August 12, 2009

"THE EYE OF THE STORM"

Just like a hurricane, it first hits with maximum fury, then there is an eerie calm before the next wave hits.

That is where we are in the economy and stock market.

Just like in 1929, few could imagine what was ahead in the thirties. Just because some rich bankers jumped from their windows because of their 90% leveraged accounts were wiped out in a single day (on a 10% drop in the market), how could that affect the masses. (We know now). That was merely the first crack in the dam.

We have experienced the first crack in the dam and are now in the "eye of the storm."
Irrational exuberance abounds. (look at the action in FRE [Freddie Mac] this week). Money is flowing to garbage stocks such as that and AIG. Penny stock promoters are back in full force and advertising on the radio. The government is spending money exponentially faster than Bernie Madoff and the public is believing the whole political bag job.

All I can say is "SELL, SELL, SELL."

A quote I have heard more than once is "I'm just waiting to get my investment back before I sell." Meaning the Dow must go above 14,000. Oh, OK...waiting until 2025? Now in all seriousness, it might break 14,000 before 2020, but that's a bit far out to see.

On the short term, we are much more likely to break 667 than 14,000. As a matter of fact, I believe we will at least revisit, if not break 667 before the end of 2010, without crossing 14,000 first. So if you are waiting to sell at 14,000 you might have a long time to wait.

While our sell signal at 956 was quite timely, we obviously did not call the top. Our short sales were stopped out at 912. The biggest mistake we made was not to reverse and go long at that level.

The risk of the upcoming decline is far greater that any advance forthcoming.

The biggest question now is from what price point will the drop start?

Some say we have already topped at 1018.

Our research and analysis could agree but believe we have one more recovery high due this week or next which could push the market up to as high as the 1040 - 1050 level. This is the point to aggressively short. With such a small advance ahead, all shorts or put positions can be purchased here and held through the decline. August options are all closed except for very short term trading accounts.

In the mean time, our spreads are working fine.

Stay tuned and good luck trading or let us manage your account for you.