Market update: April gains almost wiped out!

I have included 3 charts today, one of a 3 year of the Dow and the other a 3 year of the S&P 500. Both charts are identical. If you look at 1 month charts of each you will notice that we have basically wiped out all of the gains for the month and in my view are ready to begin the long awaited correction. The third chart is of the VIX (Volatility) Index. It rose 20 % yesterday and has been erratic the whole week, signaling major change is about to begin. It recently hit a multi year low of 15.23 and since then has dramatically risen. In my view this is setting up the beginning of the long awaited major correction, where the Dow will eventually go to the low last year of 6,400 and it will break below it causing fear and panic unprecedented in our time. How's that for a positive note to start the weekend. But what do I know, I am only guessing. :)

I have my shorts as hedges to this expected drop, as it will play out through Options expiration in October and cause a very somber mood for the Christmas holiday period and beyond. Bah, humbug!

Greek Debt issue not really resolved yet.

The Greek Debt issue is not resolved according to reports from Bloomberg.com and other news outlets. Their Bonds have dropped sharply and there are strikes in the streets of Greece over austerity measures being proposed by the government to show creditors they have the backbone to do what is necessary to get the financing of their debt issue resolved.

This is important because if this issue is now resolved soon, the World stock markets could take a turn for the worse and a major correction could be precipitated as this spark becomes a roaring fire. The next 30 days are key here. A defensive position in stocks is warranted at this time in my view. Our stock markets are very over bought and so we are in position for a long awaited correction anyway, with the recent lows of the VIX Index and the low of 0.56 for the Put to Call ratio. Add to that the sentiment of investors has reached high levels of optimism , while Volume has decreased in this market rise and you have all the necessary ingredients for a major correction. Fair Warning!

VIX Index also points to a correction

Another piece of data from yesterday's close points to a 3 year new low. It is the VIX Index which measures volatility in the market. The last time the VIX was this low was in May 2008. That was the beginning of the big drop in the Dow as well as other indexes as shown on the Dow chart with the Blue line. When you take this piece of data along with the Put to Call ratio data from the previous post, it is clear to me we are approaching a MAJOR correction period. I can't predict the exact timing but this could start the decline culminating in the Sept./Oct. period. This is about how long it took to play out last time if you look at the Dow chart. Time will tell.

Markets will be down for the coming week. Why?

I have been thinking about the market drop on Friday on accelerated volume. I was trying to come up with some possible reasons which have not ben the usual suspects. This is difficult to do as I have been expecting this pullback for months and I seen signs everywhere that things aren't going to get better any time soon on the economy even though Wall St. seems to defy Main St. So what did I come up with this time and what would be the rationale that this time the market drop is for real and will continue at least for Monday or Tuesday and then possibly on Friday.

So first, Treasury Secretary Geithner was interviewed on Meet the Press by david Gregory. Geithner when pressed seem to say Unemployment will continue to rise even while the economy is recovering as employment is a lagging indicator. But there was more in Geithner's head tilting, a sign of not wanting to answer directly the questions as he knows more than he is saying. I think Geithner knows that next weeks announced Unemployment numbers for October are going to take us over 10% and then the heat will be on. That happens on Friday I believe.

But besides that big piece of news, there are elections being held in several States for Mayor's and for Governors as well as a Congressional opening in Upstate NY, which will reflect a defeat for Democrats which Republicans will play up with the media, as they should. One can rationalize President Obama has had only a short time to fix the problems and one could argue that he may have made some problems worse. But that will be decided by historians and I am not a historian. But I believe that this gives impetus for the markets to correct specifically at this time. It is before Thanksgiving and the start of Christmas Shopping season, so the damage might not be that much of a drag on business than what the economic conditions are already saying about Consumer Spending this year. So what better time for a correction.

This is also in advance of proposed legislation for Regulatory reforms which have already passed Rep. Barney Franks Committee. There is nothing Wall Street would like more to do than to cause alarm to be slow about imposing additional regulations as the market is fragile, they will say. Gee, all this at a time when Executive Compensation is being ratcheted down in 7 of the largest firms bailed out by the Fed. Oh, and late me remind you that this past Friday was the end of the year for many Funds. So, yes, this is the best time politically, financially, economically and emotionally to have this correction. It is all part of the manipulation we have come to expect. To me it is long overdue and I have been saying so for months. But heck, what do I know, I'm only the 200 lb. Gorilla in the room. :) Yes, the market should end down for the week. Hedging with some ETF Shorts might be a smart play for some quick profit.

My Direxion 3x Short of the Russell index, symbol TZA, was finally up for a week. It went up 19.4% since last Friday, Oct.23rd. I see it going up another 20-30% this week as well. It closed Friday at $14.28/share. The ETF of the Financials, symbol FAZ, also moved up this week gaining 18.5% since Oct. 23rd.

UPDATE: 5:30PM PST
The NIKKEI has taken the lead tonight and is down over 250 points. The reason for this can be twofold. First, it could be a reaction from the Dow drop on Friday but it could also be because CIT has announced it is declaring bankruptcy protection.

Market outlook for the week of Nov. 2, 2009

Well, I was wrong big time on my market call on Friday, as the Dow dropped 250 points. I thought there would be more manipulation that day by market makers. I still do believe strongly we are headed lower. I said a few days ago something big was in the air and maybe it is the coming correction. The volume was much higher on Friday and that suggests more of the same is coming. Expect us to go below the 50 day Moving average and eventually the 100 day as well.

The 3 charts above are all of the Dow looking at it from different time intervals to the close of Friday's trading on Oct. 30th. You will notice that if you looked only at a 4 month chart or even a 6 month chart you would not have the context to determine where we are in the Dow cycle. It is apparent that the 3 year chart which I have been using for quite a while is a very good indicator of where the index is relative to either a breakthrough or a correction. The 3 thin lines are the 50 day, 100 day and 150 day Moving averages. The Dow closed at the 50 day Moving average line.

I also wanted to reiterate this piece of advice. Watch the Nikkei for direction of U.S. markets! back on Oct. 20th post I showed a 5 year chart of the Nikkei and showed it had broken down the uptrend line and I said back then that the Dow will follow suit.

Market outlook: The correction has started

News from Asia has started the long awaited correction. Headline news from China lead the drop, with The Shanghai Composite Index falling the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy.

The benchmark index tumbled 6.7 percent to 2,667.75, capping its biggest monthly loss since October. The gauge has slumped 23 percent from its 15-month high on Aug. 4 and is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally. Trading in Europe is down this morning before our market opens and the pre-market indicators all point to a lower opening.

This is the last day of August and September usually starts the most volatile 2 months of the year, capped by Options expiration for the third Friday in October.

I just returned form a short trip to Las Vegas for the weekend. It is very slow there. Not many tourists seemed to be visiting as I observed the lightest traffic since I have gone to Vegas now the past 10 years. The Casino's had many gaming tables closed because there were no players. In Bellagio's, for example, over half of the Craps Tables were closed on Friday. Normally crowded walkways were sparse and auto traffic was unbelievably light. I saw no construction going on to finish the City Center project, as well as a number of other buildings incomplete. I talked to one cab driver who said he had bought a house a few years ago for $260,000 and Citi Bank wanted him to take more money and so he took a total of $300,000. Well since the sub-prime MORTGAGE problem, his house is now worth only $42,000. He said he is going to sell the house for the $42,000 and move away to Peru as he is part Japanese and Peruvian. He claims he can live in Peru for only $20/day. He said the only thing Las Vegas leads the country in is Tattoo Parlors and Prostitutes.

Another cab driver talked about how Kirkorian will go bankrupt because he is charging almost $1,000/sq. ft. for his newly built apartments. He said everyone in Vegas sees him as a greedy person who deserves bankruptcy. And yet another cab driver was bitter as he complained many Conventions had cancelled coming to Vegas since President Obama had chastised business leaders for taking extravagant trips to Vegas while normal people were hurting. So it is clear to me it is going to be a long time before Las Vegas optimism returns to the population there and most likely the country as well. This Fall correction isn't going to help confidence much either.