The bounce

Today's reversal (Dow down 320 at one point and then closed up 300!) in the market pretty much confirms this is the short term bottom for the next few weeks, judge the length of this down leg and the magnitude, I guess the bounce in SPY will be back to around 140 (today's low is 126 and closed at 133.9) in about 1 to 2 weeks.

The market was very oversold even before today, now the capitulation in market early today is very bullish short term.

After that, all is possible.

Actions and reason:

1. Added GDX again to play the Fed cuts and inflation, gold will likely to resume the up trend, this correction in gold is shallow due to Fed's action. Gold is likely to hit $1000 before going back to $800.
2. Added DBA again, this is to play the inflation, which is almost certain in this environment. DBA maybe the best in this environment, due to three out of its four components are in shortage in 2008: corn, wheat and soybean. Only a deep recession in US will cause it to crash.
3. Added QLD. This is new. At 66.5 (low is 64.53, I waited until it started to rally). It closed at 73. I will keep it tight and let it go when SPY is anywhere close to 140. Today QLD is better than SSO since Apple added to QLD's downside, which was down over 10% at one point. This is a small position.
4. Keep enough cash to add DBA and GDX.
5. So far ,my pick of DBC is not too bad; but NLR is very bad, down almost 20% before today's small bounce since I bought it. Glad it's only the no. 4 position after GDX(no.1), DBA(no.2) and DBC (a distant no.3).

Next:

If the bounce indeed happens, then once it's back to 140 (about half point between high of 157 and low of 126 in SPY), we may go beyond that ( the August model, went all the way back to all time high, which I think is unlikely), or the bears return (which is very likely). And I need to reduce holdings to raise cash when I think the bounce is close to be finished. Rather to be safe than sorry.

P.S. I will not allow people to add comments to link to their sites, this is my personal blog to discuss trade only, not advertisement).

First test in 2008

Future looks like we'll have a 4% drop tomorrow at open, and global stock markets dropped biggest percentage in this free fall 2008.

While I totally missed the short opportunity, since I misused it so badly in 2007, I don't deserve the 2nd chance. But now I think the pull back in gold and other commodities, like agriculture should be used as a buying opportunity, like GDX,GLD and DBA. I will add DBA and GDX on pull back, as I already did last Thursday and Friday.

When it's over, these are the groups that will come out strong. I'll add small positions at a time to average the price, I won't be able to pick a bottom, but tomorrow if we have a big drop at open and then come back, I think it's the short term bottom for the market and PM and commodities. Even it's not the bottom, it should be really close in the short term.

Another wild card is Fed, will they be forced to cut interest rate tomorrow to rescue the market? Like what they did in August?

Anyway you put it, it will be a long term plus for gold and precious metal, I think central bankers around the global will be forced to cure the short term problem first, which is recession and credit crunch, and deal long term problem later, which is inflation. So, commodities will go up, in the long term, like in the next 10 years. So I think DBA, GDX and DBC are long term buys. Since energy has a dependence on economy, I think DBC(more than 50% are related to oil and natural gas) may not be the best of these three right now, but long term, all three should do better than the market.

2008

Since my last post on Dec.14th , S&P500 was down from 1467 to 1390 today. Meanwhile, GDX was up from 43.8 to 50.7 today. This is the first significant divergence between precious metals and general market. This is a very important sign!

For 2008, I think we have following main trends to play:

1. Dollar continue to decline due to the twin deficits. Yes, there will be bounce along the way, but I think Dollar will end lower against major currencies at the end of 2008. Dollar has to hit new lows in order to have significant impact to reduce trade deficits.
2. US may head into recession. Credit crunch, housing, negative saving rates, etc.
3. Emerging markets (BRIC) are still very strong, so demand for commodities are strong.
4. Election year is usually good for stock market (government will add funds to make economy strong for election purpose). This is a counter argument against recession. But this is a plus for inflation and the decline of dollar.
5. Inflation is edging up, you can find food and energy as an example, even though they're not in the core inflation complex Fed is watching.
6. Fed has to cut rates for economy, good sign for gold and bad sign for dollar.
7. Geopolitical events, US elections, China and Taiwan, Middle East, South Asia. People want to own gold, which just hit another record today.
8. Global warming will have more impact on economy down the road, and clean energy is one way to play this long term (10-50 year) trend.

Based on these, I have following ETFs that I think will do well in 2008 and in the future:

1. GDX. If gold is going to $1000 this year, GDX will outperform gold. This is the play against inflation, geopolitical crisis, and the decline of dollar.
2. DBA. Agriculture play. It has Corn, Wheat, Soybean and Sugar.
3. DBC. Commodities ETF. It has oil, natural gas, gold, wheat, corn, aluminum. But over 50% are tied to energy (oil).
4. NLR. Nuclear, uranium mining, nuclear operators. This is a energy, clean energy (global warming), foreign (Japan, Europe, Canada, Australia) play. It's like GDX, there are lot of companies in this ETF.

Out of these 4, I like DBA the most, then it's GDX, and DBC and the last one is NLR. I think all 4 of them will outperform SPY and QQQQ this year. As a matter of fact, I think short ETF may finally do better than SPY and QQQQ this year. But, the lessons I learned last year, I will not buy short ETF and will gradually add the above 4 ETFs.