Wedndesday Wrap-Up

Well that was a perfect "Which Way Wednesday" as we had a little of both ways today.

We got almost exactly the 20% pullbacks we were looking for in the morning post and we did hold our targets which gave us a chance to to improve our positions and catch a few quick trades but, on the whole, it was a watch and wait day as we fell 150 points, rose 200 points and then fell another 140 points during the session.  Somehow, 490 points of up and down moves in a session caused the VIX to fall 5%, finishing the day below 50 for the first time since early November.  UNFORTUNATELY, just 2 days after the VIX fell below 50 on Nov 4th, the Dow fell 500 points, then another 500 and then another 1,000 over the next two weeks.

So, LET’S BE CAREFUL OUT THERE!  That Tuesday was our election day rally and that Thursday, Nov 6th, was the day that foreign central banks went on a rate cutting spree, with the BOE cutting one and a half points in a single shot and the ECB showing relative restraint with a half point cut, which is what cost the markets the additional 500 points as they always want more, never less.  On that day I predicted "We may have a long, drawn-out bottom but we can generate a good income stream by choosing well-hedged positions in dividend-paying stocks as well as selling option contracts against our long-term holdings.  Until we get more of a recovery, that will be our plan – we’re not bullish so much as bottomish" and tha’ts pretty much where we still are, 6 weeks later and just 100 points over that day’s close.

So maybe the VIX is right to go down.  If you take the long-term perspective, you could have checked the market on 10/10, 10/17, 10/24, 10/31, 11/7, 11/14, 11/21, 11/28, 12/5 and 12/12 and only one time (11/28) would you have seen us outside the 5% rule around our 8,650 line.  Meanwhile, we are collecting premiums in which we are insuring our put and call buyer against 20% moves in their stocks.  Clearly the fear is theirs and the profits are ours!  Perhaps after being burned in the October, Novemeber and very likely December expiration (tomorrow), our put and call buyers are starting to wise up and realize they may have been overpaying for those front-month contracts.

Our last Big Chart was done last Monday, Dec 8th and I did a double take when I saw that we are still down 100 points from that day’s close despite Herculean efforts by the Fed to pump up the economy.  We were slightly bearish then and we’re slightly bearish now and we are still watching our 40% lines, below which there is no point to getting bullish at all:

Clearly we still have MAJOR problems!  Only the Dow and the FTSE are better than 40% off their 2007 highs while the SOX and all of Asia are more than 50% off the mark.  The Nasdaq (dragged down by the SOX) is below our must hold target of 1,600 and only the FTSE in Europe is above our "must hold" line.  In the past 10 days, our major market indexes have barely budged as we hover along the the upper 5% band of our mid-points, which are Dow 8,650,  S&P 870, Nasdaq 1,550, NYSE 5,500 and Russell 460.

These are pretty frightening numbers folks!  Don’t forget we are in our market roller coaster model (now adopted by Cramer) and we just got about as much stimulus as we’re likely to get between now and inauguration day so we need to see a big move up the tracks or we are quickly going to find out why parachute jumpers say "gravity is a bitch".

Please, please, please keep in mind that 40% is a very sad bounce off of a 50% drop – the proverbial dead cat!  Every time I hear the MSM say we are having a 20% rally off the bottom it reminds me how pathetic most people are at math.  When a stock falls from $100 to $1 and then goes to $2 – should we all run out and cry "RALLY TIME?"  Of course not, it’s silly and it’s not much less silly to think we are rallying when we go from an oversold (we hope) 50% off back to 40% off – what’s key is figuring out where the real bottom is as that is the only thing we can be sure will stand up to the relentless pull of market gravity.