Market Bounces Back From Yesterday's Selloff

Well, we are continuing to see less and less fundamentals factored into market trading everyday now, as these violent jolt in movements is not healthy for a market to sustain. These swings can most definitely lead to a market crash, if some stability isn't found soon. The most dangerous part about it, is how quickly it moves. Once again, we saw ridiculous movement the last 15 minutes of trading. This trend of everyone waiting until right before close, ultimately distorts trading volume and makes for a very unhealthy market. As we saw from Monday, this volatility going the wrong way can do a lot of damage in 15 minutes. The scary thing about it, is people may not have time to react when it moves. These trends make this a very dangerous market.

As a result, I am staying put with what I have for the time being. I'm pretty well hedged either way, with a bulk of my positions still in short. With the continuing large mood swings of the market, for the most part I'm sitting back until we start to see some real trends come. Last week we talked of a good possibility of a strong early December rally, which I still believe could still very well happen.

I was surprised to see the market bounce back the way they did, especially considering the news that came out today. Staples got killed with earnings, but leaped in share price, because it was above market expectation. Toyota, Sears, and Ford were also slaughtered in earnings reports, but also received much love in today's rally. Fundamentals have left the building. People are trying to turn the Dow into a penny stock market, which as I have said before, is very dangerous. As we saw yesterday, investors take a reality check ever so often, and when it comes, it comes hard. I am still as confident as ever in my short positions, although they continue to struggle. Why?

Australia had a large rate cut yesterday, matching their 6 year low. This contributed to banks getting strong gains today. These short term gains are all seem to be based on speculation and nothing actual tangible. The down days are entirely opposite. In the end, the market seems to trend in the direction of actual market conditions, even though there are blips in between. Everything hinges on the financial markets, which is why the rest of the market usually follows suit. Without lending, our economy can't progress. The recovery of these lending markets are not anytime soon. Banks are having a very difficult time balancing their balance sheets. It will take a while and a lot more than $700 billion to clear the air of all the bad debt the banks are stuck with.

Well, the auto industry only needs $38 billion to get back on track. While they're at it, why don't they send me a couple million. I personally feel the auto industry would be better off filing chapter 11, reorganizing, let the government take over their pension accounts, and look to the future. These bailouts aren't going to do anything for these businesses. And these are our tax dollars their giving these guys. Oh well, I guess I will have to live with it.

I am hoping for GDX to come down closer to $20 so I can get back in it. I am very bullish on Gold right now as I fear inflation is our next problem. However, I think if it can come back to $22-23, that's good enough for me. I also may pick up some YHOO for the IRA, which if you haven't opened one, you can open an IRA with free trades monthly at Zecco.com. It's only a matter of time until they get bought in my opinion. They aren't going under, no way. With a buy out, they will quickly pop back to the $18-20 range. Even if the buyout is not this year, in a normal market, its a $30-$40 stock, easy.

I did sell a lot of my SRS this morning at $157, which was strong gains for 4 days (bought @ $120). During this little rally period, I am going to tighten up on my sell point for SRS. With FXP and EEV getting dragged down with these global rate cuts and stimulus packages for the time being, I am looking to SRS to pick up some slack. I plan on buying at the $120 range and selling at the $155 range. With the daily volatility of this stock, it provides me some good opportunities to ride the bumps. Plus, I still believe real estate will have its worse year in 2009.

So until then, I plan on keeping what I have. If we do indeed see a strong rally push through these next couple of weeks, I will sell all of my long options and gear up for a downfall that I believe is eminent. People still may think we've factored "bad news" into the market already. I very much disagree. I just believe the average investor doesn't know just how bad the bad news is yet. There is still plenty of bad news to come this week to spark a sell off, but I can't dare speculate what this market will do right now. Just need to wait it out a bit. I hope everyone has a good evening. Happy Trading and we'll see you tomorrow.

7 comments:

  1. Anonymous Says:

    I have a question about your options:

    Do you typically buy them in the money or do you wait and pick a peak/low and pick them up based on how you think the market will readjust?

    I'm new to options and picking them up for premium * 100 is something I want to consider carefully before jumping in.

  2. Anonymous Says:

    Thanks for sharing your thoughts on this site.

    Unfortunately, I picked up FXP @ 87 just before it fell. Do you see it returning to that level or higher?

  3. mark Says:

    Learn your There, Their, and They're's!

    I initially felt that the answer to the auto industry was for them to file Ch. 11 but their business is different then say the airlines. As long as the planes are flying, customers/passengers feel confident that they can get to their destination, making it easy for them to file. The auto companies need to sell the customer a very expensive product with a warranty that ensures that the car will operate as expected for the duration and if a problem does arise, that they will fix it under the warranties terms. If I were in the market for a new car, I'd never purchase a car from a company which might not be around to fulfill it's end of the warranty, let alone the availability of spare parts and mechanics to repair everything. Their sales would drop even more as customers become more nervous about the companies future. Just food for thought.

  4. richardking Says:

    mark, re: auto industry filing Ch. 11- yes, the average consumer would probably stay away from a car company that went bankrupt because of the exact fear you stated. however, it would probably be unfounded because the company could get a third party to guarantee the warranty- this has been stated by those who are for the auto industry filing Ch. 11 and going from there.


    Re: going short on SRS, EEV, FXP, etc. It makes me nervous that this week, being net down 400 or so in the DOW, these stocks are all down or around break-even... I know they don't follow the DOW exactly, but is this anything to worry about? To be honest, I really have no clue which is why I'm asking...

  5. Finance Fanatic Says:

    Anon1,
    I usually purchase options on a down day at strike prices about 10-15% up from what it is trading currently. Usually, contract prices get a an extra bump in price after being "in the money". So I try and time the bumps

    Anon2,
    I'm in there too with you at 87, and I am holding. I believe its only a matter of time until China starts taking. I mean when you have cut rate 5 times in less than 3 months, you're panicking about something. It may take a bit, but I think FXP will be strong, just my thoughts.

    Mark,
    I believe Ford could maintain their warranty during chapter 11. The best thing it would do for them is free them from these retirement pensions that are holding them hostage. Even though it would take some time to sort things out, I believe they would come out stronger for future times, those are my thoughts.

    Richard,
    FXP and EEV have not gained as much as SKF and SRS because of these continual rate cuts and capital injections. However, I stil believe that EEV and FXP have some gains to yield, especially in 2009. It may take a couple of months, but I am in no hurry. I also still love SRS. Thanks for the comments!

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