Strong Reaction to the Bad Bank Concept After Hours

Top Line: Yes, we are still bullish nearterm...

The stock market tried to go up on Tuesday and it did manage to squeak out a 50 point gain in the Dow. This is not the kind of rally we are looking for...

Tonight the futures are up on the back of a couple of news items. The first is some "bad" news from YHOO but the market decided it actually wanted to give their new CEO a chance to make a difference. The other is the progress being made on the stimulus package. Oh, well, the market finally thinks there will be a stimulus package.

The rally we expected near the inauguration is now going to kick into gear with the expectation of a grand stimulus package. Sure, the market may not jump on Wednesday but the delayed rally is coming. Looking at the areas of strength, we think those are energy related and we do like the GDX. Today, Peabody Energy (we like their symbol, BTU) announced earnings that were $1.10 versus the 74 cents expected. The coal industry was the best performing on Tuesday at over 8%. Peabody (BTU) was up 12% by itself.

Part of the stimulus package seems to be directed at the Bad Bank concept. The bad bank idea is gaining momentum and has been around for a while. It will probably be the latest effort to "get the lending going again'. The article discusses a couple of issues and we recommend a quick read to get the highlights of the situation...this includes nationalization and the Fed meeting going on right now.

The rally in the after hours has to be looking specifically at the stimulus package progress. Banks were acting pretty well in the afterhours but so were many other groups. Whether you agree with what the government is doing or not doesn't matter. What matters is what the market is thinking. We expect that the news could rally the market at least as far as the "buy the rumor and sell the news" saying goes.

Last week we recommended SSO saying it "is a good buy near 21 with a good upside potential". With the Dow dropping below 8000 last week, the SSO traded below 21 a couple of times and was a great buy there. We think it has good potential in this rally. The target is 30 plus in the next several weeks.

Late last year, we warned you that we would be trading more than we had over the past several years. We have liked the GDX and have recommended it on many occasions. Right now, if you are buying something, we would probably not recommend GDX because there are better deals out there. We said we were buying (and adding to our positions) energy names last few weeks and those included natural gas and coal.

The stock market is about to go on a good run and the economy seems to be going no where but down. It is important to fade the news on the economy and focus on the opportunities in the market.

GDX Discussion

Top Line: The news continues to be bad and the market just keeps on hanging on. We continue to expect a rally. Most of the earnings are behind us and we do have the end of the month just ahead.

This morning gold was up and so was the GDX. We saw the goal line to be near the 200 day SMA and put in an order to trim some of our position. We set our prices too high and failed to sell any of our position. We are running into the situation where the GDX has gone up while other assets have just held their own, making the GDX a giant portion of our portfolio. Plus, as we mentioned, we have no cash left to take advantage of any opportunities that come along.

We do not want to sell our GDX at any price just to satisfy our need for cash or to rebalance our portfolio. We want to sell GDX, or any position for that matter, when it makes sense to do so. This morning with the GDX pushing up against its 200 day SMA seemed like a good time to sell into strength. We do think that higher prices are coming but sometimes we like to play around and try to do things that make sense to us at the time. This morning's peak at 36 preceded a severe drop in the stock back down to 33.50. That's a big reversal.

We think that GDX is still headed higher but we have been in it so long that we remember that it is no longer a value play like it was back in October. That's when we were shouting that GDX was a buy. The rally ahead of us should take GDX up through its 200 day SMA and then it will drop back along with the market. The GDX may drop through its 200 day SMA but if it does it should not stay there very long. Yes, we are getting ahead of ourselves but we have been waiting for a rally for a couple of weeks now.

In the news, existing home sales were up nearly 9% in December as mortgage rates and home prices dropped allowing buyers to get in on the cheap. The other "surprise" news was the leading economic indicators (LEI) were up rather than the down forecasted. As we mentioned in our last post, if the market expects bad news, how can it be a surprise? That would be, if the news wasn't as bad as feared.

End of the Month Rally Due

Top Line: The stock market struggled to go down on Friday and that alone could lead to a strong rally coming up in the next few days.

After a valiant attempt to go lower and the lastest Bad news, the market rallied out of the depths. We have been watching the market trying to get below 8000 for four straight days. Every time we get under 8000, buyers come in to hold that line. We don't think 8000 is a particularly important number but the market does seem to be holding the line here.

The market had tried to go below 8000 back in October and November of last year and it couldn't stay there at that time either. We think the sellers are about done for now at least. After a three week decline in prices, the bears are out of selling power. Check this article from CNN Money. The whole article is bearish even though every possible item is "expected" to be bad. If the market expects it to be bad, then it's already been priced in.

Let's go back to Friday's action which seemed pretty commodity friendly, particularly in the precious metal arena, where gold exploded for 40 bucks. GDX got chased up over 8% to the low 34 range after getting as high as 34.67 during the day. That is the highest the stock has been on this up move that started back in late October, under 16. Back in our January 14th post, we mentioned GDX being around 28...a good buy then. Now, it's up 20% from there.

The 200 day SMA (simple moving average) for GDX is sitting right above it around 36 and that should be some resistance for it; but, with the 50 day SMA moving up it's only a matter of time before the stock breaks through the 200 day SMA and starts to pull it up. Looking at the 50 day SMA is one of the clues that the drop down to 28 was a good buy. That was just above the 50 day line and the 50 day line was moving up.

We think the stock market has the power to jump 20% in a couple of weeks, too, just like the GDX. It's true that the 50 day SMA for the Dow is still moving down and the Dow is under it. There are so many other signs that the market is ready to go up now. We have mentioned them in several of last week's posts but we mention our favorites here again, the drop off in the Treasury bonds prices and the height of the volatility indexes.

Happy New Year to our Chinese friends.

MSFT Spoils the AAPL Rally

Top Line: The market is being very volatile up one day and down the next. This is the way bottoms are formed. The next few days could be volatile leading to a sharp up move.

Today, MSFT (yes, Microsoft) delivered news that they would release up to 5000 employees. We were expecting an early morning rally after AAPL's news last night but MSFT squashed that thought. Maybe we shouldn't even mention that GOOG's earnings were pretty well received after the market closed. In fact, GOOG rallied on the news at first but couldn't hold it.

This setback gave us another opportunity to use up the last of our cash to buy some more stock...yes, in the commodity category again, energy complex this time. We do Not like to be without cash, though, because we have enjoyed having the flexibility to take advantage of whatever opportunity showed up. We thought that we would be shorting into the inauguration rally which Still hasn't showed up. With that rally we would have lightened up on our long positions and had some cash for further opportunities. Instead, we found some intriguing buying opportunities in this decline.

We've had about enough for one week. Next week is the end of the month which normally brings the bulls back to the party. For now, we'll just wait until next week. Still, if the market goes Down any more on Friday or early next week, these may be good opportunities to buy some more...well, not us due to no cash. We can't let this happen again.

Have a good weekend...

Will the Market Go Down This Year?

Top Line: The stock market is in the early stages of the rally we have been waiting for the last two weeks...yes, finally. We expect a rally that will come as quite a surprise to most analysts or, for that matter, amateur traders like us.

In the last couple of days we have heard some comments and questions from a few sources. We thought this would be a good time to answer these questions. We're trying to let the market tell us what to do and the questions are all about whether to trade your cash in for stocks or keep the stocks you have.

How low can the Dow drop this year? We don't really think there is much reason to talk about what may occur in December because that's not what anyone cares about. What we all care about is Now. Let's be clear, we are generally bullish for the next several months with a few scary drops during that period. But, just for argument, we will consider a short term drop for discussion.

Elliott wave theory may need to be employed at this stage. There is a minor chance that the current downturn is a wave five like we mentioned in yesterday's post. If this is true, we can sort of estimate an area where the "low" may occur.

[Tutorial: For Elliott wave, the first wave and the fifth wave can have a similar length. You may remember that the first wave, the third wave, and the fifth wave travel in the direction of the main trend while the two wave and the four wave are countertrend waves and move in the opposite direction of the main trend.]

So, how long Is wave one? Well, the high was back in October of 2007, and the first wave down was about 2500 points from 14K down to 11,500. This would imply that the fifth wave could be 2500 points also. Now, when did wave five start? That's a big question for the Elliott wave stance. Some may say that it has not started just yet but if it has, we could argue that the start of wave five was around 9500 or a little higher than that. That means that A target for the end of the fifth wave would be around 7000.

We could argue that the November low right around 7400 Could be the fifth wave low and we are now in the countertrend move to correct those five waves down from the 14K top. Here's where Elliott wave can help us again. Those five waves down we have been talking about are the essence of Wave One of the big down move that we expect to last for a long time. The important thing to know is that the countertrend usually has a minimum target of 38.2% and a maximum target of 61.8%. Those would be about 2500 and 4000 points off the low. Just an estimate as to targets for the Dow would be a range of about 10K to 11.5K based on these numbers. These are approximate numbers and just give us an idea where we could go. The one issue here is that a wave two is notorious in that it likes to go much further than 61.8%. This excess movement is driven by people who will think the worst is behind us and it's off to the races again.

Our position is that the market has seen the lows but there could be slightly lower 2009 lows. We don't think it's enough to stop you from buying. Over the past week, we have moved out of cash and into the market. We had sold some of our positions in late December to prepare to short into the strength we would have by the inauguration...well, no that didn't happen but with that cash we got a nice present from the stock market in the past few trading sessions when the Dow dropped below 8000. We bought a couple of stocks that are near their lows of the last couple of years. Plus, the leftover cash we had in our 401(k) was moved into the market on Tuesday. We have very little cash left, maybe about 3% of total assets. We are fully long and bullish in case you are wondering.

Today's market was just what the doctor ordered based on that VXO high we saw in Tuesday's trading, not to mention that drop below 8000 again. These prices are hard to ignore and represent good entry points for this Bear Market rally.

During the day, Jamie Dimon of JPMorgan decided his company was cheap enough and bought 500,000 shares, an $11 million purchase. This is a guy who is not going to get a bonus this year and he had to pull this out of his saving's account in order to buy these shares. Ok, maybe that's not what he did. Also, Ken Lewis over at Bank of America bought some stock. So, if you think the bank stocks are going to zero, Why are these guys buying their own stock? To us, this is the one thing that should make Everyone realize that the financials may have found a bottom...

The Treasury bonds spent the day dropping over 3%. When these T-bonds go down, we get more bullish on the stock market because a lot of this money being taken out of bonds will go into the stock market. Even the dollar reversed course on Wednesday.

Also, after the market closed, AAPL brought us a little bullish present just like IBM did on Tuesday evening. AAPL's earnings were better than expected giving the market another excuse to go up. This evening the US futures are up strongly with a nice pop scheduled for the opening bell. Asia is trading up about a percent. Since Europe was down on Tuesday, they have some catching up to do so there should be a "spin around the globe" rally...at least at the US open...no, not the golf open, the Stock open.

Wall Street Drops Hard Even With Washington Events

Top Line: Stocks were on sale on Tuesday. Did you buy any? Tough to buy weakness.

Tuesday's trading included about a 20% drop in the banks, including our employer, ING. The top four volume leaders were Bank of America, Citigroup, Wells Fargo, and JP Morgan, all down 20% or more on the day. Their total volume exceeded 1.1 billion shares or about 65% of all volume on the NYSE.

The Dow dropped below 8000 once again on Tuesday so the reversal the other day from under 8000 was not the key reversal. But, here we are again. Is this a reason to sell??? What happened today that we think is important? Is the Dow under 8000 an important event today or not?

The selling was aggressive on Tuesday and the fear grew all day with the volatility indexes rising all day. In fact the VXO rose over 10 points to 56.25. A 300 point drop in the Dow was enough to push the VXO up over 20%. What else?

To us, the biggest sign is the GDX. GDX was the first to turn down which gave us a clue that the market would probably follow suit. Now, GDX looks to have put in a bottom last Thursday. That is a big hint/clue on what should happen to the rest of the market. GDX moved from its Thursday low of 27.15 to today's high at 32.51, nearly 20% in three trading sessions. This may be a little more than what the whole market may do but the direction should be correct.

The last few trading sessions, we have put our cash back into the market on the long side. Even though we suggested that the SSO may be attractive under 22 in our last post, we didn't buy it today. We decided to buy something else. We still think the SSO is a good buy near 21 with a good upside potential. We also moved the remaining cash in our 401(k) into the market.

So, after the close, IBM announced earnings that were surprisingly better than estimates. The market liked this news and pushed IBM up over 4%. This news persuaded the futures to pop a little and are still up right now as we write. The Asian markets are down some, likely in sympathy to the Dow's 300 point loss.

We don't want to waste any time on the banks this evening but you can go read about the nationalization of the banks starting with the RBS (Royal Bank of Scotland).

But, we do want to consider the possibility of a rally off these lows, maybe spurred by the IBM news this evening. When so many people just sell without much thinking, as happened today, the time to think about buying is at hand. Those people that just sell in panic or buy puts in panic or in speculation should not get rewarded for this activity after a 1000 point move down in the Dow. We say that the bears are so prevalent now that the market will have difficulty following through on the downside.

If you want to pay attention to Elliott wave, the market is trying to put in a fifth wave low of the first wave down someplace between here and zero; so, whenever the fifth wave low is in, that is a final move and suggests a strong wave 2 rally which would correct the down move from the 14k high to the 7500 low. Just a 50% correction would take the Dow back to 10,700 or so, with a normal retracement of 61.8% which would take us back to near 12K.

What we're trying to suggest is that a 300 point down day is a good buy especially considering the possibilities. Can the market go down another 1000 points or more? Of course, it can do whatever it wants to but we think a year long "bear" move deserves some recovery. When a lot of bearishness prevails seems to be a good time to think that will happen. With a VXO of 56, it's a really good time.

All Eyes on Washington...Bears on the Street

Top Line: The over night futures are weak this evening which may lead to a lower opening on Tuesday. The low prices are shaking many out of the market in order to prepare for a good rally.

Options expired on Friday with some minor drama. The Dow opened up about 100 points and then sold off about 200 points from there before rallying back those 200 points into the close. With a little selling just before the close, the Dow managed a 68 point gain for the day...but, that's all so "last week".

Tuesday marks the beginning of a new Presidency and should have been enough to rally the stock market over the early weeks of the new year. That has just not happened so will the next few weeks start that rally or not?

The US market was closed on Monday (which is why there was no post from the Update on Sunday evening...we only publish on the evening before trading days). The other global markets were mostly open and largely lower so the US is making up some ground to the downside this evening. We'll see how trading goes here on Tuesday.

The market seems to be making a run at lower prices but this should be a buying opportunity for those of you with some cash left. We have some left and will probably be looking seriously at purchasing more this week. We have been heavily leaning toward commodity type positions including commodity producers over the past several months. Our top holding is GDX which had a solid advance from Thursday's lows around 27.25 to Friday's close of near 31. Gold itself rallied 4% on Friday to encourage the GDX. We think we own enough of GDX, so we probably won't be purchasing anymore this week plus after a giant rally this is not a good time to buy it.

We have been thinking about getting back into the long index ETF's and they now may be getting cheap enough to consider again. However, the commodities look so cheap and seem to have a lot more upside to them so we would like to see a further drop in the stock indexes or we would buy more commodities that are cheaper.

Looking specifically at the SSO, it traded up to near 29 a couple of weeks ago and fell below 22 last Thursday. Friday it traded up near 24 and closed just above 23. We think the near term potential of this is about 34 so if we can buy it back down under 22 we may consider it. The QLD doesn't seem to have dropped quite as much over the past couple of weeks so doesn't look as attractive but we will keep an open mind about it in case it does give us another opportunity down around 24 or less.

Tuesday's trading will give us a good idea what will happen in the near term so we want to keep a close eye on trading. Given good opportunities we may take advantage of them.

We are doing more trading than we normally would but given the market's volatility, we think trading will need to be done more over the next few years. There may be long periods where trading is not needed but in the short run the market has given us plenty of trading type situations.

Right now we are getting close to a large rally and we don't want to miss it. Thursday's turn around may have given us a good indication for that rally but the market wants to hold that obvious until the last possible moment. That serves to confuse as many as possible.

We see the volatility indexes as far to high to consider selling our positions. The VXO should get into the 20's before we think about selling and it's still in the high 40's. The bears are out in full numbers according to these high levels so we think the market should rally strongly to shake out these bears.

Important Reversal From Just Under Dow 8000

Top Line: The stock market staged a pretty good turn around during the day. After being down 200, a 300 point rally erupted over a two hour period before closing up just a bit. This could be the turn we have been looking for or it might just be that options expire tomorrow (Friday).

With all of the news from AAPL on Wednesday evening to Citi and Bank of America on Thursday. The entire market fell out of bed at the opening bell and couldn't mount a rally until midday when the 300 point rally came out of nowhere. If you would have purchased AAPL in the after-hours on Wednesday, you could have bought it for around 75 and on Thursday it traded up to 84. This is the emotional sell-off we mentioned in our last post.

The Update has been focusing most of its portfolio in commodities which have led the market down over the past couple of weeks. But, we had moved into some cash late last year so that we could have some more flexibility. We didn't think that we would be using it the way we have the last few days. We thought we'd be shorting into the rally by now but that has not happened.

That is what is nice about having some cash, you can take advantage of opportunities that avail themselves like we have seen over the past couple of days. We paid very nice prices for these stocks and should have good upside potential. Well, we think they're good prices. Only time will tell. We don't think we'll have too long to wait.

One of the problems with trying to predict the day to day market movements is that you can't always know exactly how the moves will develop. Based on Elliot wave, there are several possibilities at the moment but we were pretty confident that the market would go up before it went down. Now that it has moved down, first, we are more confident in the rally.

Our position is that the market will have a surprisingly strong rally this year. We still don't like the position the market is in but with the recent sell-off, we think the market will have strong rally going into the next few weeks. If the market bottomed today, with the Dow dropping briefly below 8000, then we could make it back to 10K by early February.

Why do we think the market may have bottomed today? The more oversold it gets the closer we are getting to a bottom and today's reversal seems important in that process. In our last post, we mentioned the volatility indexes. Tonight, we bring you a couple more. Even with the break of 8000 in the Dow, the number of new lows on the NYSE was 81. So, there are very few stocks leading this decline. In fact, many stocks we look at are no where near their October or November lows. Yes, you're right, we're really not all that close to the actual intraday lows of November 21st.

We have previously mentioned the Treasury bonds and tonight we want to bring in the high yield bonds as well. These bonds act very similar to stocks. By comparing these bonds to the movements to stocks, you may be able to learn something if they aren't moving together...like now. The stock market has dropped over 10% in the last two weeks and the high yield bonds have hardly moved. So, what does that mean? Taken by itself, it probably wouldn't mean that much but taken with the other items, it gives us more ammunition to think the rally may be starting right now.

Steve Jobs Takes a Leave and Market Follows

Top Line: The stock market is getting closer to a low and tonight's Steve Jobs announcement encourages some emotional selling...a perfect recipe for going the other way.

No, that was Not an immediate rally. So, what now? The market is in the process of putting in a bottom and the headlines are scaring people again. Tonight's headline about Jobs took AAPL (Apple) down about 15% right after the news. Not only that, the futures dropped about a percent along with it.

We want to keep the focus in the right place. Our forecast has been that the market would rally into the inauguration which of course has not happened. Well, we still think the 10K Dow is coming pretty soon but will not quite make it by next Tuesday. When does the Dow bottom?

Today's market seemed extremely bearish and topped off with the Jobs' news after hours. The technicians want you to think the sellers were out in force and for one particular stock, C, they were. C sat at the top of the volume pack with over 500 million shares trading. That was more than a third of all shares traded on the NYSE. And, yes, C was down on the day, over 20%.

The technicians tell us that Wednesday was a 90% down day which means that down volume was more than 90% of the volume was on the downside. We like the idea that the huge down day gets us closer to a low. The biggest indicator is the fear factor which leads us back to the volatility index.

The VXO traded around 50 all day. We haven't talked about the VXO much lately so let's review. The VXO measures the premium in options and when people get scared they buy puts and will pay a huge premium for them. These levels have now pushed the VXO over 50 again. Normally, the VXO trades around 20 and Rarely trades up to 50. So, here we sit with the VXO at 50 and people wonder what to do...

So, with prices down again and the volatility numbers high, the time to buy is now. GDX is trading around 28 and there are many other cheap stocks out there. How are your favorite stocks trading? Are they urging you to sell? Please resist that urge. The first rally we get off these lows will be strong. We don't want to miss that.

Near Term Low At Hand?

Top Line: The market is now struggling to go down. The immediate result should be a rally.

This evening we must emphasize that the media can be persuasive in their incessant chatter about what the market is doing currently. The selloff in the last week has now overdone. We purchased some stock this morning because of compelling prices. We'll see how it works out because we think we will be selling most of our positions within a month.

Yes, we don't think the Dow can jump 2000 points in a week...it's possible but the odds are against it seeing as how Monday is a stock market holiday. With the current selloff going into extra innings over the last few days, we have missed on the timing so what about our 10K price target?

As far as the price target, it does seem outlandish to think the Dow could make it to 10K or above. We don't really think the price matters, what matters is that we make sure that we do the right thing as prices go up...which is? Correct, Sell. We will be watching our positions very closely over the next two to three weeks to find a good exit point.

We are not feeling too well this evening so we are going to put the post and us to bed...more tomorrow.

Market Drop Scaring Investors

Top Line: Probably the most important items right now are the headlines pointing to how bad the earnings are going to be. Do you think the market really is thinking about the earnings that represent something that happened last quarter?

The stock market dropped again today putting our inauguration day call for a short term top in jeopardy. We are not backing down from the price level over 10K before we see another drop into March or April.

The "tells" include those news items we mentioned in the top line creating doom and gloom in the market. Stocks are cheap again so with some available cash we will be most likely be buying in preparation for the rally that has to be right around the corner. Yes, we have been pretty much ready for it by now but since prices are so low the cash should be put back to work. GDX, for example, dropped below 29 on Monday. That's down from over 34 just about a week ago.

If you did some homework this past weekend, you may be ready for something that won't happen for two weeks but you will be ready. The main issue is that you start looking for good exit points. We'll spend some time on reviewing homework the next week or so.

Remember that next Monday is a stock market holiday and Tuesday is the inauguration. Back tomorrow...

Employment Report was Dismal

Top Line: The stock market may start out the week with some downside but we should get a powerful rally starting in the next couple of days.

Friday's employment report was dismal but that had been expected as we mentioned last week. The market's early response was to put on a brave face but by the time the market opened sellers had arrived. From there the market traded in a fairly narrow range but fell out of bed again near the end of the day. Apparently, no one wanted to hold their long positions over the weekend.

Nothing is for certain, but we still maintain that the best course of the stock market is up and up strong for the next week or two. We have options' expiration this Friday, a stock market holiday on Monday the 19th, the inauguaration on Tuesday the 20th, and then we get to view a bailout package from the new congress and the new administration. There is the matter of the earnings' reports due starting Monday which probably has been part of the market's reluctance to rally over the past few trading days. We'll see how that develops.

As we mentioned in the past few posts, we will be selling into any rally that occurs in the next couple of weeks. Without a rally now, we would need to revise our current strategy slightly. If that happens we can discuss it then. For now, we are busy trying to decide how to exit some of the positions we have.

One of the things we briefly mentioned last week was taxable accounts. Trading strategies in these accounts can be a little different depending on if you are close to getting long term capital gains treatment. For example, if you purchased something in a taxable account, you get favorable tax treatment, called long term capital gains, if you hold the security for over a year.

Let's say you bought GDX in your taxable account in the fourth quarter of 2008. If you want to hold out until this fall when you've held it for a year, you would get much better tax rates if you do that. We're pretty sure about this but it is possible that there may be a change in the tax law this year so that is something we need to keep an eye on.

There are a couple of things to consider if you want to hold until you have held GDX for over a year. We do expect a selloff in these shares in February and/or March. If you have the courage to hold through that drop, you might be able to make it a year. If you want to hedge that position during the drop, then you can purchase some protective puts or sell some covered calls. These strategies can be difficult to understand so we will try to explain them over the next couple of days and then probably again later in the year when GDX is peaking. If, at that time, we are close enough to getting long term capital gains, we may want to implement one of these strategies.

Another strategy would be to buy something that moves in the opposite direction of gold which could be Treasury bonds or the US dollar. We can discuss some of these strategies, which aren't nearly as optimal as covered calls or protective puts.

How to Sell Your Positions

Top Line: Stock market is about ready for the rally we have been expecting in front of the Presidential inauguration.

The stock market tried to go down early on Thursday but couldn't stay down. It seems the huge job losses that are due to be reported on Friday morning didn't scare anyone off near the end of the day. The report Should generate some selling but it is released an hour before the opening bell...so a sudden drop could turn around before the opening bell. It's difficult to know.

What we Think is the time to sell will come up quickly in the next few weeks and we should be getting ready for those sales. As for us, we have several different accounts and several different holdings. How do we get out of all of these positions when we want to? We can't really wait until the point where we can sell them because we can't put all of the orders at the same time. Plus, we may be at work.

One of the things we have to decide is the price. How do we do this? The only thing that matters is the place we can sell. What we should Not consider is what we paid for it although that's a difficult thing to avoid. So, what do you own? About what price do you think you can get for it if the market moves up about 15% in the next ten days? Where is the stock/ETF in relation to its 200 day SMA (simple moving average).

Let's get specific and talk directly about GDX. Before we forget, let's talk about tax consequences. If you own GDX in an after tax account, you may want to do some things differently than we are going to explain tonight. Depending on when you bought a stock, you could hold it for the long term capital gains tax. But, that's for a different day. Back to the tax deferred sale.

We think that GDX can get to 37 in the next week or two. What should we do? Should we put in a good till canceled (GTC) order to sell all of it at 37? If you have 100 shares, that may be an ok thing to do but even at that level, 37 may not be the right price. The round 37 doesn't seem like the right number, we like to look just over that number, say 37.13 or 37.19.

But, maybe you have 1000 shares and what do you do then? Let's say you are willing to layer five or six trades into the stock runup. If you think the price should go to 37, then what you can do is put in a 100 share order in around 36.83 and then another 100 share order at 36.96 and then maybe a 200 share order at 37.13 and another one at 37.33 and another at 37.57 and then one more at 37.91. Or, if you think you may get higher prices, you could start with a 100 share order at 36.87 and then other orders, like five or six, up to 39.97.

We are now wondering when we should start putting these orders in. Could we do it tonight? Yes, we could but we don't like to put in orders that far in advance. We would wait until next week to see what GDX is doing. This can be a dangerous choice because it could pop up there and then come back down before we get our orders in so we will be putting orders in early next week.

You might be wondering how this works in real life. If you have 1000 shares you may want to just go ahead and put in orders for about 600 shares, a 100 at each level. We wouldn't use these prices but here we want to indicate how this works.

Let's say you put in 100 shares orders at 36.50, 37, 37.50, 38, 38.50, 39. Let's say one day GDX moves up to 37.75 and then falls back below 37 by the end of the day. That would mean that you sold 300 shares, 100 at 36.50, 100 at 37 and 100 at 37.50, and you would still have orders for 300 shares in place.

You remember that you have 400 shares with no orders. Maybe you would put in two more orders of 100 shares apiece back in the 37 and 37.50 levels leaving 200 shares without orders. So, if the next day GDX moves up to 38.25, then you will have sold another 300 shares, 100 at
37 and 37.50 and 38. Now we would have 200 shares with orders and 200 shares without; but, you have done a pretty good job of getting good prices. Maybe that 39 order is too high.

This system works pretty well and you can do your setups in the evening when the market is closed and you have no emotions involved. Plus, it's fun. Selling into strength is something that feels pretty good.

One nice thing about this is there will be funds to start going the other way. We'll talk about that next week as well.

Do your homework this weekend and find out what your exit points will be. Then next week we can get specific.

ADP and INTC Scare the Street

Top Line: The price drop we were expecting seems to have at least started. The prices of some of the commodity stocks, like GDX, have come into lows that start to look attractive...the problem will be that we can't hold them very long.

On Wednesday, the stock market got hit with two news items that put a little scare into the traders. ADP, the payroll company, said that job losses amounted to 693K in December, much worse than expected. This news comes a couple of days in front of the Real jobs' report out this Friday just before the market opens. Consensus for the Real jobs' report had been around 500K but this number started to get bigger right after the ADP report came out.

About the same time, INTC announced that they were not going to make their already lowered revenue estimates. The brand spanking new estimate is 23% below last year's number. This news hit INTC for about 6%.

There was another bomb that hit the street...Satyam Computer Services Ltd., a computer software services provider, said they had falsified earnings and assets. Satyam apparently means "truth" in Sanskrit. This brought memories of the Madoff scandal and sent shivers through the street.

Why do we bother telling you all this News? Well, other then the fact that the jobs' report was obviously coming on Friday, we didn't know about these other stories. Still, we had a notion that the market would come down. Now, the media has discovered the reason for it. Now that you know why the market went down, how do you use that information? Tough to do anything after the fact...

Ok, what do we do, Really? Since the gold miners were the first to indicate a possible break in the market, they may be the first to rally. The rest of the market could still be in a down mode until Friday morning when we get the real jobs' report. Do these new items surprise anyone? Would job losses of 500K or 1 million surprise you? No, the market Expects this news and will take it in stride. The fear this week may be the earnings reports beginning soon.

Whatever is causing the selling this week is giving us a buying opportunity but this is not a long term buying situation. The sell date for our long positions is coming up in the next couple of weeks so any buying we do will not be in our portfolio for long. We are expecting much higher prices in the next week or two. Pick a point to get in on your favorite stocks and then get ready to sell...we'll be looking for that point as early as next Friday, the 16th.

We like the commodities like gold and the miners. There are several others available. Oil took a 12% hit today after a big 40% run up over the past couple of weeks. This kind of move clears out some of the late arrivers. Now, it may be free to move back up again. There are several others. Speaking of late arrivers, that's what we would be if we are getting into GDX now here around 30. With GDX, we see the 200 day moving average is right around 37 and we see this stock getting very near that price in the next two weeks. We do Not guarantee anything. We will be Selling our GDX around those levels unless we get an even higher price. Enter at your own risk...this stock has doubled from its lows late last year.

On a final note, we received a very nice email from one of our readers. Thanks for the good word, DT. Your taking control of your savings and that is a great thing. We are pleased that you were able to take action. Buy low and Sell high. These rules are hard to follow but Very profitable. This game never ends so keep on playing even if things go the wrong way for a time. Just make sure you learn what you are doing right and wrong.

The Fed Targets Inflation

Top Line: The stock market still has the possibility of a drop in the next few days. Two spikes higher during the day took the Dow up to about the same level, just under 9090.

The stock market's decline that we envision, whether it happens or not, does not change our thinking on the rally over the next few weeks. When the decline is over, again, if it occurs, we should get a powerful rally for several days. The deeper the decline, the higher the market can go. Our current price target is above 10K in the Dow.

One of the items that took the market down in the afternoon was the Fed's news that it wanted to target inflation. The Fed wants to target a positive rate of inflation so that people are more inclined to "buy now" rather than wait for cheaper prices. But, the idea that they would actually write it down and tell the world that they will Force inflation to a higher level tells you just how scared they are or deflation.

For those of you who think that deflation is a current concern, you need look no further than deflation's enemy, the Fed. This revelation should also provide ample ammunition to buy gold or the mining stocks. Yes, we have been pushing these stocks for several months now and continue to think they will provide good returns this year. Now, we are probably going to be selling them in the next few weeks but we will be looking to buy them back in March or April.

More tomorrow...

Weak Start to the Week

Top Line: We are waiting for a high in the market later in the month or possibly into February.

The market pulled back a little on Monday, not exactly what the bulls expected. After last week's rally, they wanted more this week. That is still possible but we think the best run up will happen next week just prior to the inauguration. We'll see about that.

The big moves in the market today were in banks, T-bonds, gold and oil. The stock market's moves by itself were mostly unremarkable. That's one of the reasons we have been trying to pay attention to several markets...for opportunities. As for the drop in banks on Monday, we have no position on them but since they were down about 4% we thought we should mention them.

As for the other three, we would like to comment on them. As for T-bonds, we are extremely bearish on them and they have not disappointed the past few days. As measured by the TLT, since last Wednesday morning the price has dropped from 122 to 113, about 7.5%. We think there is much more down side to come.

Gold fell about $20 causing a corresponding drop in the gold mining stocks but we will view this as a buying opportunity, certainly if they dropped even more this week. Since the gold stocks have been the leaders in this rally phase, a decline in them would probably mean the broader market will fall. Meanwhile, the oil price has rallied pretty much steadily since Christmas Eve.

The main movers in this market have been the commodities and their shares. Yes, we watch the stock market indexes but the main event is the commodities. We'll keep an eye on them over the next few days to see if there may be an opportunity.

Otherwise, we are looking to be sellers in the next few weeks.

Road Map for 2009 and Beyond

Top Line: The new year has begun and with it the market probably will continue in its volatile ways. We expect January to provide a wild ride of ups and downs that may continue into February.

The stock market has been rallying over the last few trading days setting us up for a possible drop in the coming week. This drop would be a good time to add to your long positions in almost any investment...except Treasury securities and the US dollar.

With the inauguration of the new President on tap for January 20th, about two weeks from now, the market should be headed up into that date. We will be looking to sell some of our long positions during that week. Last week, we sold some of our long positions and plan to add them back this week.

We have a generally bullish stance this year but the next couple months could present some problems with that theory. The near term volatility will cause people to continue to make mistakes in their portfolios. We'll get a little selling this week and people will want to sell and the following week we should get some buying and by the time people are convinced we are going up again and buy, they should be selling.

If you are not prepared to trade this market, you should take appropriate measures to get the most out of the year. We would recommend holding your long positions (including any new purchases you make if the market drops this week) until right around the inauguration. At that time, we would recommend you take at least some of your long positions off. Then, if we get a higher high in early February, you should sell the rest of your positions at that time.

Our position remains that the Dow should push above 10,000 sometime in January, around the inauguration or early in February. This should be marked with a significantly lower Treasury bond and a corresponding low volatility index, VXO. Speaking of VXO, it has come down quite a bit in the last few weeks as the market has calmed down a little.

Anyway, for most of you, the cash position should be a good one for a couple of months until we see a nice low forming sometime in the spring. At that time we will be screaming at you to buy again for a large move up that will take you into the highs of 2009. We would see the Dow back up to between 11,500 and 12,500 at this time, if not higher.

From there we would again recommend you get into cash and let the market continue its bearish ways, we are in a bear market after all.

That's what we recommend for most of you. For the rest of us, we are going to go into trading mode with about half our portfolio or more depending on the position of the market and whether you are trading in a tax deferred account or a taxable account.

Let's get a little more specific about the Dow in our forecast...this is a free blog so it's worth what you are paying for it...

We think the Dow wants to go up to 10,500 in the next month or so, with our best guess being sometime around the inauguration, possibly early February. From there, we see the Dow testing the November lows again. Yes, the Dow may want to go back down into the 7500 range which is exactly why we would be recommending exiting long positions into this January rally.

From whatever low is established in the spring, we would see the Dow rallying to 12,500 going into the fall. This will be a huge rally, possibly four or five thousand points depending on where it starts, that you will not want to miss. We will be looking at opportunities as the time comes closer.

From those highs, we will be looking for a devastating decline in the Dow that will last 18 months or more. This decline will take the Dow down well below the 7500 level for a 50% decline. We will want to be extremely careful during this period that we don't get too bullish, even though sharp rallies will occur. But this is going into 2010 and beyond so we can't see that far into the future.

For those of you who are Elliott wave followers, the top in the market back in October of 2007 was probably the beginning of a crushing wave C that will have five large waves to it. We are currently in the first large wave which is a down wave which should end in March or April as we test those November 2008 lows. From there, the second wave, which is a countertrend wave, will correct the entire decline from October 2007 to the spring lows. This is about 7000 points and a normal retracement would be about 60% (61.8% to be exact) or nearly 4200 points as we indicated above.

After that comes the third wave which is typically the strongest wave. This is the Papa bear and will be very destructive to values leading to great bargain prices for stocks. That's way too far for us to venture guessing where and when it will be ending but it will only lead to a fourth wave which will again be countertrend, followed by the fifth and final wave. There is a long ways to go in this bear market.

We're not sure how to manage this blog in times of extreme trading, which is why we outlined a less than crazy plan above, which you could consider crazy. What we are concerned about over the next several months is the ability to trade and let you know exactly what we are doing so we don't think we can. We will try to guide you through the maze and fog but we plan to be trading much more this year than we had to last year. You can choose the path we outlined above or follow our lead as we dare to tread on the moves that present themselves to us.

We trust you had a good couple of weeks while we were off.

One last thing: We have started our own little "hedge fund" that we will be reporting on as the year progresses. What that means is that we can invest in whatever we want, it won't be diversified, and we will use normal margin leverage at times as well as options strategies that we think are appropriate.

We decided to start it on the Close of trading on December 24th. It's a small fund and we are only doing it to provide some information on how we are trading this market. We will not share specifically what we are doing in that fund, just our results, it represents just a small portion of our funds and does not provide enough diversification for anyone but us. No, you can't participate but you can compete with us.

We call it the JGWS Fund...

2008 Review

[Editor's note: The Update will return for 2009 on Sunday evening, January 4th for your reading pleasure on Monday morning the 5th.]

Back in January we had two posts that indicated our thoughts for the coming year. We include them here for review:

2008 Preview Part One:

In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.

Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.

The market seems to think this way today.

Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.

Deflation became a big topic late in the year and continues to be a hot topic in the media. What we said a year ago was that "the Fed will be powerless to prevent [deflation]". We didn't have our thinking caps on tight enough to think about the Government opening up its wallet. This turn of events caused us to move to an inflationary stance for now. Deflation still has a chance to reappear later in 2009.

Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.

Looking at this, we didn't really make any long range forecasts here.

Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occurring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.

Even back in January, recession seemed to be obvious. As we now know the economy was just declared in a recession, as of December 2007. The housing mess has taken up quite a bit of the media's attention. Home prices are too high and as they come down the mortgages seem to stay...

2008 Part Two

Stock market:

The stock market has shown us a high that should stay in place for a long time. In the October to early November period, all the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index.

The highs we saw a year ago have indeed held for all of 2008. Now the question remains as to how long is "a long time"? We'll leave that question for later when we provide our forecast for 2009 and beyond.

There is one index that has another story, too.The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.

The Russell 2000, RUT, ended 2007 near 765 after being as high as 855 in June and July of 2007. This November, RUT traded down to 375 and today stands around 485. It has truly led the market (down) after failing to make new highs back in the fall of 2007 as the other indexes rallied to new highs.

Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.

While we did sort of miss on the top for oil, it did top around $145 even as the media proclaimed that oil was going to $200. This week oil traded [Editor's change: This should have been "under $41".] That price represents a fairly good buying opportunity along with other commodities at the moment. These price swings are so violent that trading must be done carefully.

The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signaling a downturn in the economy.

The Bank of America did rescue Counrtywide, or as some call it, Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.

All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on what is going on.

The remarks here are almost the same as they have been over the past few months. The papering over has been taken over by the government.

The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.

The Fed has lowered rates several times and now Can't lower them any more. The market has failed to hold up even with this campaign of lowering rates. One thing we emphasized during the summer when everyone was clamoring that the Fed would need to Raise rates due to inflationary pressures, was that the Fed would Not raise rates.

There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???

The year has not concluded just yet but it's likely that the market will end 2008 with much lower prices. And there were several rallies during the year that all led to further selling. We think a more substantial rally has started from the October/November lows that will surprise to the upside in January around the time of the inauguration.

That was then. What about 2009?

This post has taken too long so our forecast for 2009 will need to be finished in January. The important thing to remember is that the first couple of weeks in January should surprise to the upside.

Last Post of 2008 Postponed Until This Weekend

Come back on Monday to get the final post of the year. We plan to recap the past year and take a look at what 2009 may bring. We are polishing our crystal ball.

Today's news was that SP downgraded GE's outlook to negative meaning that there is a good chance that SP will actually downgrade their bonds. The market sold off quickly right after that news hit the wire.

Friday is options' expiration and not just any expiration, the Quadruple Witching expiration. We always like the name Triple Witch, much easier to say. Quad stands for futures and options on futures as well as index options and stock options. But what it really means is there will be some unwinding of positions Witch can cause some volatility. We think some of that happened today.

Fed Rate Cut Equals Dollar Drop

Top Line: Wednesday's stock market tried to hold up but in the last hour the Dow dropped about 100 points. We're looking for some more upside...going into the inauguration. There may be some down days between now and then but when we are getting to the highs of the market these down days will not show up much. That will be a clue...people will be bullish going into the inauguration.

Wednesday's defining characteristics were centered on the weakness in the dollar. The dollar got hammered and has now fallen about 10% in the past week. (Check it out on Bigcharts.com with the symbol DXY.) At the same time, gold has gone up which makes sense since these two are opposing forces. What doesn't make much sense is the long Treasury bond continuing its rocket job, up another 3% today. (TLT is a good proxy.)

The latest moves are in the wake of the Fed's decision to lower interest rates to virtually 0. Now there is a question as to whether the Fed can pump money faster than the deflationary forces can drain it. We think this latest argument on deflation is too late. The Update has mentioned deflation as a possible outcome of the housing bust but this Fed is not about to let this happen.

The Fed Chairman, Bernanke, has said that money can be dropped from helicopters if need be. Now the Fed is going to be buying all kinds of debt, flooding the system with dollars, thereby weakening the dollar. We don't think the dollar will stop going down until we get to the top of the market sometime in 2009.

Yes, we think dollar weakness is stock market bullish. The reason for our thinking is that the dollars now being used to flood the system need to find a home and we think that home will be the stock market and commodities. What just doesn't make sense is that the Treasury bonds would hold up in a weakening dollar environment.

Right now, the world sees the US as the leader in generating global growth by lowering rates. We're not sure we buy the argument that lower interest rates cause lower currency values because the yen is probably the strongest currency on the planet and interest rates in Japan are lower than they are here in the US. But, the argument goes that the Europeans need to lower rates to match the expansionary policy of the Fed and that will cause the Euro to come back in down against the dollar. Again, we don't really have to buy the arguments, we just need to stay ahead of the moves, if possible.

The simple truth is that the Fed and the Treasury and the Government have now pulled out all the stops to try to generate growth. We have avoided saying that they are trying to hold up house prices because that is a tough job, ok an impossible job for now. What low interest rates do is encourage people to pursue riskier assets to generate more yield. This means all types of risky assets including mortgages and high yield bonds and all kinds of assets that are currently trading at lows not seen in decades.

What about house prices? The Fed is hoping to push mortgage rates down to levels that "force" people to consider buying houses. What rate would make you buy a house? There has to be some pent up demand for houses. The problem is that there is still too much inventory that needs to be sold and not enough mortgage underwriters willing to loan money unless there is a good risk coming to borrow.

Housekeeping: Thursday evening will be our last regular post of the year. We plan to lay out our current near term strategy and which direction the markets we follow are going. There may be further posts if unusual things happen over the next two weeks but we don't plan to go back to a regular schedule until Sunday, January 4th.

Federal Reserve Pushes Rates Down to Zero

Top Line: Do you need more proof that the market is headed higher? The Fed has just lowered interest rates to virtually zero and promised to do whatever it takes...

Here is a (new) paragraph from their statement:

"...The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity..."

As the Fed was deliberating on what to do about interest rates the last couple of days, the market was expecting at least 50bps as we mentioned in yesterday's post title. Of course, a cut of 75bps would even be better. The Fed decided that 75bps wasn't quite enough so they have stated that their target is between 0 and 25bps. The market was actually surprised by this news and pretty much rallied from the moment the news hit the wire. By the end of the day the Dow had cruised up 360 points.

Here we are with the Dow still sitting under 9000. Can it now punch through it so that it sticks this time? The round numbers for the Dow seem to provide some trouble and 9000 is no different. This is nonsense because it's just a number but the market has respected this level for a several weeks now. We think it's just a matter of time before we get over 10,000 so yes we think the 9000 will soon be behind us.

The Fed cut rates and the dollar dropped as it should have. Gold jumped $20 right after the news, again, as it should have, if not more. Then there was the Treasury bond market which again defied reality by jumping a bunch in the wake of the Fed's news. All we can say is that the price of these bonds is dizzying and should drop dramatically. The higher they go, the scarier they get. Justification to buying these can not be found.

50bps Coming?

Top Line: Stocks opened stronger on Monday morning but that was the high for the day...except for the gold mining stocks which held up for the better part of the day. The market seems to be having some trouble going down which means the downward momentum of the past year has at least subsided.

Gold jumped on Monday morning to a two month high and gold mining stocks opened strong, too. Over the past couple of weeks, the dollar has gone down and meanwhile gold has gone up. Did gold signal the dollar going down or confirm it? We usually say that the mining stocks lead the gold. The dollar and gold should generally move in different directions, that is the idea after all.

With today's rally, the GDX has finally come back to our first entry point just around 30. Fortunately, we continued buying it all the way down, with our lowest price just under 17. So far, our GDX position is our best performing asset since we started going long back in October. Our other assets are slightly under water but the GDX is providing some upside balance.

Tuesday's Fed rate decision plays a role in today's dollar decline. The Fed will likely lower rates again on Tuesday with 50bps being the most likely outcome. Frankly, we don't think another rate cut can do anything except show once again that the Fed is willing to do anything to thaw the credit freeze. The plan they have devised may reignite inflation. At least, that is what the market believed for a little while on Monday.

Back to the action, the stock market traded down most of the day. Then with about 45 minutes to go, a violent rally erupted leaving the market much closer to even but still negative on the day. The rally didn't hold up but the market did show some strength in the last hour. The Update gives the late day move a good mark for bullishness.

As we have said many times in the past couple of months, the economy has not recovered and may not recover for a long time. That is not the central theme in the stock market and does keep most risk takers out of the market for now. They will be back next year when the market manages to rally back to a much higher number. That's when the confidence will come back and the volatility indexes will have dropped back to 30 or lower. Meanwhile, we will be enjoying gains and may sell our shares to them.

Will the Fed's decision bring any volatility to the markets? The stock market is looking for a 50bps drop but would really like 75bps. If the Fed gives us 75, the stock market might have a little rally, otherwise, the news of 50bps should not make much difference. Anything less than 50bps will probably provide some movement, down first but then we could get a stronger rally. We don't think there will be much "news" in the Fed's news. We say 50bps.

A possible market mover is the Goldman Sachs' news which is believed to be that GS is going to report a loss for the quarter. These are the guys who told us how well they did in the mortgage market as it was falling. Yes, they are probably some smart traders but the market has gotten to GS, too.

The CPI will probably not move the market either...

One other subject is the Treasury bond market. Monday, the long bond traded higher and in our opinion to a riskier place. In the past couple of weeks, the long bond has held its price which looks like it is at a precipice and ready to dive. These bonds don't seem to realize what is happening...inflationary expansion.

Bullish Conclusion to Friday

Top Line: The market dived into the abyss on Friday morning but recovered as the day wore on leaving a nice, bullish, Higher Low in place from the prior week. In late Sunday trading, the world markets are continuing the rally.

Friday's open, while down hard, was not down as much as we surmised on Thursday evening; and, from the opening drop, the market generally moved higher the rest of the day. The overnight futures had predicted a Dow that was going to be down about 450 points but the futures improved before the open and the Dow only opened down a little more than 200. The NASDAQ indexes we follow, the Comp and the 100, were down early but rallied strongly all day and were up over 2% by the close while the Dow was up less than 1%.

And, looking at the Treasury bonds, we had indicated on Thursday that the overnight trading showed strong gains in bonds but by the time the stock market opened these gains were largely gone. The trading during the day was down and then up to about unchanged on the day.

The volatility indexes were pretty much as expected, jump at the open and then selloff most of the day to mirror the stock market. Volatility is still extremely high indicated by the level of the VXO being over 50. We shouldn't expect that the stock market is going to go down much with these levels in the volatility. Even as the market opened on Friday, these indexes were no where near where they were the prior week. All in all, not the day that was signaled on Thursday evening.

As we look out over the next few years of in the market, we see some continued volatility causing most people to slowly leave the market. Many have left already but we suspect that the vast majority will come to the conclusion over the next several years that it's just too difficult to play the market anymore, that the old dollar cost averaging or buy and hold approach doesn't work anymore.

To that we say, fine, let them leave. We'll continue to try to pick good opportunities. The problem is that if you want to stay in the market, you will need to be more nimble with your trades. Buy and hold Is dead and dollar cost averaging only works if you know when to Take your money out, you know, at higher prices than you paid. This is not that easy for most.

Our position is that there will be a couple of required portfolio changes that need to take place over the course of 2009 with more to follow. The first is in late January when the recent bulls will declare victory, saying the market is now ready to go back up. The headlines will start to read bullish again, something different than we are seeing the last few weeks. Even as the market has rallied, most of the news we hear is tainted to be bearish, not bullish.

The market needs to rally quite a bit between now and then so it needs to get going. We expect that the first week or two of January will see a huge spike with the inauguration happening right after that. We expect the Dow to push over 10K in January just in time for us to sell into the new-found bullishness.

Right now, there seems to be some optimism that the government will indeed bailout the automakers. The Fed is meeting this week to discuss reducing interest rates Again, lowering them Below what Greenspan did following 9-11. We're not sure if optimism is the word to describe how people feel about another rate cut from the Fed. Probably the kindest word would be indifferent.

The fact is clear that the Fed is accommodating and the government is aiding and abetting them. We point to these items as being the most powerfully bullish arguments there are...then there is the stock market itself showing higher lows. We do need to now start seeing higher Highs as well and then everyone will be convinced the market is "headed" higher. Again that will be when we will be abandoning our long positions, at least temporarily.

Enough Bad News To Go Around On Thursday

Top Line: Thursday has set the market back...again...giving late comers yet another opportunity to buy stocks cheap. We don't like this. We should have been selling into this morning's strength. Then we could think properly about this ugly day.

We are speaking of the late night fallout of the failed automaker bailout. Just before we started our post this evening, the Senate talks broke down and the market fell out of bed. The SP5oo futures dropped 30 points in about five minutes. So much for the idea that the market didn't want the government to bail out the automakers.

This news followed several other negative bombs during the day. The first one was the jobless claims were up and well over 500K. JP Morgan's CEO Jamie Dimon said that the integration of Bear Stearns had not gone too well because of the market turmoil in the past couple of months. He said a few other things that didn't please the market and then, after hours, Bank of America said it might lay off 35K employees. These items hit the market even before the Senate dropped the auto bailout. All of this has given the market a cold shiver that all the worries of the past couple of months may come back again.

Let's take a look at the volatility index and the Treasury bonds to see if something is amiss. First, the Treasury bonds didn't move up much even with the 200 point drop in the Dow. In fact, the TLT's have been sitting right around the world record price for about a week. As for the VXO (or the VIX), there was very little net change on the day. These two results do not support a drop in the stock market. With the selloff in stocks after hours, the Treasury bonds did jump to new highs so we'll have to see if these two indicators with confirm the down move or not.

As we go into Friday's trading, we are very disappointed in the way the market is trading. Yes, we know that the news is bad but we expect there is a rally in the making. If we have to go down and make new lows, so be it, but we really don't like that outcome. Putting in lows should have been done back in October and November. It felt like a rollover this morning so now the question is, "How far down do we go?" We'll see what happens Friday morning.

Happy To Be In GDX Today

Top Line: Today the market gave us fresh evidence that the commodities are coming back. This is evidence for the new inflation that is coming after all of these injections.

Yes, it's Wednesday. Tonight, we think the market is in the process of confusing many participants which is it's main job. So far the Dow has moved up from its November low around 7450 to just above 9000 a couple days ago. As we see it that's about 15% and the bears are claiming that the market will suffer another drop before we can consider going up again.

The mere fact that the bears are getting even a chance to express themselves is reason enough to suggest the 2008 bear market is Over. People are in enough fear without reading some of this bearspeak. Haven't you heard enough of that from the Update when you needed to know it, actually before you needed to know it so you didn't lose a lot of money being long. These bears have come out of the woods and now we're supposed to listen to them. Right...

The current situation is far less troublesome than what we were dealing with back in October and November. Back then stocks were cheap and people were scared. Now, people are not quite as scared but are cautious about what they are doing. This is still the point...there is a lot of liquidity rolling around and it is going to go into the stock market.

Our position going back over the past couple of months has not really changed: Stocks are cheap, Treasury bonds are in a bubble, gold mining stocks are still cheap as the dollar should get cheaper.

Thanks for the nice comment, Erick. Putting our thinking out there for the next several months is our opinion and you should look at it as one item in your thinking process, not the end all in your decisions.

What To Do In Your 401(k)

Top Line: The stock market pulled back today pretty much on track and now should move a little higher again.

A "regular" reader asked a question about moving some money from cash to stocks in their 401(k). This is the time to the Update to bring the practical into the post in order to answer this question.

Before we answer this question, we should say that we are fully invested in the stock market. We purchased all of these positions in October and November and any purchases we make in the near term would have to be done by selling something to raise enough cash to buy something else. We don't like this position because we like to take advantage of new ideas. These types of flaws will be fixed the next time we sell which should be sometime around the inauguration.

Ok, let's get back to what to do if you are still in cash.

Let's take a high level look at the landscape. Since 1982, the market has generally gone up in what we fondly call a bull market. During this time the market had some major drops in order to scare the bulls but all in all there was a move toward convincing people that the stock market always comes back...and goes higher.

After more than 25 years of bull market where the Dow went from 775 to 14,000, we are now ready for a serious bear market that will last for probably another ten years. Yes, you read that right, ten more years of a bear market. What should you do?

As happened in the 25 year bull market, when there were severe drops, this ten year bear market will feature its share of sharp rallies. This is what we think is going on now because of the huge fear factor that covered the public in the past couple of months.

The stock market is going to be volatile for the next ten years which will offer many opportunities to lose money. Or, if you're thinking about the buy and hold strategy, you will lose money on that, too. We would say that you can't have a long term hold strategy and you have to be careful about trading. Oh, yes, we would recommend coming back to the Update for clues on what to do. You are the captain of your ship but if you come back here you will get unbiased opinions on the market. So, here they are...

You can start your journey on this volatile ride. We think the Dow will top in January, near the inauguration on the 20th, near 10,500 followed by a severe drop. This drop may actually try to come back down to test the November lows which would give us another fantastic buying opportunity. For you 401(k) holders that can not "short", you still don't want to hold through that drop so we would recommend buying (on pullbacks like today) and then getting back into a cash position in January. Then, buy back in as the market drops back. This will not be easy for most of you but the results will be rewarding.

Dow Trades Just Over 9000

Top Line: As expected, the Asian rally continued around the globe pushing stocks up in its path. After jumping 300 points on Monday, the market kind of hit a wall called Dow 9000 and couldn't manage to stay above it. After a brief rest period, the Dow should make another run over 9000 and it will stick.

We're kind of relaxing with our positions at the moment. The market has been so violent for the past several months and now a day like today with only a 200 point range in the Dow is sort of boring. Ok, not so boring due to the nice gains we enjoyed. The market is on the way to a nice gain going into January.

The news over the weekend is that the President elect is wanting to spend some serious money on infrastructure to provide jobs. The liquidity being poured into the system is just incredible and we think that the market will be a primary recipient of those funds. With the extreme depths of the fear in the last couple of months, we expect that people will continue to feel that we are in a bear market. This means that they will be selling rallies until they decide that the market truly is moving up.

One of the items we have heard in the past month or so is that the market will experience some tax loss selling about now. We're really not sure what that means this year because there have been few gains that need to be offset by selling losses. Since the bears are roaming around, they are looking for any reason to tout their position and tax loss selling is as good a reason as any.

The stock market is in an up trend. We think volatility has decreased over the past two weeks and people are not talking about the market nearly as much as they were just two weeks ago. Complacency will return next year as the market moves up. These are our clues as to when the market will be ready to roll over. We will have a couple of opportunities next year as the market floats up. We think the first will be right around the inauguration on January 20th. There will be others, one will be a good one which we will talk about when the time arrives.

For now, we are looking for a small pullback based on the way the overnight US futures are trading. The news from Fed Ex (FDX) was that they would miss their numbers and got hit about 10% after that. Texas Instruments also made negative comments so the futures are under pressure this evening.

Once this current adjustment is over, there should be another push over 9000 sometime in the next week or so. We think that the Dow will be near 10,500 when we get to January 20th.

What's your thought?

Maybe Jackson has an idea, well, a smile for you anyway.

Jobs Are Not the Stock Market

Top Line: The Asian markets are higher this evening and should help the rest of the global markets head higher as well. The jobs' report is now behind us and as bad as it was the stock market couldn't stay down long. We are looking at a pretty good up week...

Friday morning, several things happened, all negative. But, after the market went down about 250 points, the sellers decided to vanish from the premises. From there, the market headed up about 500 points from the lows to close up 250.

The other market we are interested in is the Treasury bond market. This market confirmed the reversal in the stock market by rising at the same time the stock market was falling and then reversing to the downside as the stock market was rallying. The 30 year Treasury bonds hit further highs in the early trading and then reversed.

Speaking of Treasury bonds, we think that the highs in these T-bonds have made are going to hold for a while. These long bonds had a yield just about down to 3% on Friday morning and the fundamentals really do not justify those prices at all. For those of you who have good credit are in a position to refi your mortgage have a great opportunity right now. The past two weeks have seen mortgage rates drop significantly. Otherwise, for those of you who own Treasury type bonds should be leaving that party.

Even as the Treasury bonds are making gigantic highs, the stock market is grinding out its lows of 2008 and is showing some strength, strength that is not being noticed by many. The volatility of the past couple of months has scared people into "waiting" for a good buying opportunity. We're quite sure they will be anxious to buy in January after the market has "proved" that it can go up. We've seen the Dow put in lows around 7500 and now we are up to 8600, but those 1100 points are still being questioned.

You may have surmised that we are bullish on stocks but in case you haven't gotten that message, then we are telling you that we are right now. Stocks are going up in a violent bear market rally that will shake the bears and put them back into hibernation sometime next year. Right now these bears are all the rage. Every time you look at the financial news, there are all kinds of bearish comments. These comments are made about the economy which are then translated by most people to mean the stock market will "follow" the economy. Who ever thought the stock market followed the economy?

We know that the stock market is in a counter trend move, which happens to be a rally in a bear market. When counter trends are happening, there are very few news items that match up with the stock move. When they finally do, that will signal to us that the market is about to stall and go the other way. January 20th is our target for now. Don't wait until then.

What Will the Jobs' Report Do to the Stock Market?

Top Line: The jobs' report is due on Friday morning and it's supposed to be "bad" with about 300K to 350K job losses expected. The stock market sold off with the expectation about job losses. Guess what...the news is Old news. The stock market is getting ready for a rally...

On Thursday morning, the Europeans decided to lower rates. The rate cuts were widely expected but not the amount. The BOE, Bank of England, lowered rates by 1 full point to 2%, the lowest since 1951. Meanwhile the ECB, European Central Bank, lowered its rate by 75 bps to 2.5%. This follows other rate cuts around the world in the past week.

We have witnessed some incredible liquidity injections and central bank rate cuts. The world is sitting back and waiting for something to work, including the governments and central banks of the world. As they wait, the cash builds up in their basements. For banks, they do not want to lend because they are waiting for good credit risks to apply and very few are walking into their lobbies. So, instead of loaning out that money, they will be buying stocks. As soon as it gets going, a lot of others sitting on cash will act, too.

We continue to be amazed at the way some assets are being bought and others are being sold. We of course are talking about Treasury's and oil. The Treasury's were up to another high and have now gone up well over 20% in a month. These are bonds we are talking about!!! Oil, and gas, fell quite a bit on Thursday closing under $44.

This stretch between these two asset classes should give us an idea what to do. Let's see if the word contrarian actually means anything. It's time to get out of those T-bonds which means it's time to get into oil.

Friday brings us the jobs' report, which could be ugly, but it's OLD NEWS. We think the selling was done today but there could be more right after the report. Just remember the market will be higher by January 20th, what are you going to do?

Another Wild (and Up) Day for the Dow

Top Line: We think the stock market has been trying to rally since the October 10th lows and then we watched the Dow drop to a modest new low a couple of weeks ago. The market wants to go up so bad and we think the future point of reference is the inauguration on January 20th. Since that's a date we think will be a short term peak, the market doesn't have much time to get going...so get going.

Stocks had another wild day with a range of about 400 points. The market opened with a thud as the Dow started with a loss of 150 points and then rallied 300 points followed by a 250 point loss before closing with another 300 point gain (all numbers approximate). Wild indeed.

The market has given people incredible volatility over the past couple of months. This volatility has kept most from entering the pool. Traders are having trouble in this market because it moves so far so fast. We have taken the position to buy at what we think are good prices and now are trying to be patient for the market to move higher.

We don't want to over analyze this market but we do want to understand why we are in the positions that we have or positions that could be good for the next few months. At the moment, the riskiest asset class is the Treasury bond, particularly the 30 year variety. We would steer clear of that class at least until rates go back up again.

The problem here is that the T-bonds are at incredible highs and so is the dollar. These two asset classes are closely tied and will fall together. Why? The government and the Fed have been pushing dollars through the printer and into the system to stave off deflation...we think it will work, at least for now, and inflation will return. Inflation is not a friend of T-bonds or the dollar. Who does have a friendship with inflation? Yes, commodities and in particular, gold.

Stocks don't really like inflation but they won't find out about it until they have gone up quite a bit. When they do find out about inflation, they will not be happy but until then we want to be invested.

Housing really doesn't like inflation either because of higher interest rates. Right now, though, interest rates have collapsed and mortgage applications have surged in the past week or so. This action is expected (not by us) to put a floor under housing. That confidence should put a floor under the stock market as well but that's not why we bring up housing. We are negative long term on housing because rates will go up and up into next year...but we do not see these same negatives in Asia.

In Asia, particularly Japan, where people didn't get crazy on housing. Prices of houses there never went up very much. Housing will Not have a drag on their economy like it has here in the US. The stock market will be able to go up in Japan with no burden of falling or fallen house prices.

Generally we are bullish on stocks for the near term and the reason is because of all the money being added to the system. We would have been bullish on stocks without that but this added liquidity just juices our thought process even more. Companies are awash in liquidity and banks don't want to lend it out so we think the best place for them to keep their money is in the stock market.

What should you do? If you are interested in refinancing your mortgage at lower rates, now is the time if you can qualify. In fact the latest news is that the government is trying to get new home buyers, probably not refi's, rates at around 4.5%. There is no clear plan but the WSJ broke the story Wednesday and you'll probably hear more about it on Thursday morning. Here is CNN Money's take on the subject.

The other thing you should do is buy stocks because at some time in 2009 we should see the Dow at a minimum of 10,500.

Don't forget, we've got the old jobs' report on Friday morning.

See you tomorrow.

When Did You Buy?

Top Line: The second day in December tries to balance the first with the Dow gaining back some of the losses. With the very negative day on Monday, Tuesday needed to "shock" the bears which it seems to have done. More upside on the way...

Monday's loss seemed to be an over reaction. Now, it is up to the market to tell us for certain that it wants to go up. The signals are pretty clear based on the lows recorded last month and in October. Even with Monday's extreme selloff, stocks held up pretty well. You may not think so but you need to look at the prices at the lows of the last few months.

For example, GDX dropped 4.07 on Monday to close at 22.50. Ouch, that leaves a mark...but, let's take a look at the recent history. Back on October 24th, GDX opened at its 52 week low of 15.83. If it had been in existence, it would have been about a five year low. From there it rallied to 24.72 on November 5th. Then on November 20th, it traded back down to 17.59, nearly 2 points higher than the October 24th low. On Friday GDX rallied to 26.71. Dropping down to 22.50 on Monday still shows higher lows and higher highs, very bullish in our opinion.

We are looking forward to what we expect to be a horrendous jobs' number on Friday. This is the kind of thing we expect over the next few months, more bad news...but at the same time the market should continue to rally. This is the trouble with reading the news and then trading stocks based on that news. It's a losing proposition.

When we were in the thick of the news in the last two months, it's difficult to step up and purchase stocks but that's exactly what needs to be done. If you look at the times when you should be buying and selling, you will see the fear or confidence in the news. That's why the news is not helpful at the turns.

It's difficult to do what needs to be done but the benefits are cheap prices. Yes, we paid higher prices than had we waited for a while, like a week or two, but you can't hit the lows. The "easiest" thing to do is buy into the decline and begin by losing money so you can buy more as stocks go down. You don't think it is easy, right? Well, if you "miss" the bottom, then you always want the prices to go back down...because you missed the bottom you have problems buying at all.

December Starts Down Big

Top Line: The stock market dropped back quite a bit on Monday, something that should get the bears talking again.

Today the NBER, National Bureau of Economic Research, announced that the US economy is in a recession. Oh, and by the way, it started in December of 2007. The NBER is the organization assigned the task of determining whether the economy is in a recession and when it comes out. Popular opinion says that a recession is when the GDP declines for two quarters in a row. That's a pretty good way to think about it but it's not the Official determination. Now that we know for sure that we're in a recession, do people think it's time to sell stocks???

There were several bad news items today. The biggest one is the one in the last paragraph on the recession. Then there was the ISM index that fell to a 26 year low. (Notice that we have changed from the 1991 lows and are now looking back at the 1982 lows.) The Chinese manufacturing dropped the most on record. The California governor, Arnie, declared a fiscal emergency and called the legislature into session to deal with a multi-billion dollar deficit. And, let's not forget that Bernanke and Paulson were making statements as they seem to do every day.

Do any of these things seem bullish to you? No, they don't. But, that's the whole idea. These things are not New, they have been known for months. Why should we be thinking about an investment strategy based on this Old news. The bears were smiling today because of the news but we don't think the news matches with what is really going on...which is, the market is going up. The lows have most likely been put in and a day like today just makes the bulls nervous. You may not have noticed that there were only 98 new 52 week lows on the NYSE.

What is happening in this fear driven market is that Treasury's are being sought, even by the Fed. The 30 year T-bond was up 5 points today...unbelievable. The yield on the 30 year is now at 3. 20%. Now, the Fed wants to start buying more Treasury securities to provide liquidity to the market. Can you say bubble in the Treasury market?

We think the Treasury's are now extremely overbought. The easiest decision to make these days is to buy Treasury's. How can that be?!? We mentioned that the short Treasury's are at basically 0 yield and the 30 year is barely over 3%. To the Update, these are some of the worst investment you can make at the moment. We would say that the rate on the 30 year Treasury bond has the chance to be 5% plus next year which would be a 15% loss from these price levels.