Friday, August 17 Market Assessment

Investing cannot be based on Hope

Yesterday's market was another wild one! The DOW made a 700-point round-trip during the day, scaring the daylights out of many. It's possible that the 340-point move back to the 12800 support level that I identified two weeks ago was, in fact, the hoped-for "relief" rally that marks the beginning of an upturn. But I think it's too early to make that call.

First, today is options expiration day. That alone should increase volatility (which spiked to new 7-year highs yesterday). Second, the credit crisis is not over, although hedge funds have probably bought about two weeks before they have to start redeeming billions of dollars of cash again. Finally, there are no new leadership sectors. Yesterday's rush at the end was led by the financials, and they are in no position to lead a fresh market rally. Everyone would like to see tech stocks lead the way, but even the NASDAQ is pushing a string against heavy selling pressure. HPQ had a nice earnings report after the close, but I suspect that it was a surprise only to the TV commentators who constantly cheerlead for the bulls.

The next several sessions are going to bounce up and down (I've been saying this for the last week, unfortunately) as the trader crowd tests support at 12800. The next level down is to 12400, which is very weak. A plunge below that level takes us back to 11900, at best. Let's not go there. But let's be prepared for some more wild swings. Stay away from intraday trading; set buy points and stop-losses based on end-of-day charts. I am optimistic about September, once we get away from Hedge Fund redemptions in late August. The country will accept a 1200 point retracement as natural; a 15% drop from 14000 to 11900 in one month is going to convince a lot of people, including me, that next year will see a recession. Let's "hope" that doesn't happen.

Summary: Short term neutral, long term bullish.

Wednesday, August 15 Market Assessment

I see a Light at the End of the Tunnel.

Yesterday's 208-point plunge caught me by surprise because I felt that we had seen the last of the triple-digit swings for the month. But I was wrong, and the market chased off the remainder of the weak sisters left over from last week's wild ride.

Credit concerns still roil the market, of course. We will see more downside in the next few weeks, especially among the homebuilders and their financial collaborators. This retracement in the market is clearly all about the real estate bubble, and it will be over soon for everyone but homeowners and their real estate agents, who will feel pain for at least another year.

It’s possible the subprime mortgage debacle and its fallout could spill out into the real economy. It's also possible the market will make even more dramatic new lows. But neither scenario is highly likely in my humble opinion.

I follow the odds, and the odds in this case are that the mortgage crisis will be contained. It’s always hard to fight City Hall, and in this case City Hall is the world’s central banks. As last week’s events showed, if you’re bearish right now, you don’t have just the Federal Reserve against you, but the European Central Bank, the Japanese central bank, and even the Australian central bank as well. Together with the Fed, these banks injected more liquidity into the system than they have at any time in the last seven years! Also, I assume all the other central banks would make it a priority to keep the world financial system running smoothly, and will step in if needed.

With this kind of effort from central banks, and a lack of weakness in the economy, I have to put my money on the Bull, but not just yet. Even if we get a new low, it should be a shallow low, followed by a nice rally in the Fall. If that seems a little optimistic, I have to confess to keeping a sharp eye on the DOW, because a big step down to 12,800 makes sense from a technical point of view. That's the next level of support, not 13,000, where the market is slowly churning as this is being written.

Right now, I'm sitting tight on cash and equities (MDT, VZ, GRMN, BEAV, GOOG) and prowling the put listings for money-making spreads in the homebuilder and finance industries (XHB, MBI, LEN, MS, CFC). Bargain-hunting begins next week if the volatility starts to return to more moderate levels.

Summary: Short-term neutral, long-term bullish.

Wednesday, August 8 Market Assessment

It hasn't been pretty!

The market has been vicious the last few days. I've been whip-sawed thoroughly, stopped out and pounded upon. Right now, I'm down substantially after the roaring come-back of the financials, but I still don't see a market bottom, much less the resumption of the bull run. The market internals have been questionable at best: as many stocks declining as advancing, more 52-week lows than highs, and volume still much higher on down days than up days (overall).

So, I'm holding on to a few put positions (XHB, CFC, SLPS), retreating mostly to cash, and looking for good equity buys on pull-backs. I can't agree on the promise of a tech rally just yet, and I certainly don't believe that we've seen the last of the mortgage/housing mess.

I had hoped that clever positioning with puts would enable me to weather this storm with no losses, maybe even some gains. But a market that moves 200 points a day, and a VIX that shoots from 21 to 27 and back to 23 in less than a week, is a treacherous place to be. If you don't hear from me for a few days, it's because I'm off licking my wounds.

Summary: Short-term bearish, long-term bullish

Friday, August 3, Market Assessment

Look Both Ways Before Crossing

As bullish as the commentators were after Thursday's nice triple-digit climb, storm clouds still darken the horizon. The latest round of better-than-expected earnings boosted optimism and stocks jumped at the end of the day (once again!). But volume totals on the exchanges were lower than Wednesday's levels which is a less than ideal scenario. Normally, we like to see volume expand as the major averages advance and contract when they decline. Breadth was positive as advancers led decliners by nearly a 2-to-1 ratio on the NYSE and by a 17-to-13 ratio on the Nasdaq exchange. However, the number of new 52-week lows continues to beat new 52-week highs on both major exchanges. If the bull is coming back, he's not here yet.

So we're not out of the woods. In fact, I believe we will see this sideways action -- I'm assuming another down Friday* -- for most of August. It would be nice if the market could pick a direction and just go there, but it's going to be a while before the financial jitters are settled.

From here on out, I'm looking for pull-backs on some good stocks. Today I bought BEA Systems on a pullback below $40, and a few more puts on the Homebuilders index. Naturally, the homebuilders all bounced up Thursday, but everyone knows that they still have room to fall. Every bone in my body says that we're heading for an economic slow-down in the 4th Quarter, so I'm focusing exclusively on defensive stocks, while keeping a sharp eye on the bellwether tech stocks to see if they start to move as a group.

*After I wrote the section above, the DOW crashed down over 280 points, confirming my belief that the market is still overbought, especially in the financials. Oil is also tumbling, but that may take a while longer. Katy, bar the door!

Summary: Short-term bearish, long term mildly bullish.