10:40pm (EST)
We were busy on the last trading day of 2009 adjusting trades and locking in gains on half positions. We even did a market update late in the afternoon and mentioned the bears had controlled much of the action but the damage was minimal. However, selling accelerated in the last hour as the bulls headed out to celebrate New Year’s and the bears stuck around until the final bell.
We weren’t happy with the triple-digit drop in the Dow and the major indexes failed to hold their 10 and 20-day moving averages for the most part. The Dow finished the year at 10,428 but we were hoping for a close above 10,500.
The last trading day of the year is normally bearish anyway so we weren’t expecting any huge rally, especially after the nice run we got over the past couple of weeks, but we think it’s worth noting the dip below the moving averages as we head into 2010.
The Dow finished December with a 0.8% gain and for 2009 the index added 19%, or 1,650 points.
The S&P 500 fell 11 points on Thursday, or 1%, to close at 1,115. The index added 1.8% for December but fell below the 1,120 level which also wasn’t a good sign. For 2009, the S&P 500 added 211 points, or 24%.
The Nasdaq settled at 2,269 and also tanked in the final hour, losing 22 points, or 1% as well. The Financials stocks may have made the most noise as far as comebacks go in 2009 but the tech-heavy Nasdaq gained 5.8% in December and a whopping 44%, or 690 points, for the year.
Another warning sign that the bears may be ready to roll was the spike in the CBOE Volatility Index (VIX, 21.68, up 1.72). The VIX measures “fear” on Wall Street and is one indicator we like to follow to try and get a read on the market. High readings mean that Wall Street is nervous and bearish. A low reading indicates calm and the Street is bullish.
The VIX traded as high as 57 in 2009 and as low as 19 over the past year which is where we are now. However, the 8% jump on Thursday was not pretty.
If the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident.
In September 2008, we watched the VIX spend 10 trading sessions in the 30’s and it looked poised to jump into the 40’s, which at the time was suggesting to us that a dramatic price decline in the market was coming. As we headed into October the VIX kept rising and we saw the market fall to a fresh low a few weeks later as the Dow hit 7,773.
The VIX hit a high of 90 once we bottomed and fell to a low of 44 right before the Presidential election which was still high. In March, the VIX hit a high of 57 when the market bottomed once again as the Dow hit a low of 6,440. The point is, the VIX has settled back down into more historic ranges but watch for a sign over the next few weeks as to where we are headed.
Again, the VIX is not a crystal ball but it helps to know what it is and where we are at. Our subscribers cleaned up the “blood on the streets” and made some fantastic returns as everybody panicked. Take a look at our 2008 portfolio and you will see the 867% AIG trade or the 360% put option Merrill Lynch trade. In 2009, most of our big winners were playing the market rebound using call options.
The bottom line is we want volatility and we think there is a good chance things heat up from here on out.
Against this backdrop of continuing uncertainty, it looks like Wall Street wanted to lock in some profits before the start of the New Year. The aforementioned tidbits were mainly negative but we are still in a bull market as we type. Of course, that can change in a New York minute which is why we believe the first two or three weeks of 2010 could give us a clear indication on where we are headed over the next few months.
Last Sunday, our short-term targets for the market which were 10,800 for the Dow; 2,275 on the Nasdaq and 1,175 for the S&P 500 which we had set in August of 2009. This is as far as the “crystal ball” could get us and we knew back in August the rally that had started in March would run through year-end.
We were met with resistance along the way, especially when the Dow dropped 150+ on Black Friday and traded to a low of 10,179. This was the Dubai news and it shows how fragile the market is after climbing off the March lows.
The market is trading right about the range we were at before the Lehman Brothers collapse that started the domino effect that lasted from September 2008 until March 2009.
To make things clear, we are not a bull or a bear by nature, and we all know buy-and-hold is dead which is why we love options. Our point is that we are looking for movement and if the market trades lower from here then we might start looking at put options. If the market continues to move higher and even breaks out then we will stay long and strong.
The headwinds we face are this. The dollar and unemployment on Friday will be in focus this week and next week 4Q earnings will start to roll in. Alcoa (AA, $16.12, down $0.18) will report earnings next Monday, January 11, and it will be interesting to hear what they say and what kind of grade Wall Street gives them.
A higher dollar could weigh on the Metal stocks and we all know the run gold has been on. At $1,100/ oz. gold looks top-heavy. We were expecting another huge rally in gold before the train stopped but it looks like the smart thing to do is get off and head back down the hill.
Then again, the gold rally may not be over but we are due for a pause even if we are wrong…we just don’t see the “euphoria” lasting in this play and when gold crashes, it is going to fall hard and fast.
We will talk more about this in the days ahead but as you can see the first few weeks will be crucial on figuring out where the market is headed over the long term.
Before we roll out, we wanted to let everyone know the 2009 portfolio is complete and in the books. You can view the results on the website. For 2010, we will be including a “live” portfolio that will be available in the Members Area that will keep track of our open trades. Once we have closed a few trades, we will start a 2010 Portfolio for closed trades outside the Members Area.
This will make it a little easier for our current subscribers to follow the action and give them a quick snapshot of what is happening if they are busy or are on the go.
We have spent a lot of time this weekend looking for possible trades to play the market if it goes up OR down and our playbook is getting packed. If the market were to tank from here then we would not be nervous at all. If it goes higher then we will continue to play the trend. The key is noticing what is happening around you which is why you have us.
We will be back in the morning with the trade updates and Monday’s outlook.
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