Tuesday, August 18, 2009

Is the Market Ready to Crack?

The Dow average is rebounding this morning after dismal PPI data. The talking heads assure us that THIS DOES NOT INDICATED DEFLATION! Ten year interest rates fell to 3.47%. In another day, Rick Santelli on CNBC would be proclaiming "GOOD NEWS!!!" now we can refinance our houses and add more stimulus to the economy!!! Unfortunately, banks aren't lending anymore so bad news = bad news. But yet the market rallies still.

Whoops! I forgot to mention that the market looks forward. Yes, I am happy to say that someday, the market is going to be strong. It will be vibrant and market investments will thrive because the economy is strong and healthy. Oh, but by then, the market will be looking forward still and be looking for bad news. Ummmm, where does one turn? Who does one believe?

Do investors have an effect on the market? Or is it all the big institutions with whom we entrust our money? Look at the TURNOVER numbers on your favorite mutual funds. These guys (and gals) are often trading with reckless abandon with your money. Would you do the same? Probably not. Who pays for this? Of course, you do. You might not notice it, but these extra trading costs require that fund managers make more just to equal the market. Having to earn excess market rates REQUIRES that they take EXCESS RISK!!!

It's all a game. They make millions while they are right (with your money) and suffer minimal consequences when they lose (LOSE ALL OF YOUR MONEY). But they quickly get jobs at other firms and manage to gamble with your neighbor's money.

Enough of my morning TIRADE. In the end, the market is just a casino and if you fail to recognize this, you are going to lose. REMEMBER THE HOUSE ALWAYS WINS. and YOU ARE NOT THE HOUSE.


I can't begin to guess where an irrational market will take prices. As I have been mentioning since June, I got a 15% portfolio gain and hoarded my profits, only playing tactical plays to stay involved in the market so I can pass on my thoughts to you. Boeing continues to get squeezed into the pennant and that is good news if you want to play. As volatility dwindles, option prices also dwindles. While my bet is to the downside and as I mention, take your option positions out to at least Jan 2010 to be sure you can participate in the October meltdown that most agree will not happen. I hope that they are selling the put options that I am buying so that they can truly put their money where their mouths are.

As you can see, Boeing is mimicking the Dow average. I think that BA will be a leader in the next major move, whereever it goes. Throw away the fundamentals. If they were important, the market would surely crack. But the trillions of government stimulus money needs to go somewhere. In the end, the house of cards will fall. The emperor will have no clothes, etc. Unfortunately, I can't say when it will happen.

Back in 2005, I wrote about the impending market crash and I even predicted that it would fall to the Dow 6,500 level. And it did, three years later. As they say, the market can remain rational much longer than one can remain solvent. Yes, cliches abound this morning. I guess the secret is to always understand what is truly happening in the economy and take a long term position for this. Still, you must also play the short term whichever way it is going.


I did this with OIL, an ETF that reflects the oil futures market. I added small positions every ten percent down finally buying at the 14 level. Oil did spike into the 20s and I made money. Now, I continually add DXD, SDS and TBT positions in small increments at 10% intervals. If the markets never come down again, oh well, this is irrationality outlasting me. But it is obvious that there are serious problems at hand. The government has guaranteed failing banks, failing auto companies and so forth. They are committed to keeping these badly managed organizations afloat. It is my fear though that when the truth about the banks risks and losses finally come out, they will not only fail but bring the government down with them.

I guess the lesson is, don't let market euphoria shake you out of your short positions. Always be hedged. As we've seen before, when the market finally cracks, 5% daily moves can happen in a blink of an eye. Remember, this is all but a big game for the institutions and billionaires. You and I don't count. If you can't see this or if you aren't willing to lose everything, you better not be playing.

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