Market outlook: Painful times

Lest there be any doubt, the markets are heading down a lot more down. If you had any doubts, look at the volume of Fridays drop in the chart below, with 280 million shares traded. Average volume runs about 180 million shares these days. The volume for the last two days should have woken you up to what's happening. The major stock of the Dow 30 stocks responsible for this spike at the close was Cisco's stock. This market move of the past 30 days is a systematic steady erosion and not the quick panic correction followed by a nice rebound. This is eventually going to get quite painful for most people.

Most people will watch the drip, drip drip of their losses like a deer caught in the headlights. Those of us who are on the short side of this market, will reap the rewards of our patience. But here this, I will not take much pleasure out of this as the true meaning of this decline was avoidable and many fine people are going to be hurt financially. As a newsletter I read today said, "Wall Street thinks all is rosy, but Main Street knows it is a depression."

I have posted many charts on this site and showed some 30 year charts in those posts. The future does not look rosy. I wish it did! But we must face the reality that our elected officials are not trying to solve our countries problems. And let's be honest here folks, the Republicans are still saying no to any taxes, even for millionaires. They would rather see us default on our debt and try and win some political advantage then to fix the economy. I realize I am being partisan here, so save your emails to me. The last time this happened was when the then Speaker of the House, Newt Gingrich, shut down the government. They lost the next election smartly. It wasn't necessary. People were reacting to the inflexibility of those in power. If everything is on the table, so is taxes!

Monday June 7th Pre-market

Futures are down as the Nikkei plunges. Currently down almost 400 points at 8:46pm June 6th. It is going to be a follow on crazy day of market action. But it is consistent with the reality of the economic conditions facing us and Europe. European leaders seem to be bickering over the direction of monetary policy of the EU. Tim Geithner, Treasury Secretary is pleading with them to implement a Debt rescue plan, according to reports this weekend on Bloomberg.com. Check in during the day Monday for updates and intraday chart analysis.

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.

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.