Tuesday, May 25, 2010

Market outlook: Higher volatility days ahead.

Scary day today for the markets. If you pay attention today, your blood pressure will surly rise as will the VIX. The Nikkei dropped almost 300 points in overnight trading for a 3% loss as did the Topix and currently European markets are also down anywhere between 2% to almost 3%. World jitters are said to blame and certainly we have enough of them. For example, concerns over the North Koreans starting up the war again with the South Koreans and drawing in China and the US. Then there's the catastrophic Oil spill in the Gulf which has been going on for a month and most likely will continue for another 2-3 months before the well is sealed. Then add to the mix the concerns in the Euro zone about the recent debt problems of Greece and now of Spain, not to mention our own debt problems, and you have a vessel holding a lot of world issues in it.

However, everyone seems to discount the fact that the charts of the markets, which are produced by trades of our collective human minds and the software, which has been used to create formulas which can execute those trades in micro seconds, have been telling us this market drop was coming over a year ago. But we wanted to believe that we were missing out on the rally if we weren't in this rising market. Well watch how you react when the market now reverses. It's the old greed and fear paradigm at play. This creates volatility in markets. So watch the VIX index rise today.

Dow Futures point today for the Dow to drop as low as the 9700-9800 range and the other Indexes point to a similar move. If you are new to this Blog, you might want to read back issues of this Blog ofr the past 6 months or so, sampling the various warnings I had posted. I will summarize the message here as follows: We are headed eventually here to testing the previous market low of 6,440 and it will not hold ultimately. Prepare your portfolio for this and your psyche. It will not happen all at once but rather will play out over the next year or so. But it will play out!

If you haven't noticed lately, 3 Month Libor rates have doubled over the past few months. The rates, which are what banks charge each other for lending to each other, has gone from a low of 0.21% to now 0.54%. All in preparation of a tightening of lending even more than previously. Hmmm, you think they knew tis trouble was coming? Hmmm, Oil has gone down significantly as well. Today it is down over $2.29/barrel to $67.84. One would have thought with as large an Oil spill that the prices would have gone up. This is deflationary.

I thought we might get a relief rally back to 10,500 to 10,600 but we may not as well. I might be forced to part with the TZA OPtions I bought yesterday but it was not a large bet, so that's OK too. I still have 1/2 of my October Call Options as well as owning many TZA shares outright as well as FAZ, both of which are ETF Ultra Shorts. TZA is up to $8.20 in pre-market for a move of 7.5% after hitting a high of $8.38/share earlier.

Watch 1044 on the S&P 500 as that is where support is. If we can hold that, we can then get a rally in the next few days. If we can't we are heading lower and breaking that support level. And it's a long way down from there before another support level will stop the drop. On the Dow, that level is at 9850 and on the Russell 2000, that level is at 580.

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