Sunday, November 30, 2008

The Week Ahead

Last week the shorts got killed. Consider these numbers. Following the close Wednesday you had the biggest 4 day gain in the history of the U.S. markets going back to 1932 (in the middle of the Great Depression). That is before the Friday rally. It underscores something I have been saying for awhile, it is okay to be very small or not participate at all. The market continues to be very sick. The ultra short financial etf was down 44% last week!!! Wow!! For those following my short trade I put on at the close on Monday I exited at the open on Wednesday at breakeven (actually made a very small amount). I thought it was a great risk reward setup that did not pan out and was able to get out when the market opened down over 100 points on Wednesday. That is one key that many investors have trouble with. If your make a long term investment based off many hours of research, don't become a trader with that position and if you place a trade but typically are a long term investor don't get sucked into holding your position for the long term if your thesis as a trade breaks down.

The early indications are mixed but I get the sense from reading several articles that Black Friday was not as bad for retailers as many feared. I am not really surprised considering the level of investor expectations. Considering the rally last week most of this will be priced in though. You have alot of bad economic news coming out this week. Front and center will be job numbers released on Friday. You also have chatter starting up again concerning the GM and Ford bailout. A pullback to 850 would be natural and even a big pullback back to 800 would not be necessarily out of the ordinary. I would be shocked if we break 800 anytime soon. I am going to go out on a limb and say that we will not be breaking 800 before January 20, 2009 and that the S&P will break 1000 before we break 800. I could be very wrong but why do I think this?

Last week marked a potential major shift in mortgage rates as they tumbled with the FED's latest rescue plan. There is this built up psychology of investors that if housing prices would stabilize everything would be okay. That housing is the problem. This is very closely coupled with mortgage rates and investors bemoaning the fact that mortgage rates haven't come down with the FED Target rate. Well last week mortgage rates tumbled and I think you are going to start seeing more and more chatter on this being the panacea for housing. Then you have more and more chatter about the coming Obama administration and plans to save the world. January 20th, 2009 is the inauguration date. I think both of these will keep the November bottom in and over the next couple of months feed this powerful rally. I think this is another bear market rally full of false hope. Why?

First, investor are right that if housing prices stabilize everything would be okay, twelve months ago. We are long past that. The feedback loop has moved well beyond housing prices. It is a problem but only one of the problems. Even if housing stabilized, though this would be huge, it wouldn't fix everything. The economic tumble is going to cause corporate defaults and job losses out of this world. Concerning housing prices, even if the mortgage rates stay low, housing prices still need to decline to get back to normal long term averages. Secondly, it is well established that your brain receives more pleasure anticipating pleasure than the actual event of pleasure. You receive more emotional excitement anticipating food, sex, money than the actual event. This is well established in investing as well. That is why a stock will rise in anticipation of an earnings beat, then the company beats and the stock sells off. So the mass psychology is going to buy ahead of the Obama inauguration and I think start selling afterwards. Finally, I think you are going to see a huge spike in unemployment starting with the February numbers. January I think you will see mass layoffs as corporations start out the new year and this will show up in numbers released February 6th and March 6th. The natural dopamine letdown after the Obama inauguration combined with continued poor economic numbers I think will start the next sell off downward.

I could easily be wrong especially if something like General Motors files for Chapter 11 or the Thailand riots create instability or a sovereign country defaults. We may never see 1000. Those are my thoughts of what I think is natural. Of course that tells you nothing of how to make money. It is never easy to make money in bear markets because of the rip your face rally that occurred last week that occasionally occur and because fundamentals are marginalized. That is why it is best to play small and focus on wealth preservation. If you have preserved wealth it does not really matter if you have caught the absolute bottom.

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