Vacation is FUN

Vacation is fun. Can you imagine the feeling in knowing that you surpassed your annual goal for market returns and it's not even July yet? Can you imagine not having a care about what the market does today, tomorrow or the next day?

Let's face it. Investing has changed significantly since I was young. I hate to sound like the old, wise, sage fool. But I just turned 55 a few days ago and this has always been my retirement target date. Here I am. And what have I learned?

We can see that a generation's worth of wealth can be wiped out in a short period of time. The longer you sit in the market, the more risk you face. You've got to adapt to a new way of investing. Or at least consider it. The market is nothing more than a casino now. I've heard that there are more mutal funds in existance than there are actual stocks. what does this mean? It means that the markets are now nothing more than a game. Trillions of dollars flood into and out of asset classes on a whim or an article. You can easily find yourself down 10% in a day and no one thinks anything of it anymore.

Our regulators have plenty of tools at their disposal to manage the markets. I was once a regulator for six years so I have been there and understand that culture. How Bernie Madoff could have pulled off his scam for so long, despite compliants against him, wouldn't you think that some government officials also need to be hung out to dry? I believe that regulation is a joke. It's nothing more than an extra tax. Those who intend to rip you off will!

WAKE UP!! GET SMART

We've got our 12% market return in the bag already for the year. Do I need to work more? Do I need to stress day in day out over what Bernanke and Geitner and Obama are going to say? And then there are the lesser Fed officials who can move the market when the market is desperately looking to move. It's always a nightmare. IT's always stress. But you know what? IT's only money. If you want to be rich and play the game, go for it. i guarantee to you that it is no different than Las Vegas. The house will take your money every time. You have to know when to walk away.


I was surprised to get a number of e mails from people now that I have been on vacation. I will be on vacation for the next month as well, traveling to great places. And you know why? Because I got what I needed from the market and now it's time to enjoy the fruits of my labor. If you don't manage your financial situation with targeted objectives, you will live the whole year in stress, living through the emotional rollar coaster that the market provides.


The Market is Nothing More Than Your Piggy Bank

Know what you need to achieve for the year. Have a financial plan. Use conservative estimates, get it, get out, store away your year's gains and then have fun. We have excess profits and we are going to play some selected options plays for fun and excitement. We are going to dabble a little more in the futures come August when I return from vacation.

If you want to know more about how we achieve your goals with less stress, be sure to write me and get on my mailing list. If you haven't taken your share out of this huge rally, and you are still hoping for more, then you need a serious adjustment.

For now, the advice is still free but this won't last forever. I want to help you all achieve your goals. Sign up now to be a part of the inner circle.

Boeing Shares Fall

Boeing shares fell sharply over the past few days. I'm pleased to report that on June 14,we spoke about the Boeing trade and bought January 10 45 puts. We were sellers of the stock even though (and especially since) it started to break out to the upside. If you don't have the extensive experience in being intimate with the stock market, you might have interpretted the spike up above the 52 level as a bullish indicator. Fundamentals don't look so bad at these levels too.

But if you have been following our monthly newletters (available by subscription only), you would have seen how the overall market is acting. In our May 31 Newsletter, we pointed out that there is a strong downtrend occurring in the stock indices. On tv, there was a lot of talk about the 200 day moving average. They spoke of how the 200 day average and stocks closing above this indicate that the bull market is at hand.

I have stressed heavily that you can't fight the trend. In the newsletter, we said that the Dow would do no better than be flat for the month and for the S&P, we were looking for a 900 target and in fact, sold July 900 SP calls. Those moments above the trend were strong sell opportunities or at the very least, a good time to add some short calls to your portfolio.

Seeing that the market was sure to fall soon, I wanted a stock that is above trendline and outperforming the Dow but with the same chart pattern. It could be likely that the stock would give up all of its excess gains and continue to trade down with the market.

IT'S FUN MONEY TIME

We have mentioned that our core stock portfolio was up nearly 12% at the start of the month. We have met more than our expections of 8% - 10% per year for targeted accounts. Our core portfolios are now heavy in cash, in-the-money buy/write positions, and ultra-short market positions. We have guaranteed a successful year by our standards. There is little reason not to take our targeted gains and protect them against risk for the rest of the year or when another compelling opportunity exists.

It's now when the market is really enjoyable. You have earned your requirements and have nestled it away for the remainder of the year. But now you have some fun money left over. This is when you can now rock and roll, have fun. For me, I'm going on vacation for the month of July. I'll be in Mexico, a little work but mostly travelling to Chiapas to see Palenque and other wonderful archaeological sites down the Usamacinta River. Then off to Merida to enjoy the wonderful colonial city and of course, make a stop at one of the newest wonders of the word, Chichen Itza.

If you are still worried about what the market is going to do next, then you should take a look at the targeted rate of return approach to investing. Earn your targeted rate of return with a minimum amount of risk. Be able to enjoy some time away from the market.

Be sure to catch my next market newsletter at the end of the month. If you don't receive it, send an e mail to me and I will put you on the subscription list.

Have a happy summer.

Market Rebound WEAK!!!

For those who watch my blog in real time, I wanted to point out that it sure does look like a time to add to shorts. But only a few minutes later the markets are turning negative again.

This is an important juncture, the test of the trend line crossing. It really supports a new negative trend for stocks and I was going to suggest if you weren't positioning yourself for additional downside, you should quickly check with your financial adviser to learn what risk management tools he or she offers. If you get the same old line, "you are well diversified, be patient and stay the course," well you might again be about to face another market melt-down. How will you feel if your portfolio drops another 50%?

If you aren't sure about your adviser, I give a free consult. Just e mail me and we will get in touch. Or just read and follow my blog. It's all here for free for the taking!

Rates Decline 5th Day in a Row

A less than expected gain of 0.1% in the core Consumer Price Index this morning caused the 10-year interest rate to again head south for the 5th day in a row after testing 4%.

Analyzing the daily move from a cycle perspective shows that we might be at the bottom of this short term move. The strong uptrend line in the rate chart along with cycle indicators suggest that again rates might again turn up to test the 4% level.

Only the Beginning!

Second and Third Derivatives Rock!!

Green shoots and second and third derivative concepts have been motivating the market to a dizzying 30%+ rally. If you believe in second derivatives, here's one that might rock your world. This is the moving average of the standard deviation level for the weekly S&P price. It might not mean anything, but then again, it might mean everything!

Usually markets move in cycles and that's why all of us believe we can trade them. If they didn't go up and down, the whole world would just be piling on to the sky! But nope, stocks go up and stocks go down. The fundamentals don't always mean anything. There are always more important issues other than whether a company will make money or not.

It hasn't been very often that this indicator begins to reverse and doesn't fall significantly.

Here is the weekly chart with today's closing SP price. You can see that we are clearly at the crossroads. Which route will we take? All of my cycle indicators show DOWN. No reason that Bears can't also have green shoots. Or are green shoots and second deriviatives only for Bulls?

As fair notice: we are long DXD (ultra short Dow) and SDS (ultra short SP) in various portfolios. Also we went short July SP 900 call at the SP 940 level receiving 56 premium for the option. Looking for 900 or less on SP by month end.

Short the Notes Again?

Rates continued to fall again, falling off of the 4% level. But notice that it came right to the trendline. Just where you WANT TO BUY IT! A strong uptrend like this can't be ignored. The endless supply of new debt has only temporarily stopped but we can expect at least another $100 billion or more of debt to be issued next month and the next month and the next month ...ad infinitum.

Short-term daily size reversal confirms that move might slow down and rates again might rise. I took a position at 3.667%. Want to ride the trend.

Who Pulled the Plug????

No test, no nothing. Rates on the 10-year horizon hit 4% the other day and reversed big time. It's as if someone pulled the plug.

Funny thing about markets. They can run from one extreme to another in a moment's notice. What has changed? Not much. A few comments here and there. In the end, the world is not much different than it was last week but the 10-year rate has dropped 30 basis points in nearly a straight line move.

Unless the stock market collapses here, I would expect the rates to turn and again test 4%. Seems like a good place for it to be. But it's not such a friendly number for the housing market or the Fed's balance sheet (if they use mark-to-market which they probably won't). In the end, it just shows how overbought or oversold markets will try your patience but in the end, they always get normal again. It's why your capital backing your derivatives trading is so important. Markets can remain irrational much longer than you can stay solvent. Risk management and strong capitalization is usually the key to sustained success in these kind of markets.

Market Cycles Still Headed Down

The S&P 500 along with other major market indices continue to remain at high levels despite definite internal weakness. Although the oscillator continues to fall, the S&P experienced its first down week after advancing four weeks in a row.

After a mighty market run that might have been the result of nothing more than massive government stimuli, the market will eventually crack under the weight of a continued weak economy. Housing prices continue to fall and a recent spike in interest rates is sure to reignite downside pressure in this sector. Don't expect that the banks are off the hook yet. It's been well publicized that a slew of mortgages will be resetting throughout 2010 and 2011. Many of these are negative amortization mortgages. These are mortgages that require a payment less than the what a normal payment would be. The additional amounts not paid are added on to the principal of the mortgage. With housing prices continuing to decline, it's pretty obvious that many holding neg-am mortgages will be walking away.

When the government did the TARP reviews and accompanying stress test, they should have set it up like a bankruptcy. If you and I go bankrupt, we cannot go bankrupt again for seven years. Should have been the same for banks. If you repay the TARP, you will not be eligible for additional government assistance for seven years. In recent months, we have seen a mad scramble to get TARP out of the lives of banks. This urgency seems to have arisen as soon as the government began applying salary caps to those bankers involved. As it should be. If you are owned and/or controlled by the government, you should fall under the government GS/ES pay scale.

With banks headed for more trouble in the future, we should take a look at the big run ups to identify banks that are overvalued and might even collapse should the government permit.

Is Boeing Topping Out?

Nice run from 30 to 52. Overhead resistance is strong. I'm buying Jan 10 45 puts.

Puts give me the right to sell the stock at 45. The puts are selling for aroun $4 now so really, I need to get down below 41 for a win.

It is one of many positions I hold in a diversified portfolio. While I remain overall "bearish" with the marke and the economy. I feel that some stocks will do well while others won't. Boeing is dependent on air travel as airline companies need to replace aged equipment with modern aircraft to increase efficiencies.

In the past, I loved Boeing as a long term space age play. But the "star trek" dream has failed to meet my expectations and with a new social world order, I doubt that space travel will be on the agenda for many years to come.

Military Tensions Make Me Uneasy

North Korea continues to "rattle the sabers." Iran continues to remain under the control of someone intent on destroying others. The nuclear threat is abundant yet no one appears to be taking action.

While I never condoned President Bush's invasion of Iraq, the UN and other countries show that they don't have the will to be strong against real threats. Why are we letting others "catch up" in military might? Well, as this blog tries to keep political comments focused on the Fed and wasteful US government spending, as I look forward onto the investment horizon, I have to believe that aggressive actions by other countries that hate the US are possible. And such actions would most likely cause additional "uncertainty" in our markets causing possible sell-offs in the stock markets and the familiary flight to quality sought in US government securities.

We all know that interest rates are headed higher. It is now a common belief but yet as the 10-year note hit 4% on Thursday, it immediately backed off. At the time it was testing 4%, I wrote how SIZE WAS REVERSING! How could that be? Rates continued to rise but yet real volatility was RUNNING OUT OF GAS. And no sooner did I mention it then interest rates declined in a dramatic fashion.

What to Watch For

Look for rates to rally again to the 4% level on Monday. This would be the three-day test of the high. I don't expect rates to follow through on the upside. In fact, all the while that rates rose sharply through the pennant that I had been discussing for a month, I was aware of one phenomenom that I have seen many times in my trading experience.



Look for rates to do an "about face" and drop like a rock. It will be much more than a short shake out. It will be real fear driving rates down hard.

I don't know the news and I am not a psychic. I only know that I have seen this happen so many times in my career. Volatility shrinks as the pennant narrows. There is a breakout pushing prices to abnormal levels, but then a dramatic reversal ensues.

It Pays to Be Aware

Be sure that you heed this advice. It's not that I'm saying that this will definitely happen. I am still holding my long TBT position in the core portfolio and I am not going to give it up no matter what because it is a small percentage of the portfolio. I still believe that the interest rate picture should continue to be gloomy for years to come. Every month now, we are going to be focused on the Treasury auctions. Volatility will increase as we head into this action. The number is a new one but the game is the same. There is always some headline number the market focuses on. I like to occasionally bring back the CRB Index on the site because it used to be a major market mover. There is always something.

But if you are a futures trader or have a disporportionate amount of risk in bonds or notes, you must be aware of the risks that appear to be imminent. Do you think that North Korea would not fire a nuclear weapon at someone? Have they shown anything but irrationality in the face of overwhelming forces? Is China backing them up?

What about Iran. Do you think that they would not do something irrational given the chance?

And are leaders. More sanctions, more resolutions, more talk. No action. Again, I don't advocate anything here other than know your financial risk. The flight to quality happens often. When it does, the market moves can be huge. Practice prudence. Take your profits and pick your spots for trading. You don't have to be in it every day.

Good luck. Hope I'm wrong about this but again, I am a little worried and wanted to share my thought.

Weekly Industry Report 6-12

(Click on Panels to enlarge sections)
Closing data as of 6-12-2009

The Beauty of Option Selling

I'm not always right in picking exact moments in the market. That's why I really like selling options. You don't always have to have pinpoint precision in your market timing because options also contain a premium for time value and volatility. As time passes and volatility changes, so will the price of the option.

At the beginning of the month, we sold S&P July 900 calls at 56. Our timing was not so good as the market has continued to creep higher. Yet even as the S&P lies more than a point above our entry price, the option price premium has eroded by from 1 to 2 points. We sold the July option instead of the June since we wanted it to still be active when we wrote the end of June Trendsetter Newsletter. Had we sold the June option, the price premium would be eroding even faster and our gains would be greater. If the S&P remains unchanged at 940 through the end of July, we would still win even though our expectation for a lower market price was wrong.

Since Volatility is also an important factor in the pricing of an option, we need to keep a close watch on it. The Size indicator above is our measurement of volatility. When Size is rising, you need to be very careful about selling options. Increasing volatility will cause option prices also to increase even despite eroding time premium. We can see that now the Size figure for the S&P is beginning to reverse indicating that both a decrease in volatility and time will be a positive factor for option sellers

Now might be a good time to consider selling S&P call options. To be safe, sell options out of the money. Often, the index price will need to move a large percentage against you before you lose money in this transaction. When Size is declining, your chances of profiting from the transaction are greatly enhanced.

Strong Resistance Seen at 4%

10-year rates broke through the 4% level briefly this morning following the jobless claims and retail sales numbers. Job losses came in again above 600,000 yet analysts claim this to be good news. Retail sales improved 0.5%. Rates have since backed down and hold the 3.96% level as I write.

The above chart shows significant overhead resistance at the current level. Any sharp move through 4% will certainly garner the attention of the Federal Reserve as well as the Treasury Department. The whole key to their economic recovery plan seems to be lower interest raets, cheaper mortgages, a stronger housing market, etc. Higher interest rates will certainly derail any plans for recovery here.

As jobless claims continue to be high, the economic consumer engine continues to dwindle. There is every good reason for rates to fall as the economy continues to be weak. However, the government continues to flood the market with more and more debt each month. This afternoon, the 30-year paper will be auctioned. Yesterday's 10-year auction came in at 3.99%, 0.80% higher than last month's auction results! This can't be good news for the government, nor the Federal Reserve which has been buying treasuries. Rising rates result in falling prices for the interest-sensitive assets held on their balance sheet. This should result in a weaker dollar.

The Fed could skirt around this issue by applying not applying the mark-to-market rules which banks pushed the accounting standards boards to remove. Without mark-to-market, the Fed could report losing assets at full value on their balance sheet since in 7, 10, 30 years or whatever, they should receive all of the ir money back.

Size Finally Reversing?

While the day is far from over and the 30-year auction results could cause strong moves in interest rates, should the 10-year rates not close above 4%, it appears that Size will begin reversing. This could be a good time to pull the plug on short Treasury Note Futures positions as the manic selling pressure may be subsiding. 4% is a fine level to moderate at. We discussed this in our recent newsletter.

Another possibility for profits is to sell options on futures or interest rate options on the CBOE as declining volatility will deflate option prices.

10-Year Rate Tests 4%

10-Year Rates continued their dramatic move, nearly doubling from the beginning of the year. Rates were spurred on by today's 10 year government auction which priced the notes at 3.99% with strong demand. As mentioned in this month's Trendsetter Market Letter, we anticipated that rates would reach the 4% mark and stabilize. If you didn't receive a copy of the latest Trendsetter to see where rates will be headed next, be sure to drop me an e mail and I'll be glad to send it out.

The stock market reacted poorly to the auction but the still remains in positive territory for the month. As mentioned several times this month, I am targeting the 900 level on the S&P by month's end. We sold July calls at the 940 level and while the S&P rose as high as 952 this morning, I remain confident that we are overdone.

I would expect both stocks and rates to fall going forward.

Stock markets remain strong this morning, bolstered by a weakened dollar, higher commodity prices, higher interest rates and newly-found confidence in the banking system. I have to chuckle a little as I list all of the "positives" that might be pushing the market higher. Seems like many of these items are economy-busters and soon, the market again might find itself in a free-fall.

Being a strong respector of trend lines, I expect that the S&P index will likely find its way to the 900 level by the end of the month. Currently in electronic trading, the SP future trades above 951, more than 5% above this moving average. To me, this is almost "free money." Yet, the market continues to run without end.


My industry analysis shows that some 153 stocks are positive on the year compared with 97 that are negative. In aggregate, the composite index of the stocks I follow is up over 10% this year already. Surprisingly, both oil and gold are only up 8.4% while the S&P is up 4%.

Nothing goes up forever though. I still haven't bought into the idea that the economy is improving. No one I have talked to in various industries tells me that there is any uptick. If stabilization at reduced levels is to be considered a success, then perhaps we have achieved it. I continue to believe that there is now more profit potential on the downside than the upside.

Capitalism's Finest Hour?

The US Supreme Court denied an Indiana Treasurer's appeal that the Chrysler transfer to Fiat be overturned. Not enough members of the Supreme Court felt that the argument had merit and decided not to meet on this issue.

This appears to be another nail in the coffin for Capitalism. Perhaps bondholders may not have gotten more from a liquidation of Chrysler. That's not the point. The point is, bond holders are senior creditors. They deserve first crack at the assets remaining in the company. But in this case, senior "secured" creditors were anything but.

It won't be long before the government trashes our dollars and gives us pennies on our real dollars. Time to start looking for offshore investment options I think.

No Place to Run, No Place to Hide

Shorter-termed interest rates continued to surge yesterday, with the 5-year rate nearly doubling since the Fed announced it would aggressively buy Treasuries in an effort to keep rates low. As many had warned from the beginning, the Treasury market was turning into the next bubble. Really, there is no place to hide. While the powers that be continue to print more and more dollar bills, these dollars are not going out to businesses who need them to grow and flourish, it all goes to the "casino," the stock, bond, and other markets.

Many had gravitated to the shorter-termed maturities to avoid the high risk that the longer-dated treasuries inherently carry. Shorter maturities are traditionally less volatile. But not the case today.

In fact, the 5-Year rate now carries a daily volatility level of 7% compared to just 2% for the normally more volatile 30-year rate

What About Housing?? Where is the Fed?

Despite the Fed's assertion that it would aggressively be buying treasuries to keep rates down, rates have been soaring since their announcement! The government stressed that recovery would occur if we could keep rates low, allow people to continue refinancing their mortgages at lower rates, enable home purchasers to acquire cheap mortgages, etc. Everything was based on the housing recovery. The optimists claim that rates are still low even though they have backed up more than a full percentage point in the last month. Where is the Fed? Are they all talk?

In an article posted on the On-Line Journal,Monetizing Debt Not the Answer, the tactic of monetizing debt does not seem to be the way to go and in the past, this tactic had been rejected. Could it be that the great student of markets past, Bernanke, has reassessed aggressive treasury buying?

If lower interest rates were in fact the key to success, and rates are much higher now? Can we still expect the stock market to continue to remain so high? Seems to me that despite all of the bullish talk that continues to fill the airwaves and press, I believe that we will retest the market lows and continue even lower. When it will happen? Who knows. In 2005 I predicted that the market would fall to 6,500. And while my prediction was correct, it took nearly four years to come to pass. As they say, the markets can continue to remain irrational much longer than I can remain solvent. As I result, I'm slightly bearish in my core stock position with some SP call option shorts and DXD Ultra Short Dow positions to complement a holding of "In-The-Money" buy/write positions.

Where Do We Go From Here?

Interest rate moves were the talk of Wall Street last week as rates moved sharply to the upside raising real concern about inflationary pressures in the market. Stocks also moved higher with the best week on record for the year with 20 industries in the overbought section (see table in previous blog).

I had thought that the failure for the market to take out the highs of three weeks prior was a good indication that prices were topping out but no. Stocks moved big on Tuesday and held up for most of the week. Again, there is too much money out there that needs to find a home. Yet I am unsure and wound down stock positions on Monday while shorting in the money S&P July calls. My target SP rate is 900 by month end. Still, I remain unsure as the chart continues to move higher. For me, I made the right choice in stepping aside. I don't like to participate in markets that I don't feel I understand.

Size Not Confirming

Size continues to fall and I don't trust market moves without size. Not to say that the new week won't bring higher prices along with increasing size. For now though the move has been long winded and in my view, excessive. I believe that many of the problems that still exist are being masked by changes in accounting standards and tons of paper money injected into the system.

Bank Losses Being Masked

Bloomberg has a nice article on the bank profits. Certainly the government has done everything to make the banks look good. And now, with banks receiving money virtually for free and rates ratcheting higher, bank profits should surely pick up, if they were willing to lend. In my mind though, the profits are being created by government intervention, not because the economy is strong and there is heavy demand for money. There's not.

Fed Uneasy with New Accounting Rules

In still another article this weekend, the accounting standards board wants to change rules on hiding stuff offshore. Bank and other corporate balance sheets don't include everything that's going on. That's a big reason why I don't believe in fundamentals. They put all their risky stuff in "Qualifying Special Purpose Entities" that may hide losses. The Fed is worried that if we saw everything, banks could very well be insolvent!

Cycles Still Moving Down

With all of this in mind, I believe that we are getting set up for another big move down. Imagine the outrage if we learn that the banks again are insolvent and need even more bailouts! Where did all this money go? Who knows? Really, I'm worried about a lot more than another market meltdown.

Weekly (6-5) Stock Market Industry Data

The following data is available daily, weekly and monthly. Click on data to enlarge.

Five Year Rates Up 0.5% This Week

Much of our time has been spent reviewing the 10 year rate since this is the rate associated with the mortgage market and is of the greatest interest to this audience. Quite a few other maturities also trade. When all of these rates are viewed in aggregate, they form the Yield Curve. Many economists look at the slope of the yield curve, that is the difference between short term maturities and long term maturities to forecast the country's future economic condition.

Normally, the shorter end of the yield curve is not as volatile as the long end but today, that changed. Notice the surge in the 5-year rate this week. It rallied today to close up 0.506% on the week to 2.853%. This compares to the 10-year rate which rose 0.397% and the 30-year rate 0.318%. The flattening of the yield curve caught the attention of almost all analysts today, some suggesting that it marks the end of the recession while others claim that it proves inflation is coming.

Size Skyrockets!

As always, we focus on Size or our measurement of volatility to guide us. We can see from the above chart that Size previously spiked when rates tumbled as the world flocked to US government securities as a safety trade. It's quite possible that Size could reach it's previous peak and "no one wants to be the last one out!." Who could not have known from the beginning that the government security trade was just another Bubble. As a result, our commentary all year has been focused on the weakening dollar and higher rates.

Where Might We Go From Here?

If you subscribe to the Trendsetter Market Report, you might recognize the same formation (reverse head and shoulders) that we thought could build on the 10-year note with the neckline forming slightly above 4%. Here, it appears that the 3.37% area seems to be a likely target for expanding rates. There it would also meet with the all-powerful 40 month moving average and could likely back down to form the right shoulder.

This is just a guess though. We know that when markets start moving, they feed on themselves. You can throw all charts out the window. Don't bet against the trend, especially when Size is rising.

Rates, Stocks, Dollar Surge!

Stocks and bonds surged this morning as the long awaited non-farms payroll data for May was released. Results were more positive than expected at a minus 345,000. If the job numbers continue to improve at this rate, by the end of the year, the economy and job picture should be roaring. I had better get my resume polished up!;->

Interest rates especially surged across the board with 2 year rates rising to 1.19% and 10 year rates approaching 4%. Many fear that the spread between these two rates indicates that there is significant inflation ahead however the Fed Chairman Ben Bernanke assured us this week in his testimony before Congress that he is up to the task of preventing inflation. For this to occur though, a significant tightening of the money supply must begin now. And even though the jobs number strengthened over recent months, how will the automotive bankruptcies affect the job numbers in the future? How will the higher interest rates affect individual's ability to manage their budgets as credit card rates continue to advance, mortgage rates soar and capital becomes less and less available.

S&P 500 is breaking out from a significant base. There has been no retracement and test of the lows. Soon, it appears that the markets will be back to where they were prior to the big selloff. Advocates of the buy and hold strategy will rejoice. It doesn't matter what the economic fundamentals indicate. It doesn't matter that still millions and millions are jobless and many more continue to lose their homes. This is a capitalistic society, not socialistic. It doesn't really matter about the common people. It's all about capital. The Fed has injected trillions more dollars into the system expanding the game even more. With all these chips on the table, those holding the chips are making bigger and riskier bets.

Obama says that he is going to eliminate the wild fluctuations in the market, but I've got to tell you, before the jobs report was released, I felt as if I were in Las Vegas or waiting for a lottery drawing. Did I bet right? Do I hold a winning number? S&P futures soared nearly 20 points on the news. The S&P mini contract which allows you to take advantage of the index movement times 50 at a margin requirement of about 6,000, moved nearly 20 points! This is a quick $1,000 return on a $6,000 bet! Not bad. The ten year future play did even better.

The ten year note future plunged a full point on the news. This is also worth $1,000profit if you bet right. You only need to put up $3,000! Hey I love it. I'm a player but this is how it is now. This is truly a casino and anyone who looks at it any differently, well, I guess that's what makes it a market.

Markets Await Unemployment News

Interest rates continued to rise overnight in anticipation of improved unemployment numbers. The most positive estimates project that under 500,000 jobs were lost in the previous month. Normal numbers have been coming in minus 600,000. Today's estimates peg a loss of 520,000 jobs. The 10-year rate hovers around 3.75% now, the same rate that existed back in November, before the real fall in rates occurred. Rates last year, on this day, were 4.05%. In contrast, the Dow was 12,600 and the S&P 1,404. Gold was around the 865 level.

Which Market is Right?

I began looking that the relationship between rates and stocks in 2005 and saw a big disconnect at that time. In normal times, we can see rates and stocks highly correlated. When we had the big correction in stocks several months ago, stocks and rates were at the same point. Now, we see stocks getting ahead of rates again. Which market is right? How will this be corrected? And when? The unfortunate solution however is that both stocks and bonds (move inversely to interest rates) must both fall.

With such a prediction, it is obvious that your traditional money manager will not be able to help you through this correction. With both stocks and bonds falling, investors are at risk at again, taking big hits in their portfolio. If your portfolio hasn't been reviewed by a financial planning expert that has experience not only in stocks and bonds but also deriviatives to help you hedge your positions, you should find such a person soon.

Remember, DIVERSIFICATION means nothing if all of your assets are positively correlated.

Does .001 Matter??

As I suggested this morning, 10 year rates needed to clear the 3.715 level today. Do you think that all of my three-period babbling is irrelevant? Look at how the note rates surged in the final minutes to edge out the previous closing high by .001! at 3.716. The 10-year rate closed three days ago at 3.715. Does it matter? Is this a successful test of the high? Or does the .001 make all the difference in the world?

Rates continued to push higher on the electronic exchange after cash market closed. Rates tried to reach the 3.75% level but quickly backed down. I was hard pressed to buy note future calls to close out my shorts but no one was selling. Could this indicate that tomorrow, the unemployment report will be worse than expected and rates will fall? It's a hard call here. Rates want to get to 4% as discussed in June's Trendsetter published this past weekend.

How Does This All Play Out?

At some point, rising commodity prices are going to have a negative impact on the economy. Today, gas prices on my corner rose to $2.95 from $2.25 a few weeks ago. One major investment bank is now calling for much higher oil prices this year. Energy prices surged today after falling back a little yesterday. Reminds me of the dot.com bubble when the analysts would come on and say that a stock will rise 50 points this year and the stock rose the 50 points that day. Irrational Exuberance I believe the Maestro called it. Seems as if we are getting back to this mentality. Really, these markets are nothing more than casinos. The volatility, even though it is reduced, is still extreme. There are trillions of dollars coming in and going out of markets in short periods of time. Be sure to keep your emotions in check. Have a plan when you get in, don't take losses beyond your means, take profits when your objectives are met. You don't have to win every last penny. Just be sure that you don't lose it.

Rates WANT To Go Higher

First time jobless claims "improved" to 621,000 and same store retail sales came in fairly negative with 70% missing analyst estimates. Yet interest rates rebounded from yesterday's lows. Rates seem to want to keep going up and the momentum is still clearly in favor of higher rates.

As you can see, the Size number, my measure of volatility continues to increase indicating that the rally in rates may not yet be over.

I thought that rates could fall as several days ago, rates tested the closing high of 3.672. While the rate went slightly higher, to 3.715, other indicators showed that the momentum was slowing. Yesterday, rates dropped but could not break through the three day low. Now we are again, trying to fail on a three-day high test. Is this all confusing to you?

In the end, for the 10-year rates to reverse and start going down, I am looking for it to fail to break through the 3.715 closing high today. I am currently playing the rates to decline. The move in interest rates, while predictable, is now growing weary and is ripe for some backing and filling. Not sure how low rates can go at this point but I sense that the dollar trade is growing old. While I haven't taken a dollar position yet, I am looking for a test of the recent lows on the dollar. Should the dollar rebound, I will expect that you will need to adjust your portfolio to accomodate this move. I believe that most of the gains that we've seen in the stock market, gold, oil, agricultural commodities and so forth have been the result of a weakening dollar. Should the dollar strengthen, these markets will likely give up some, if not all, of their recent gains.

If you have some concerns about your portfolio and your potential risk, contact me at gary@assetdesigncenter.com. In addition to risk management, I stress tax efficiency in your portfolio. There are lots of other ways to improve your financial position. It's not always just about your investments.

More Evidence of a Market Top

Before any major market decline, specialists drive prices higher, generating big demand, that they sell short into. We might have seen such action in the stock market yesterday when prices, across the board, surged. The evidence of the breadth of the move is illustrated in the chart above. If you have followed my writings, you will know that standard deviation is at the core of my analysis. When prices move to extremes, it is generally not because of a change in valuation, it is a change in sentiment. When prices move to the +2 level, people are acting irrationally and chasing stocks to price levels that are not "normal."

I haven't looked at my daily data until just now as I was wrapping up the details for my monthly analysis. Yesterday though, if you had read my blogs, you would have sensed the frustration I felt as the bull run reached a ridiculous level in my mind. I instinctively sold just about everything and sold an S&P call to boot!

This is the opposite reaction that others would have. Others were instinctively buying into the rally. They were obviously (????) doing the wrong thing? Only time will tell.

LOOK AT THIS!!

Notice Point A and Point B on both charts. Point A came on January 2, 2009 when the S&P rallied to 931.8. It went up two more days then collapsed! Look at Point B, yesterday's trade. Another huge spike in overbought stocks and another market high? For reference, my database used in this study is 208 stocks, each the leader in it's industry. There is only one representative from each industry. In the January reading, neary 50% of the industries were overbought. In yesterday's reading, almost 35% of the industries were overbought. Since I haven't seen such a spike in between, I've got to take it as a good hint that specialists were distributing across the board and that the market will soon fall.