Monday, December 22, 2008

Potential bearish breakout

This chart of the S&P 500 index says it all. (The S&P has broken downwards through a bottom trend line.)

By the way, my second purchase of GRZZX was processed on Dec. 17th at a price of $8.67 per share, so my average purchase price was $9.02.

Tuesday, December 16, 2008

Do you see what I see?

The S&P 500 index closed at 913 today, which is the highest closing price since the November 20 low of 752. More importantly, the index climbed more than 5% in one day, erasing the gradual decline of the previous five trading days.

Just two weeks ago prices were forming a small bullish pattern of a gradual rise interrupted by a brief, steep correction. The past six days reversed this trend, sporting a gradual decline that ended with a big single-day rally. In other words, the charts are starting to look bearish again.

Tomorrow I will transfer another 25% of my Roth IRA funds to GRZZX.

Sunday, December 14, 2008

Too much optimism about stock prices

It's Grizzly Time.

In the last couple of weeks, short-term optimism about stock prices has become almost as great as it was back in May, when the S&P 500 briefly topped 1400 before swooning to new lows. In addition, the short interest ratio, which quantifies the fraction of investors who have made longer-term bear market bets, is at a multi-year low. When these factors are coupled with an S&P 500 forward P/E ratio of 21 for the 4th quarter of 2009, it just doesn't make sense to stay in cash any longer.

The positive money flow and breadth that I mentioned last week are still in play, but in my book sentiment trumps other factors in a tie. Besides, stock prices have been strangely flat despite the bullish internals.

On Monday I will direct 50% of my Roth IRA savings to the Leuthold Grizzly Short Fund (GRZZX), which means the purchase probably won't happen until Tuesday. In my taxable margin account, I will sell short the leveraged 2x bull fund SSO, instead of buying the 2x bear fund SDS. This way I will actually get a boost in my returns if the derivatives market implodes.

There's a good chance that world events will sabotage my timing, either by crashing the market on Monday before my purchase is made, or by an auto-bailout-Wednesday that rallies the market right after I've taken a bearish stance. These things happen - especially in a market as volatile as this one.

December 15 update: It's just occurred to me that I may need the cash from my taxable account in the next few months - both to fund my Roth IRA for 2009 and for other things - so I'm not going to short SSO this time around.

December 16 update: My opening position in GRZZX was priced at $9.23 per share.

Monday, December 08, 2008

A rally with legs

The S&P 500 closed at 909 today, which is a 21% gain from the closing low of 752 on November 20.

I'm not even suggesting that the bear market is over, but a few characteristics of this rally indicate that it will last a while longer. Money flow is more positive than it's been since September, and breadth has been solidly positive for multiple days in a row. Most importantly, the chart could almost be mistaken for a bull market rally, if not for the insanely high volatility. Instead of the bearish norm of a few big up days interrupting a gradual downward trend, the last two weeks have seen a series of relatively small up days with one big downward "correction" on December 1.

So, although there's been growing optimism about stock prices, I'm inclined to respect this bear market rally until I see more signs of weakness.