Today's reversal is the clearest signal we have seen recently to indicate that the market may finally be ready to head south. We will continue to watch this move and see if it does develop into a lasting sell off. We said in our last post there is some pent up selling that could occur in a hurry. We are short already so that wouldn't bother us too much...but as you know we are certainly not very profitable over the past couple of months.

Listen to the market telling you to be cautious. Sell your long positions. The risk is too much to keep your positions.

Sunday, October 18, 2009

Market Trying to Decide What to Do

Top Line: The stock market is indeed struggling to go up. Friday saw some downside but not enough to convince us that the top is definitely in. We need to see some normal selling.

Friday's options expiration brought in a few sellers after the two days above 10K in the Dow. Tonight the futures are a little weak but we still need some proof for the downside. Yes, we are already short but the market has been indecisive about moving up. With the upward drift, selling has only been enough to relieve overbought conditions, not enough to get oversold.

Every day that goes by, we think the market can't continue to go up but it manages to hold on. The more resistance the market has to selling means that selling doesn't occur. We would say that there is some pent up selling that will come as soon as a little break down happens.

The Update is keenly interested in the market's down move that seems almost around the corner but still illusive. As you see the market turn over, we will be adding more information to the Update. Sometimes we like to comment during the day if we see something happening. If that happens, we need to put those thoughts in the comment section so check those out. We don't have the ability to post at work so a comment has to do.

The technical position of the market is measured in a couple of ways. Our favorite indicators are the dollar, bonds, and gold, not to mention the volatility indexes. Tonight we look at the dollar for a few minutes. It looks like the dollar is trying hard to put in a low. The media is trying to convince everyone the dollar is going down forever and no one cares that it's going down. The possibility is that there is so much negative press that all of the sellers are gone.

At the same time, gold is trying to find a short term top. The media is still trying to look at gold positively. The dollar and gold are polar opposites and normally they should trade opposite. With gold at all time highs the dollar should be at new lows but it's not. Last year, the dollar was even lower than it has been the past few days. This could allow the dollar to drop a little more but we think it is signalling that it is close to a low if it hasn't already put in.

Let's keep a close eye on the dollar to see if it is finding its way higher. If so, that would be negative for commodities in general. This may give us an opportunity if the market can move down. Stay tuned.

Wednesday, October 14, 2009

Dow 10,000, Let's Party???

Top Line: More of the same...the earnings for INTC and JPM were greeted with a big lift to the market. The Dow crossed back into 10K land and some would like to see that be the start of something big.

Everyone is excited about the Dow 10,000 event. March 1999 seems like a long time ago but that was the First time the Dow crossed 10K. That time, there were Dow 10K caps for all the traders on Wall Street. Were there caps today or just dunce hats? We don't know but the fanfare had to be much more subdued than 10 years ago.

Still, the media wants you to believe the fantasy that now is a good time to believe the worst is behind us. We are wondering where these news stories were in March when the worst truly was behind us, for the time being. Now, after a 50% move, they expect that you are OK to get back into the market.

Whatever you may think, after no gain for 10 years, there should be no celebration...but people who own stocks for the long term are eternal optimists. We call it the Lost Decade and we expect another Lost Decade to come. OK, enough.

As far as the real action today, stocks were up on the back of JPM and INTC earnings. The earnings were somewhat better than expected and that seemed to be the catalyst for the market's move up...expectations that most earnings reports will show good news. At some point the market will stop partying and move against those complacent stock holders or fresh new buyers. In the mean time, we hope they are very careful.

We are not going to say that we have called this market right over the past few months but we also don't think there can be much more upside based on the money that's been used to get us where we are.

Realism does cross our minds on occasion and this should be one of those times. We do not think the market can continue going up but it is. The right thing for the Update to do is to continue to wait for a point to get back in if that is truly the right thing. We won't know that until it actually happens.

We have considered our position that GDX would go to 55 and gold would go to $1100 but we seriously think there should be more than that. GDX has struggled to keep up with the move in gold and our position is that is not bullish for GDX or gold. We expect both should be sold right here and now. If we get a chance to buy GDX back we will certainly take a hard look at doing so. That would be around 40 and maybe even lower. However, even if that happens we would make sure that it was the right thing to do.

For now, the stock market is not safe due to GDX not leading anymore. We will continue to watch the miners to see if they can tell us anything else. As we have said, gold could go to $1100 but that's not all that far away. One of the Fed officials said that he didn't think the Fed would change their powerful accommodating policy until employment improved so gold got a little pop from that but we are quickly coming to a reversal in both the dollar and gold, of course in the opposite direction. Be careful.

What we are looking for in the stock market is a turn. What we have been getting for a couple of months is modest pullbacks with higher highs after them. This creates a safe environment for traders and gives stock owns comfort because they now don't have to sell. They sleep better due to all the little comeback rallies that have happened over the past three months. In order for them to take note, their stocks need to roll over pretty hard. When that happens, sellers will come back, probably in panic, as usual.

While it's easy, or seems so, to be bullish now, it will not be as easy when stocks are going back down.

Monday, October 12, 2009

Waiting Game

Top Line: The stock market traded pretty flat after an up opening. The main event was dullness. The market still seems to be putting in a top of some kind.

The Columbus Day holiday was a dull event and there really wasn't much new information that we saw. The market opened strong and the various indexes traded back to or near last month's highs. If the market wants to go higher, it will. We still think that the market has stretched itself too far already but with no impetus to go down, we need to wait for confirmation that it actually wants to go down.

As we sit here and wait for the market to make up its mind, time is passing with no meaningful moves. For the past month, we have traded in a pretty tight range (about 5%). The moves we have seen have not been easily traded so we have been patiently waiting.

The TLT has had a rough few days but it should be just a minor setback. The move coincides with a similar but opposite move in stocks so now we need to figure out if either is real. The only way we can do that is to wait for the market to tell us. The odds favor that the market needs to make a move down.

GDX and gold were continuing their dance with gold moving ahead of GDX as we mentioned a few days ago. This is not a good sign if you are looking for a confirmed higher move. It is possible that gold is heading to $1100 as we expect but even if it doesn't there should be a rapid move back down probably dropping back into the triple digits. Since GDX is not really confirming gold's move, we expect that GDX will move down below 40. We will try to buy some more down there.

As we move through the month of October, there should be some downside. This could be a swift move but we expect there to be a reason for it. Earnings could be the cause, whether they aren't good enough or are actually bad. The only real thing that matters is how the market deals with whatever news there is. We wait some more...

Sunday, October 11, 2009

No Post This Evening

The market should tell us more on Monday so we will post Monday evening. We went to the Twins' last game at the MetroDome tonight. Yes, they got sweep by the Yanks.

Thursday, October 08, 2009

Today May Have Been Significant

Top Line: Today was a key reversal day for gold and the dollar as both moved to extremes and then backed off. This has implications for the broader market.

We feel compelled to post this evening. There were a few key indications that present information that is valuable. The combinations are interesting.

The dollar collapsed to a fresh relative low like it seemed to have wanted to do for about a month. Meanwhile gold jumped to a new actual high. Normally this is what is supposed to happen, these two asset classes move in opposite directions. We think that the reversals are what are important today. The media will most likely tell you about the extremes in both and conclude they will continue in that direction.

Today's reversal is a first good sign that the moves might be over. Time will tell but for now we say that the market is showing us something different. The reason we say that is the action in GDX today. Yes, GDX went to a new high for the move near 50, that's true. But, as we mentioned yesterday, GDX is Following gold, not leading. This is not a sustainable in our opinion.

While this was going on, the stock market was merrily moving higher which it can easily do because it is Below its recent highs. We think the market can always get back to where it was but getting past that is what makes us pay attention. Today, the market failed to get back to the highs together with a new relative low in the dollar and a new high in gold.

Taken all together, we think today was significant. We hope you found some way to sell some of your GDX in the 49's today. If not, we would probably have you re-read yesterday's post and figure out a way to get off that risk for awhile as we wait for further developments. Tomorrow should tell us a lot about whether today was important or not.

Wednesday, October 07, 2009

Gold at New Highs

Top Line: The market does not seem to want to go down. Our key indicators are still negative on stocks. No buying should be done here.

As we look at the last three days trading, the Dow has run up over 200 points. GDX has jumped back up to the 48 level even as gold has mounted a rally to new highs. TLT has remained pretty strong in spite of these developments and we watch it carefully.

The key item for us is the dollar which is struggling under the strain of negative press, mostly. Gold has popped to a new high but the dollar and the TLT have remained steadfast. The dollar should be making new relative lows along with the spurt in gold and TLT should be dropping due to the same.

Let's concentrate on GDX for the moment. We are in a position that GDX is getting close to a long term capital gain if you purchased it last year at this time and haven't sold it. This makes the decision to hold on much easier since we still think GDX will enjoy some remarkable gains going into 2010.

Right now, with GDX under performing gold, we are getting a little concerned about GDX and frankly the gold move as well. Gold could well pop to $1100 and is moving up as we write. That price isn't too far away and we'll see how GDX reacts to any more upside in gold. With all of this bullishness in gold, we contrarians get nervous. The interesting thing is that no one actually believes that inflation may be a problem but still gold rallies. Imagine if people begin to think that inflation may come will soar. This is exactly what we think. We don't really think a lot of inflation is coming but we do think enough will appear so as to scare gold much higher which will be led by the GDX.

We mostly think that GDX Leads gold, not the other way around. If GDX is struggling to follow gold up, which it currently is, we would want to lighten up on both. Again, if you have a taxable position, we would be more cautious about selling if the position is close to a long term capital gain. If it is, then we may recommend a legal tax hedge just in case the complex drops.

Since we are trying to focus on GDX, we would want to short something else. This is not something that you should do without some serious thinking. In fact we're not sure we would recommend this to you unless you are close to a long term capital gain. If you are near a year, holding out until then would be an extremely tax friendly transaction.

We will explain this further if you like. Send an email or make a comment here. First of all you will need to get a margin account in order to short something. Please do not attempt this without full consideration of taxes and whether you really want to deal with selling your position.

This recommendation to buy GDX over the past year has yielded us great gains. That is not a good reason to sell necessarily but when you have a good gain you sometimes want to protect it. In this case, there are plenty of reasons not to sell. If you have been trading it all along and there is no pretense of a long term holding period, then you can feel free to do more trading.

The question then becomes is this a good time to get out. If it is, we would recommend a strict buy back point which we will be watching and waiting for.

With that in mind, the stock market is currently being led by GDX. If GDX leads the market and gold, at least in the current environment, then we need to watch GDX for clues. If GDX does manage to rally with gold here, we would need to consider that the market can go up as well. We do not have this position at the moment, as we are fairly bearish stocks. This, as you know, has not served us well over the past couple of months.

Sunday, October 04, 2009

Jobs' Report Disappoints

Top Line: The stock market seems to be tracing out a down move. The Dow dropped 200 points on Thursday and failed to make any headway on Friday after the jobs' report. The market should have a solid intermediate high in place and we will see how far it can go down.

Since the 23rd, the Dow has dropped about 400 points and we don't think the first wave is complete. The market may try a quick pop on Monday morning or maybe a little longer than that. After that we should see another drop to a fresh low for the move. At that point we may have the first completed down wave which will tell us some more about how far we can go down.

If we were to guess, that first wave could be around 550 points down to the 9350 level in the Dow. That should give us a good read on the next move which we will project when we have that information. For now, we would say that would mean about a move to 8500 in the Dow in the next month or so. More as we see it develop.

TLT jumped above 100 as the jobs' report was announced Friday morning but then dropped the rest of the day. Still, TLT is showing some strength over the past month and should give us some confidence in our current position that the market is declining. Meanwhile, GDX dropped to a relative low on Friday morning. Both of these indicators support our position.

October should give us a much anticipated drop in the market. The Update will be back on Wednesday evening and we'll see how things go.