RSSMy Thoughts on Stocks, Gold & Bonds Near-Term
By Jim Welsh | November 21, 2008 | 9:34 AM | 0 Comments
Last month I wrote, "My guess is that the DJIA will drop below 7,882, but hold above 7,200 in coming weeks. If this develops, a one to three month rally could follow, as analysts convince themselves that a narrowing in credit spreads and a second bigger stimulus plan will mean the economy will begin to recover by mid 2009. As more investors embrace this scenario, selling pressure will dry up, and coupled with a little buying and some short covering, the market will rally on lighter volume. This is what happened after the March low, and the market rallied for two months. If this plays out, the DJIA could rise to 9,600-10,200, and the S&P to 1000-1050. My guess is that after this rally is over, the DJIA will likely drop below 7,200 by next spring." So far this scenario seems on track. However, the DJIA has really been masking the weakness in the overall market. The S&P is below its October intra day low by -4.0%, the Russell 2000 and Nasdaq 100 are both below their October 10 lows by -11.7%, even as the DJIA holds above 7,882. This degree of weakness increases the odds that the 2002 and 2003 lows will be tested sooner, rather than later.
If the DJIA drops below 7,882, traders should look for an entry. Needless to say, with the VIX above 70, this is not for the feint of heart. Wherever you choose to go long, use DJIA 7,200 as a stop, and raise the stop to the DJIA low, if the DJIA climbs above 8,200.
Right after 9/11, the volatility index (VIX) got up to 43, and at the bottom in July 2002, it pushed up to 47. In recent weeks, the VIX almost got up to 90. Today it finished above 74. The S&P has swings of 3% to 5%, almost daily. Trading risk is extremely high. As noted last month, my managed accounts are up 14% since July 1, 2007, and 2% so far in 2008. We've been basically out of the market since July, waiting for a bottom that looks capable of lasting longer than a week.
GOLD
"Although the extraordinary measures adopted by central banks may be inflationary in the long run, in the short run they have not yet stopped home and equity prices from falling, nor prevented a further contraction in credit creation. All signs of deflation. Gold won't move up, until after a period of real stability, and we aren't there yet. This suggests Gold could drop to $660." These comments from last month still apply, although Gold may make a run at $600.
BONDS
I would not buy Treasury bonds. Even though there is a mountain of supply coming, the economy is likely to remain weak enough to keep yields from climbing much above 4% on the 10-year Treasury. That means it's too early to short them either.
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