Click chart to enlargeWe've been bullish for the past 4 months not so much because we thought the market was headed much higher, but because we figured it wouldn't crash again after its big drop in October. We were expecting either a snap back to the averages, or a long sideways consolidation to the averages. Either way, the market over any "multi-month" term is attracted to the averages like a magnet. In this case, while they didn't snap back to them in a single formidable rally, the gravitational pull of the averages helped keep the market bouyant for the past 4 months. This consolidation could continue for another few months, going by the support and resistance lines drawn on the chart of the Dow above. The resistance line of the triangle is actually getting pretty close to the 100dma. At some point, the market will have to make a decisive move one way or the other. We're hoping for another leg down, as we remain only 30% invested.
If you want to feel good about the market, you can seek solace in the fact that the Dow is the worst looking index chart. The Nasdaq and S&P are outperforming it. This may be due to the Dow's dependance on its financial stocks, which of course are weighing heavily on its performance. Some stocks in the Dow-30 do not even meet the criteria to be in the index at this point. Some have suggested that this makes it a broken index, and its performance is therefore not indicative of the health of the broader market. While there is some truth to this, we strongly believe that its psychological effect on investor sentiment cannot be ignored. Even if the Nasdaq and S&P were to remain above support, and just the Dow were to break down to a new low, the headlines would make it appear that the world is ending. A new low for the Dow could easily lead to a new low for the other indexes.
We will continue to watch and wait while the market remains in its consolidation phase. Only a return to 7500 would pique our buying interest. Maybe adding another 10% at 7500 would make sense. But we're saving the other 60% for the "big puke", if it ever comes to pass. Just our opinion, but if the market does break to new lows, it will be another one of those "taking out the stops" scenarios, where it breaks it quickly and not by much more than a few hundred points. In other words, a Dow bottom of 7,250 is more likely in our minds than a Dow bottom of 6,000.
28 comments:
Snot,
some remarks:
1) Dow stocks
If the weak stocks in the Dow would be replaced, that should itself cause a bullish reaction. Right?
2) Gold
Even though we are currently facing a deflation, gold has attracted a lot of interest lately. Apparently, private investors favor gold as a save haven. What do you think of the chart - looks pretty tradable to me.
3) China
I mentioned that before (and got no reply): Seems like Shanghai and the Hang Seng have left their downward channel. Given the huge investment program in China for infrastructure that looks like a good long opportunity to me. What do you think?
Best regards,
newfrankyboy
gold made a strong move through resistance at 925 this morning and is currently above 940.
my gdx & dgp positions are looking real good today :)
if gold can close above 925 it looks like it may start making a run for 1000.
imho, the chart for gold looks very healthy for being long.
oh, above post is from me, rl
I don't think the big puke comes until Q1 2009 earnings get reported. Another weaker than expected quarter along with Geithner's request for additional money (because the TARP will have run dry) should cause the vomit to spew forth in the projectile like manner that we're all waiting for.
But for now $350B + $800B = $1TRILLION+ waiting to be deployed in one form or another, so the question is does anyone want to bet against that kind of money over the short term? Surely that's enough to stave off a drop over the next few weeks.
Only when this $1T fails and Geithner's request for yet more money is made to an appalled Senate and Congress will the market give us a vomit scenario reminiscent of "Monty Python's The Meaning Of Life".
Franky,
Yes, if the weakest Dow stocks were replaced by more eligible candidates, it would help the index. The woes of the banking industry run so deep that they aren't going away any time soon. C and BAC are on the brink of bankruptcy, and it will cost us more than the war in Iraq to save them. The chart of GLD looks great, but buying it here?
China is outperforming the U.S. lately, but their recent performance doesn't look like anything more than a bounce following a 75% decline. If U.S. markets fell 75%, a rebound similar to what China's experiencing would be the least that you'd expect. Look at a chart of FXI with its 100dma. It keeps hitting it but getting rejected. It's at it once again, but has yet to break through.
Mr Creosote,
It's very possible that it plays out as you suggest. Just going by stock performance, which is a window into insider knowledge, Citi burned through the $15B they got in late 2008 in less than 2 months. At that burn rate, they will require further help. Maybe more than once. It's just a matter of time.
Anyone bother to keep tabs on SIRI? If you avoided buying the stock as it fell from $69 in 2000 to 11 cents, and instead bought it yesterday, you'd be down 50% today.
It's amazing how on Wall Street even if you're smart enough to avoid disaster for 9 years you can still lose a huge amount in a single day. Our theory that all stocks eventually go to 14 cents may have to be revised. 6 cents may be the new reality given the state of the economy. Anyone want to gamble on Howard announcing an extension of his contract? It could be worth a quick 300% pop!
snot: in regards to gold, i agree that buying now is not good timing, as both gld and dgp are near the top of their uptrending channels.
but, following your advice on how to trade uptrending stocks, I will be watching closely to look to sell near the top of the channel, and expect there will be an opportunity to buy back in if/when gld/dgp approach their support trendlines.
rl
Icon and rl
Thanks for replying. I bought a small chunk of QID back in mid Dec. and have rued it since. These ETF's really degrade over time. Even factoring in the 14% dividend paid out Dec. 30, it gradually loses ground compared to the Nasdaq.
Gold is an interesting play. It is about as pure a hedge as you can get. Worldwide, I can't imagine folks buying as much rings, necklases and the like as in years past, but that is moot.
Like Snot, I'm planning on buying acreage later this year. If ever there was a time to buy low, now is it. For the first time ever, the Federal Gov. is interested in selling some of their detached forest land.
yep, I'm in a similar situation in qid. luckily gold has worked as a good hedge to qid/dxd. still holding on to both qid & dxd, but trying to pay more attention to overall market trends so I don't keep holding them on confirmed uptrends. like you, i see the same time decay on these etfs.
speaking of which, i read a post from one person that said he was short both qld and qid, or ddm and dxd. his theory was that all these index etfs incur time decay, so by being short both the long & short etfs, it was basically a guaranteed win over time.
i should look at those charts more closely to see if that has actually worked over the last 6 months or so...
rl
Hi Snot
Did you take a look at GOOG, AAPL,and AG stocks: POT, MOS... All are trade above 100 DMA. Do you think this is bear market rally for these stock or trend is changing? Thx
A down day tomorrow on GDX will create a new dowtrending rsi resistance line. I am buying some DZZ in anticipation of that sell signal. I think the gold bugs are ready to be squashed again.
Also, I am setting my next trade trigger to buy ERX if/when XLE trades at 45.88.
icon: thanks for your comment on the rsi trendline for gdx. i'll keep my eye on that tomorrow...
looking at it now, i don't see that it's broken down yet, so i'm hoping gold opens higher tomorrow and keeps the trend intact for gdx.
the break above its 200dma today seems very bullish to me, as it's bounced off the 200dma a few times already recently, but was never able to break through before. i'm hoping it stays above its 200dma. time will tell...
rl
Just Look at FXI and FXP. Since inception one is down 55% and the other is down 50%. A couple of spikes along the way for FXI which were not reflected in FXP and then both carried in straight down.
As clear an example as you could get as to why these ETF's are not reliable as a hedge over the long term.
conorsh: so if you went short both fxi & fxp, it would be pretty much a guaranteed win no matter which way the market went, right?
if this is the case, i need to open up big short positions on all these etf pairs: fxi/fxp, ddm/dxd, qld/qid, etc...
what am i missing here? obviously this would be too good to be true.
rl
Ah, if only it was that easy.. Shorting one would seem to be a hedge against the other with the time depreciation eventually "guaranteeing" a win overall.
The difficulty is that your short would be devastating during the october spikes in FXI (would you have had the margin available to cover them? Would you have the nerves to hold on and trust that they would go back down? )
Also the big fall in both has happened at a time when the whole market crashed and is more likely as a result of money pulling out of them than an actual reflection of their worth (like the rest of the market). Certainly the monthly fees & Time depreciation dont justify such a fall and therefore the strategy is flawed from that point of view.
My problem with the ETFs is that they are not predictable and that they don't react as you would expect which is what you require from a hedge. Eg a fall in chinese markets doesn't always lead to a rise in FXP. Thats very different from suggesting that all ETFs will lose value over enough time. They could easily all rise if the market goes on a run in defiance of how an ultrashort should react!
Essentially, past performance is no indication of future gains!
Shorting both of a pair of ultras will work, I believe, only in a bear market. In a bull market it will get you exactly nowhere.
In the DIG and DUG chart, notice that for the first year they cancel each other out. Only in the last year would it profit you to short both of them.
DIG DUG
Do you recognize the bear-flag on these charts? C, USB, JPM, AXP, TRV
Triangle on WFC.
These are some of the most important companies of the financial sector.
The oil and REIT companies are close to there last supports.
Lots of bear-flags on the mining sector.
I think we have 1-3 more days to the upside, and after that comes the big legdown.
Simply there are no real buyers in this market.
Sorry for my English.
I just want to say that today I started to use Gary's approach. :)
I'm tired of this market, my previous tactic needed too much time to trade. I used to be a swing trader but lately I became a day/momentum trader with 1-2 days of positions. I hate it...
I choosed 5 stocks to short and 3 to long but with proper timing (at least I think). Let's see what is happening.
Wow, oil at $35! Who would have predicted that number six months ago? There's no doubt we're witnessing widespread deflation at this point. Buying a gallon of gas for $2.00 with Q1 2009 money is probably equal to buying a gallon of gas for $4.00 with Q2 2008 money. Unfortunately, the income side of the equation is not equal for all. Some are enjoying their 2007 salaries in a deflationary environment and living like kings. Others are out of work, or have lost everything. And such is the wheel of fortune that is capitalism... the great wealth re-allocation machine in action.
gold looks strong again today. gdx down currently, but considering the dow is -175, gdx is holding up very well imo. also still above its 200dma. as long as gold continues to trend higher, i would expect gdx to rebound like it did yesterday.
rl
Snot
I'm just curious. Just how does the market 'take out the stops'? With billions of trades daily spread out over millions of investors, albeit some very, very large, how is the thing engineered? The assumption must be that there are a few players that have immense impact on the market as a whole. Are we just ticks riding on those doggies' backs?
lol I predicted $20 oil 5 months ago, here. We still got a month left to go....
Notice XLE's opening price today. 45.88! Funny stuff...
Icon, That was a nice call. I certainly didn't think it would hit $35 so quickly..
On the taking out the stops thing i don't really buy it. Its basically talking manipulation again and suggests that "they" deliberately tank the market so that they can buy lower and profit from the recovery. It just doesn't make sense.
A) No one is in a strong enough position right now to be playing with the market on that scale, the big banks and funds are losing their bollocks just like everyone else and they last thing they need is a break of the previous lows pushing them into bankruptcy
B) We are already down megascale, If "they" pushed it down then why haven't they started pushing the recovery yet. We are down enough for unimaginable profits to be made if the strategy was real.
Bottom line, All the really really big players with the capacity to drive markets are net long players and they are fighting for survival just like everyone else. No one is deliberately pushing the market down to "take out the stops"
Last thing, When oil was $140 gas cost me $1.50 a litre. Now oil is $35 and gas costs .90c per liter .
Anyone wonder whos making the extra margin here?
Cheap oil does not mean good for you. I have two cousins are engineer and work for oil company. They just got layoff because oil is too cheap to keep producing. Oil will go to zero some days and we are all going to beg for food!
How does HANS look for an uptrending chart?
We may be in the minority, but we still believe that Goldman Sachs, along with their partner, the Fed, have enough money to manipulate the market at its key support levels. That's not to say that all of this is the result of manipulation, of course it's a lot more than that. But there's no doubt that GS will take advantage of your fear to buy at 7200 and sell at a quick return to 7800. That's not to say that after a few swing trades like that, they won't lose control alltogether and be forced to just watch the market dive lower. All in all, we must admit, a quick glance at a chart of the Dow is sickening. A quick glance at a chart gives you far better information than hours of studying it. If it were the chart of an individual stock, we would be pounding the table SELL SELL SELL!
HANS... at least its 200dma started to turn up, but it just doesn't have much of a track record.
Post a Comment