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To
OTC Journal Members:
There two comments from this past
week of note- I blogged a quick presentation on a heavy market, which I'm
going to expand on in today's edition, and a couple of paragraphs on Nighthawk's
(OTC BB: NIHK) Q1 quarterly report. Before the end of the weekend,
I'll deliver an expanded version of my thoughts on NIHK's earnings
release.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
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back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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A Heavy, Heavy
Market |
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The Bear Market of 2008 was nasty
from about Nov 1 to Mid March, and then we entered into a nice rebound
phase in Large Cap land. Consumer electronics super stars Apple Computer
(NASDAQ: AAPL) and Research in Motion (NASDAQ: RIMM) have taken
center stage, with RIMM hitting a new all time high last week.
Energy, materials, and manufacturing
companies with a multi national theme has also traded beautifully since
about March 10th.
I don't know about you, but out here
on Main Street it doesn't feel like things are going all that well. Oil
continued soaring last week, there's no sign of restoration of home values,
and food costs are going through the roof. Out here in the real world of
the good old USA, things are just a little harsher than normal.
Against a backdrop of a pretty tough
environment, the market has chugged higher quite nicely off the March lows-
the NASDAQ Comp as measured by the QQQQ ETF is up 22% from the March lows.
The DOW is up 10.6%, and the S&P 500 is up 11%. These are pretty healthy
rebounds, and they've been going on for about 2 months without any sort
of significant correction.
In my view, the market is simply
too complacent right now. Check out this weekly chart of the VIX- short
for the volatility index- the contrarian's index of choice for gauging
fear. The idea- the more fear in the market, the more likely the next move
is up. The less fear, the more likely the market's next move is down. The
value of the VIX is derived from a complex measurement of call buying (a
bet the market is going up), as measured against put buying (a bet the
market is going down). The lower the VIX, the less fear- a higher VIX suggests
greater fear.
The VIX is now trading at the same
low level it hit last October, just prior to the market entering a major
correction and pricing in recession.
Now let's look at some technical
indicators from my old pal Leondardo Fibonacci- BTW-I'll have some educational
content on Fibonacci retracements and extensions in June.
Here's the NASDAQ Comp as measured
on a weekly basis going back to last summer. The NASDAQ Comp gave up a
full 600 points in the October to March time frame.
Since making the March lows, the
COMP has recovered a nearly perfect 61.8% of the ground it lost- that's
a Fibonacci ratio- one of the most powerful mathematical ratios that continues
recurring in nature.
Leaving no stone unturned, let's
look at the S&P 500 over the same time frame.
The S&P technically is nearly
a perfect match for the NASDAQ Comp. Both indexes have rebounded to almost
exactly 61.8% of their losses.
Over the past week, the market worked
a little higher, but without much conviction. The volumes are very light
as the market extends higher, suggesting buyers are getting exhausted.
I believe all of these indexes are
likely to come back to the blue lines- the 3x3 moving averages. Those lines
act like gravitational pulls on the markets.
This would suggest the NASDAQ Comp
should pull back to 2377, and the VIX should surge to 22 as some levels
of fear return. The S&P 500 is vulnerable to a pullback into the 1360
range.
So, can we make money betting the
market is ready to take a breather and pull back some? You betcha, and
here's how I'd doing it. I am betting against the NASDAQ Comp as
it has rebounded nearly twice the percentage the DOW and S&P
have enjoyed. The ones going the highest have the farthest to fall.
My security of choice for my own
account for this idea is QID- this is a ETF (Exchange Traded Fund)
that inversely tracks QQQQ (ETF for the NASDAQ 100). This is a 2
for 1 leveraged ETF- here's what that means in simple terms- if
QQQQ
drops
1%, this security should increase in value about 2%.
As you can see, QID has dropped
from a high of about $57 back in March to the recent lows in the $37 to
$38 range.
This past Wednesday, I picked up
2,000
shares if QID at about $38.50. I'm down a point so far in the
first couple of days, but one or two soft days in the market will bring
me right back.
If you want even more leverage, you
could buy call options on QID, or put options on QQQQ. The
problem with the options- you have to pay a premium to go a ways out in
time.
Since I can't pinpoint the exact
short term top, in this case I want the luxury of waiting for the correction
without watching my time value erode- hence the investment in QID.
The market is extremely complacent
right now. There hasn't been any earth shattering negative news of late.
Something is bound to spook the markets in the next week or two.
I have written about this in the
past- hedge fund managers live and die by month to month performance. Their
mantra? Don't lose money. When the market starts to crack, you will see
these fund managers piling out of high flying stocks before their trading
profits erode.
I have a lot of conviction on this
idea. I am prepared to continue to add to QID for some weeks by
continuing to accumulate. I want to be there when the rebound ends, and
a corrective phase starts.
I'll keep everybody up to date via
the BLOG.
Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
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