Black Tuesday

No, we don't think tomorrow will necessarily be Black Tuesday, but it would be irresponsible for us to not voice our concerns about the state of investor confidence. Crashes don't just happen out of nowhere. They are a result of a steady deterioration of confidence. We are approaching that point now, with the almost daily failure of major financial institutions. The crisis is only now becoming broadcast as a global phenomenon, and the conditions are in place for a substantial global market meltdown. The possibility for this is higher now than at any point throughout this crisis because of what's happening in Europe in particular. These are truly phenomenal times, and we think there is a strong possibility that this whole thing ends with a loud bang.
Now is not the time to be long any individual stock. The risk clearly outweighs the reward. We are particulary leary of Tuesdays for obvious reasons. Perhaps the bailout package will save the day once again, bringing traders back to the long side for a day or two. But void of that, this crisis is on the verge of reaching a boiling point.

Mosaic

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The above chart of Mosaic shows why you should sell a stock when it breaks its trendline and moving average. Late July was the time to bail on the fertilizer stocks. We haven't looked back since. We said that these stocks, despite their incredible strength in 2007 and early 2008, were headed to $0. We still stand by that, with the caveat that all companies have some intrinsic value, which prevents them from actually reaching $0. The problem with the stock market today is that they create such an absurd number of outstanding shares, that a single share of stock is only worth about 14 cents (intrinsic value of the company divided by the number of outstanding shares). This is why when stocks break down from lofty levels, you MUST sell, and never look back. Our best guess is that MOS, MON, CF, POT and AGU will spend the next three years slowly trickling down to single digits, and then spend the next 5 years struggling to stay above $5 a share. Congratulations to any of you that loaded up on SMN when the ferts broke down. SMN has been a stellar performer of late.

In other news, the Dow is once again in no man's land. It is near the center of its downtrending channel, making it nearly impossible to guess at its next move. We continue to remain focused on buying DDM or DXD when the Dow makes a major (800+ point) move.

Although the Dow has recently been very volatile, it hasn't gone anywhere in 2 weeks.

Bought DDM

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The market has been going down long enough for us to establish a trend channel that is paralleling its 200dma. The chart of the Dow above shows this channel. During bull markets, 10% corrections are typically not long enough in duration to make the moving average turn down. Being that we're now in a bear market, it is no suprise that the Dow is trading below its downtrending moving average. Any rally, no matter how impressive, is typical bear market action. This holds true until the 200dma starts to trend up.

Anyway, on to the point of this post... we bought some shares of DDM today. Although we would never buy shares of any stock locked in a downtrend, we are willing to bend those rules when it comes to trading the indexes themselves. This is because they have far more resiliency than individual stocks, and are not subject to bankruptcy. We plan on averaging down from here if the market continues to drop. Buying where we did today (at the quarter mark of the channel) has resulted in a profit in every case for the past 12 months. We have no reason to believe that this iteration will be any different. Worst case scenario, the way we see it, is that we break even on the next rally on these shares. In order for that to happen, the market would have to go significantly lower before rebounding. We would be adding on that dip, and the added shares would result in a profit. The only way we can lose is if the market does the unthinkable. We're betting that the Fed will not let that happen. Bottom line... Dow down 650 points from its high set 3 days ago... start accumulating it here. We're 16% in DDM, and 84% in cash.

The Dow and OIL

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The chart above is the Dow. We sold DDM at 61 and change because we felt that an 800 point gain in a bear market was too much too soon. We're looking to either buy DDM (Ultralong Dow) or DXD (Ultrashort Dow) for our next trade, but right now we couldn't tell you which. The market is in no-man's land, and a gain of 600 tomorrow would be no more suprising than a loss of 600. We're in neutral territory. If we get anywhere near the 200dma (blue line), the market becomes an obvious short because the economy will be kept under pressure by the ever-weakening American peso, proposed higher taxes, and the ongoing rise in commodity prices. We're at 13.2% inflation this year... OUCH!

The only time the Dow is a "buy" is when a major 100+ year old financial institution goes belly up and the market drops 1,000 points in a few sessions. Other than that, we don't want it.

The chart on the bottom is OIL. In an earlier post (or comment to a post), we said that after OIL had completed its S-curve, its sharp drop was definitively over. In hindsight it is now obvious that OIL has put in a credible bottom. We do not expect OIL to reach old highs anytime soon. A long, boring, sideways consolidation is in order. If we are wrong and OIL makes it to new highs, this will not happen without coinciding with Dow 9,000.

We're 100% in cash waiting for a dose of irrational exhuberance (Fed induced or otherwise) to give us a chance to grab some DXD nearing the 200dma, or waiting for Citibank to go under so we can grab some cheap DDM. We'll let you know when one of these index funds looks like a low risk, high reward scenario. Until then, 400 point days, regardless of direction, are meaningless.

The Dow

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The chart above is a weekly chart of the Dow (each bar/candle represents 5 trading days). We started buying some DDM (about 10% of our portfolio's worth), otherwise we're in cash and have been for some time. The Dow is in virgin territory on the downside and set up for a real crash. While the potential for disaster is clearly outlined by the horrible technical condition of the market, the odds favor a bounce when the Dow reaches the bottom of its channel.

We would NEVER buy a downtrending stock trading below its downtrending moving average because 95% of the time it is a losing proposition. While the Dow is currently in that exact technical position, we are willing to buy the Dow for the long term for obvious reasons. We are looking to add to DDM as the Dow falls, but are still being very cautious because it is from these extremely precarious technical positions that real market crashes happen.

We are not interested in investing any more than 20% of our capital if and when the Dow reaches the bottom of its channel at approx 10,300. It is only if it crashes below that (by a substantial amount - 1500 points in a day?), that we would back up the truck. You can actually look at the Dow in terms of its percentage below its 200dma and get a pretty good idea of where it should stop free-falling. 10,300 is just a rough guess based on a quick trendline.

Of course if something as dramatic as a real market crash were to happen, curbs would kick in, the Fed would cut by a full point and a bottom would be put in. The next day would see a 1,000 point rally. Until then, we're just nibbling on the Dow as it drops.

As an aside, we see a good short candidate in GM. Despite its recent fall, the chart is amongst the weakest we've ever seen.

LEH and The Dow

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Lehman Bros has been on our short list for nearly a year now... going back to our days on the LDK board. At any rate, the inevitable is happening, and LEH may just be creating opportunity for the rest of us. Every tradable market bottom has a story. Anything could happen over the next day or two, but our guess is that you may just be able to get a nice trade by buying DDM (Dow Ultralong) on a serious spike down either tomorrow or Tuesday.

We're going to watch the market early this week closer than we have recently because if something cataclysmic should happen, we will buy some DDM. We have no qualms about buying the Dow at these levels. An additional spike down would just make it that much less risky.

Our take on the economy is that we're still in serious trouble, but that we'll pull out of it over the next 15 to 21 months. If asked last month when the economy would improve, we would have said it was not in the forseeable future. But now it is. The reason we can see a light at the end of the tunnel is because the government's takeover of Fannie and Freddie will force rates to stay low for a long time while the excess inventory is unloaded. This is excellent news for the real estate market, for speculation, and for the economy as a whole.

While we aren't as depressed as we were last month, we aren't throwing any parties yet, either. We cannot and will not embrace the concept of a renewed economy until we are comfortable that Obama's tax hikes are not made a reality (at least not to the extent promised). Left unchecked, Obama will destroy any possible economic recovery we may be on the brink of. Americans simply cannot afford higher taxes at this critical turning point in sentiment. It is better practice to slowly raise taxes as the economy picks up momentum.

We understand that it is not Obama's fault that Bush has put our country in one of the weakest economic positions we've been in since the Great Depression. We only hope that Obama's administration, if elected, will approach paying for this massive debt with a little finesse.

The American work ethic is extremely strong, but only when we feel that our efforts are being rewarded. As the economy starts to show signs of life, it is crucial to allow speculation and greed to take hold before thwarting the American spirit with further obstacles to success. This is solely in the hands of the new administration.