Did I Say Expect A Pullback?

I wasn’t the one that said expect a pullback this week, was I?  Ok.  Maybe that was me.  But, once again as has been the case during this bear market, the government changes the rules.  This time for the good.  Timothy Geithner unveiled his plan for “toxic assets” over the weekend.  The government will use $100 billion of the TARP money to start purchasing these assets.  It’s the PPIP (not picture in picture for those who are familiar with remote controls).  Public Private Investment Program will buy these bad assets from the banks, etc. Just what we need, another acronym.  Basically, private investors can buy these assets using their money and then lever up something like 6 to 1 and have a lot of this guaranteed by the government.  If done correctly, a lot of money can be made by various institutions.  Now, let’s be clear.  You and I can’t participate.  Sure, they say it’s public private.  But, by private, they mean the Blackstone Group and they mean Bill Gross.  Their rationale is that maybe our pension plan will get some of these assets.  Oh wait, you and I don’t have a pension.  Most Americans have 401-Ks that are down 60%, not pensions.  So, it’s not really private.

But, all in all, the market liked the plan and I liked the plan.  There are still some details we’re not sure about.  But, the rules changing caused an overbought market to become more overbought.  Nothing wrong with that.  I bought more today as a matter of fact.  Not much but some.  As the market proves itself to us, we have to respect the rally.  As I’ve been buying the past couple of weeks, I’ve been slowly diversifying as well.  Up until today, I’ve been pretty specific in commodity related purchases.  Today, I purchased some small caps as a basket.  As I wrote last week, I’d like to see a weak pullback, but without that I’m using time stops.  Buying a little as it goes up.  Methodically and carefully buying.  You have to still be prudent but the internals continue to improve.  In fact, we had almost all of the volume today consisting of up volume.  In fact, this is the 5th day we’ve had a 90% upside volume day in the last 10 trading sessions.  That’s strong.

However, please do not let your guard down.  The more violently we go up, the more violently we can fall.  Just remember how you felt last fall when stocks were falling 10-15% in a day.  That is still a possibility.  But, what if the market just keeps going up?  There are two plans.  The first is that we do get a much needed pullback that we can buy the dips and use even more cash to purchase securities.  The second one which looks like a bigger possibility is if we get a blowoff top.  That means volume increases and we keep getting days like we’ve had the past two weeks.  That market would have to be sold and all the positions we’ve been purchasing lately would be sold for profits.  

It sure felt like the train was leaving the station today.  We had plenty of opportunities for the market to sell off but as it went up, the rush of buyers came in pushing it higher. That’s the sign of investors not being invested enough.  Too much cash on the sidelines.  That’s the fuel for rallies.  We’ve had several tests in this horrible market.  Tomorrow will be yet another one.  We broke through the 50-day moving average today but we’re still at the top of the down channel we’ve been in since October.  In addition, if we can hold these gains or even add to them, there will have to be more short covering.  


This post published at www.karleggerss.com

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