Market Volatility And A Short Term Bottom?

First thing I want to say is that no one should “count” on a bounce. Suddenly the bulls are coming out of the wood work to say that a short term bottom is in. But, I say again…you CANNOT bet the farm on a short term bottom, if that is what is currently forming. I can’t emphasize enough how precarious the market is at this point. Regardless of current technical indicators, the potential for a significant market downturn is STILL on the table. Today we advised closing the index shorts after the action that occurred in the S&P around 1:45pm. What was becoming a bear flag from 12:15 pm to 1:30 pm turned into a failure, and the flag formation broke to the upside. A catalyst for this break to the upside was the vehicle sales data from General Motors (GM). Their sales were bad, but it was not as bad as the market had been expecting.

Additionally, GM said they expect the economy to recover in the 2nd half of 2008. It’s interesting that this is the same company that only a month ago announced significant layoffs, plant closings, corporate wide restructuring, and announced that “high fuel costs are here to stay.”  This caused them to change their future manufacturing plan for many years into the future, but now they think things are improving? We do not share the same view of the economy as GM stated today. On the contrary, all indications continue to point towards a worsening economy with long term implications. During the wild action and volatility that began at 1:45, Lisa and I discussed our positions and current recommendations. It was agreed by both of us that in the short term it was better to take our profits off the table, and good profits they were indeed, and play it safe. But, we are NOT recommending any long investments here. There may be some short term scalps on the long side, but we are still teetering near a cliff and we have economic data coming that could cause significant damage to the market in an instant.

Volatility remains elevated, and in that environment the market remains extremely bi-polar. It could snap one way or another very quickly. Contrary to a recent comment, the US dollar is currently unstable. This is reflected by the wild swings in the FOREX markets, as well as the rise in Gold prices. Additionally, with the ECB rate decision coming on Thursday morning, there may be some additional FOREX (and US dollar) volatility coming.

Nothing has changed today from yesterday. The bounce in the market witnessed today was mostly technical with a kick in the pants by General Motors. I do believe that if it were not for the GM sales data we would have closed significantly in the red. Regardless, the bounce that did occur was not convincing to us for volume levels were not as high as I would have expected to see on a significant technical rally. But we have the holiday week impacting the trading so the lower volume is actually more of a concern, an illiquid market can be a dangerous market.

For a short term scalp trade on the long side we suggest the ETF method for this type of play. We feel an ETF play is the safer way to scalp the market for short moves. For our subscribers who are day traders there will certainly be individual stocks in which to trade for quick plays. However, for a general bear market rally (if that is what takes place in the coming days), then we would suggest DDM (Ultra long for the Dow), SSO (Ultra Long for the S&P), and UYG (Ultra long for the financial sector). I must advise strongly however that these trades will need to be watched VERY CAREFULLY. Risk remains very elevated still.

On the subject of the banks and financial institutions we feel there is still a significant risk of another implosion taking place. Which is one reason why we advise extreme caution here on any plays to the long side. We are still in a bear market and bear market rules apply:

1.Preservation of capital is paramount

2. All long term investments must be sold on any long term trend line break, for if you don’t take your gains you may never see them again.

3. Bear markets are NOT the time to be adventurous and foolish with your investments and/or trades.

4. Over confidence in any bottom (short term or not) can be very hazardous to ones wallet.

5. Preservation of capital is paramount.

The economic conditions of the United States continues to decline by our own analysis and ‘real world’ surveys. Lisa and I research the markets and the economy to all hours of the night. The current economic conditions keep us very busy reading, analyzing, and studying trends and data. We don’t simply repeat what others are saying. We do our OWN research and we stand firm that the economy is continuing to weaken.

Personally, I will be closing all trades before the holiday weekend. I do not want to risk holding any positions going into a long holiday weekend with the banks and other financial institutions still in an extreme danger zone. Holiday weekends tend to be times when we often see dramatic announcements.

On the subject of the new web site and individual stocks that we trade. In January we contracted with a web development company to customize a database format site that would enable us to have a portal that we desired to operate from. Unfortunately, the web company was unable to successfully perform the work and we were forced to cancel that contract and begin from scratch. Our needs for a web site are many. Our search for a suitable system required that we could provide our analysis, charts, individual stock plays, provide a forum for our users to interact with us and each other, and for aggressive traders, to provide a webinar system that allows for real time interaction with us and the ability to see our own screens and see what we do and how we do it. I located a company that developed a content management system that I tested and found to be a very workable solution. A contract was signed, a check was cut, and work in going on now as we speak on creating our new portal. There will be additional announcements in the coming days.

Posted in Categories: Contributor, Eurozone, External Research, Stocks, USA.

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