Stock Market Update 19 April 2009

A quick update for the week ending 17 April 2009.

The markets have been on a tear for the past 5 weeks. The short term bottom I was expecting sometime in the spring has transpired. What I have been astounded with (and was totally unprepared for) is the speed of the current ascent. This is unprecedented in terms of rate of upward price change over the given time frame. Bottom line is: TOO FAR/TOO FAST.

I regret I was not able to get on this advance as most of my indicators switched to bullish in mid March but I was on leave at the time (without internet access) when it occurred so I missed out on the buy signal. Irrespective, I would not have expected the reaction we have witnessed in the current advance as it is totally outside the realm of normal stock market advances.

One of the things you learn when you have studied and worked within the markets over years is that you never attempt to chase a train that has left the station without you. If you do so, I can guarantee you in the end you will be run over by that same train and your account will be decimated as a result. I have no intention in doing so and I would suggest those who follow this blog heed the same warning. Another chance to catch the train is coming soon.

Since my last blog, this market has continued to be overbought and, in my opinion, to commit new capital into this rising market is foolish. There will come a time when price corrects from its current insane rise and, when that occurs, I will commit capital on the long side in the provident fund. Until then I will wait on the sidelines and watch with bemused interest as others throw their money down the toilet in a market that is just waiting to collapse.

That is not to say that I have not participated in this bear market rally. I have committed small amounts (20%) of my trading account into equities over the past 4 weeks. These purchases are outside the realm of discussion within this blog but for full disclosure my purchases have been positions in Berkshire Hathaway (BRK.A/BRK.B). This is the holding company run by Warren Buffett, arguably the most successful money manager in the history of stock market investment. In my mind, in times of doubt invest with the guy that gets the "sweetheart deals" no one else in the world gets. That is Buffett. The price of his stock was beaten to very cheap levels and compelled me to purchase some shares at what I thought was reasonable prices. I have set stop losses on these purchases in case another major correction occurs but feel comfortable with my purchases. I suspect they will be good long term buy and hold positions but the only thing I am "married" to is my wife. If the market turns down significantly I will sell those positions in the blink of an eye.

On to the charts. I will start by putting up longer term daily charts (without technical indicators) that indicate where we came from and where we are currently at. I suspect when you view those charts it will give you some perspective as to how far we fell and how little we have recovered. In short; ignore the crap you hear in the media. A picture is worth a thousand words.

When you view these charts; think:

-1) Where were we at at the top,
-2) Where are we currently at in relation to that level,
-3) Where is the current price resistance levels, and
-4) Where is the current price compared to the 200 day moving average.

To my mind, that is a key thing to focus on when you listen to the daily barrage of media hype that the decline is over and we are at the start of a new bull market.

As always, click on the charts to enlarge:

Dow Jones World Index:




S&P 500 Index:




U.S. Dollar Index:




XLF Financial Services Index:




Commodities Index:




Natural Gas Index:




I saved the last 2 for a reason. Many have asked where I am looking to commit my current investment capital. The last 2 charts tell you the answer. Both the CRB (and specifically Natural Gas) are forming bottoming patterns that are looking very interesting. Upon a break out of these current patterns I will commit a substantial portion of my trading account into these areas. I am waiting but should a breakout occur that would signal the first hint the markets have switched their minds from their current mindset (deflation) into the next mindset (inflation).

Buy things when they are cheap, hated and beginning a new uptrend and you will make a fortune. These are the 2 I am watching closely.


Bottom Line:

There is no change to my view of the markets from my last blog on 26 March 2009. Specifically:

I want to start by making one thing perfectly clear: we are still in a severe technical bear market decline. This is nothing more than a bear market rally off of an extreme oversold condition that I believe could continue for several months (even into late summer).I still am of the opinion that we will see lower lows (below the recent March 9 short term bottom of 666 on the S & P 500 index and ultimately down to the 500 level) before this bear market is completed.

This is a bear market rally that is due for a temporary correction. Ultimately I think we could have an additional 20-30% upside from here but not before at least a pause or minor price correction.

Until that correction occurs, I will continue to remain in cash in the provident fund and mostly in cash in my trading account (with the exception of my Birkshire positions).

In my opinion (no investment advice implied):

-For those who are in cash.......stay there. The time is coming when there will be a minor correction to this current rise and it will be time to commit a small amount to the next leg up in this bear market rally.

-For those who are in 100% equities.........you are being given an opportunity to get out before the next significant down leg. Watch close and exit when things turn for the worst.


As of today, my "strategic" positioning in my provident fund account remain as follows:-100% Black Rock/MLIM US Dollar Cash Fund (actual positions: USD cash 90%, equities 10%)

**Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).

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