The Remarkable Rally Continues

During my radio show this morning at 10:00 a.m., I told a caller he had to cover any short positions he had if the market held its gains today.  He said he owned some double beta ETFs.  At the time, the Dow was up about 200 points.  If the market had only finished up 20 or 30 points, it would have been a huge disappointment.  The S&P 500 had been hanging around the 875 level for a while but convincingly went through that to close above 900.  A few weeks ago, I wrote the S&P could get to 900.  I didn’t believe at the time it would get to that level by May 4th.  It’s been a really good rally.  If you are short like the caller, you don’t have a choice but to cover shorts.  I prefer to hold some equities and some cash right now in my appreciation accounts. Shorting is too dangerous.  They’re getting killed right now.

The next logical test for the S&P 500 is going to be the 2009 high around 935 or so.  There are enough doubters that could push this rally to that level very quickly if they convert to bulls.  And, believe me, there are doubters.  There is a lot of money on the sidelines.  That eventually has to find a home and won’t sit around earning nothing in money markets forever.  

If you’re a bear and not becoming somewhat more bullish, you need to re-consider.  I’m not suggesting running out there and buying everything in sight. In fact, I believe patience will be rewarded.  If you’re holding a lot of cash, I think there are going to be cheaper prices in a lot of stocks in the next couple of weeks.  I simply see too many red flags.  Retail investors are becoming way too bullish and the floor traders are beginning to take some profits and build a little cash.  There are traders and hedge funds that are putting on some shorts right now as a trade.  In addition, stocks are still extremely stretched.  So a correction is due and it’s usually at a time when medium term indicators are turning BULLISH.  That’s where we are right now.  Buy programs kicked in all over the place today when we finally broke through the 875 level.  So, be careful.

I’m spending my time looking at my portfolio and figuring out what I want it to look like six months from now and one year from now.  I think we need to start adjusting our time frames.  You see, in the short run, the market is still very overbought and requires some skill and caution.  But, in the long-run, we’re oversold given the amount of stimulus being put into the economy.  You can argue the long-term effects all day long, but it’s a huge shot in the arm the economy has received over the past six months.  It’s like putting a sword in your arm, not a needle.  

My overall theme is to begin to buy the dips as opposed to selling the rallies.  Selling the rallies worked for so long but it’s not right now.  You need to figure out what you would want to own if the economy was chugging along just fine.  Those are the things we should be nibbling on and buying more of on selloffs which I think we’ll get soon.

 

I’d encourage you as well not to forget about bonds.  I know many of you only want to think about stocks but there are still great opportunities in bonds. Money continues to move out of treasuries and into riskier assets such as corporate bonds and equities.  If you’re one that believes we’ll churn around and go nowhere for twelve months or longer, bonds can give you income plus those capital gains.  If you don’t understand bonds, this is the time to do your homework.  Bonds perform great when economies are recovering.

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2 Responses to “The Remarkable Rally Continues”


  1. 1 Steven Chadick May 5, 2009 at 11:12 am

    Karl,

    Thanks for the great work you do on Bizradio, I have learned a great deal from you and Dan– my sympathies to your wife who probably wishes you were not so “connected.” Now, to show you how much I still don’t know…My Delimma: I bought the triple etf FAZ last tuesday (after hearing a host talk about his column in the Wall Street about double etf’s for the financial’s). I know you have said to leave this area alone…I guess I got greedy/ exercised bad judgement and put alot of my wife’s and my own investments into what I hpoed would be a quick “hit.” I’m now like a deer in the headlights and don’t know if I should ride this out till Thursday’s Banking “Stress Test” results…I bought this etf at around $9.50 a share and it is currently trading in the sixes… Any friendly third party “If I knew someone in this situation, I might recommend’s” would be greatly appreciated. By the way, I do not have a sophisticated trading platform, just a Merrill Lynch on-line account…Thanks
    P.S. Happy Birthday wishes to your son; kids are a great blessing (and responsibility)–I’m trying to enjoy every moment.

    • 2 keggerss May 6, 2009 at 5:23 am

      Steven,

      First of all. Thanks for the compliments. I really appreciate it. As far as FAZ, you got a pop yesterday, you’ll probably get a pop today as Bank of America needs to raise more money than most thought. In addition, the stock market may pull back on profit taking. Taking all this into consideration, it may be ok for the next few days. Given that, I’d still have a stop (not too tight given the 3X) because I’ll go back to my original comments on not shorting or going long financials. Keep listening. Thanks Steven.


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