Saturday, May 08, 2010

Stock market outlook: Thunderstorms with Tornado winds

I feel like I have been crying in the wilderness saying this correction is coming for quite a while. And most recently I have been saying so in a feverish pitch if you go back to my March 23rd posting. But it is now here and it will unfold slowly but consistently. The 3 charts today show that we have broken below support of the Dow. Oh, and all the Indexes are similar so it's not necessary to post all of them here.

We will be breaking below the 200 day Moving average shortly for most of the Indexes as we are closer as of Friday's close. The chart above, on the VIX (Volatility Index), shows that we hit a low and a high all within weeks. When we hit the multi year low I wrote here that it was a signal that the long awaited drop was near. Well it only took 2 weeks or so and here it is.

Also note the Put to Call ratio chart above, which shows we had hit the multi year low of 15.23 only weeks before this major rise up. It was a signal that there was too much optimism in the markets and it helped fuel the drop. All 3 charts are of a 1 year timeframe so you can se various moves and look at what happened in the Dow.

Now I know many of you think the worst is over from yesterday's market action. Heck, I heard on CNBC that the markets had "recovered" from the previous day's major selloff, which they still say they don't know what happened and it must have been a system glitch. In my view they will find no system glitch. This was a panic selling moment. More will come. Everyone knows the meteoric rise of the Dow since the lows had to come to an end. Those folks feel a 10% correction was inevitable. And so we have had almost a 1000 point correction from 11,400 on the Dow to 10,400, but, unfortunately, this is just the beginning of the big step down in all major markets. Elliott wave Theorists have been saying it is coming for a while as well. I posted a 30 year chart yesterday. I suggest you look at it and ask yourself this question. What do I do if this really does happen? Am I positioned to weather this kind of a drop? And lastly, Uf not, what can I do in the coming days and weeks to get more secure and less vulnerable to a major historic Bear market collapse like happened in the Great Depression.

I have many Short positions and Options currently, so that is my bias. I listen to myself and ask myself the same questions. I still see much upside movement in them. Here are two recent purchases and their status. On Monday I mentioned I had purchased a Call Option on the Ultra Short ETF, TZA, for $0.58/share with a Strike price of $9.00/share and an Expiration of October 16th. It closed yesterday at $1.74, after hitting $2.03 earlier in the day. So that one is up currently 200%. My other one was on MGM. It was a Put Option for a Strike Price of $12.00 for September for $1.15/share. It closed yesterday at $2.08/share. This one is up currently 81%. The underlying stock has closed at $13.12 and for a brief moment this week actually went to $12.52, well within the reach of a $12.00 Strike Price. And much can happen between now and September on this one as well as the TZA Call Option. I also have shares of TZA which I have held on to. I also own some FAZ, which is an Ultra Short ETF of the Financial sector. It has moved this week from about $11.50 to $15.00 for a move of 30%.

So there are other vehicles available to you if you need protection. Talk to your financial advisor. Don't put all your eggs in one basket. Consider cash a part of every portfolio. But don't do like many folks out there do. Don't look at your holdings only when a crisis appears. It's too late. You worked hard to make your fortune or are still working. Don't be a slave to events. Take some accountability for your future and manage it, rather than letting external events manage you. Best of luck. We will be visiting this issue as the days and weeks unfold the market direction more clearly to you. I have my crystal ball. I hope you do too and that you're not looking at yours through rose colored glasses.

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