It’s beginning to look a lot like market top

by JDH on May 8, 2010

So let me get this straight: some guy had a fat finger, and the market dropped 1,000 points? That’s possible, but I think it’s more likely that the market was looking for any excuse to fall, and it did. It’s not beginning to look a lot like Christmas; it is beginning to look a lot like a market top. I guess if David Letterman worked for CNBC, his Top Ten List of Why the Market is Due For a Correction would go something like this:

10. Unemployment remains stubbornly high, which is not good for this stage of a “recovery”.

9. Massive government stimulus spending will lead to inflation, currency devaluation, or higher taxes in the future.

8. Massive vacancies remain in the U.S. commercial real estate market. That’s not a sign of a recovery.

7. Commodity prices are easing; other stock markets are falling; say goodbye to any thoughts of a “V” shaped recovery.

6. A hung Parliament in the U.K., with no clear winner in this week’s elections, creates further uncertainty in the world wide economy.

5. The Greek debt default is only the tip of the ice burg, and is likely to spread, at the very least, to Spain and Portugal.

4. JDH wrote on article on Sell in May and Go Away on April 17, when the Dow was at 11,019. The Dow closed on May 7, 2010 at 10,380. This whole crash thing is JDH’s fault. Probably my May 1st posting Was That the Market Top didn’t help either.

3. The market, as represented by the S&P 500, got close to the key Fibonacci retracement level of 1,225 (it got to around 1,218 on April 26 at around 11:30 am), but it didn’t go through it, so we must conclude that technically we remain in a bear market.

2. On December 31, 2009 the S&P 500 closed at 1,115. On Friday May 7, 2010 the S&P closed at 1,111. That means the market has not gone up at all in 2010.

1. We are in the middle of the longest freakin’ depression since the 1930’s; why wouldn’t the market go down?

Sorry, but the news isn’t good. So what happens from here?

One possibility is that we get a bounce. If we assume that over the last month the top was around 1,218 on the S&P 500, and the bottom hit on Thursday was around 1,069, a 61.8% Fibonacci retracement would take the market up to 1,161, or 50 points or 5% higher than where we sit today.

That’s not a prediction. That’s just a possible outcome. After two big down days, a small bounce would not surprise me in the least.

Beyond that, obviously I’ve been negative on the market for a year, so further weaknesses will not surprise me at all. It certainly looks to me like we seen the market top, but only time will tell.

From a strategy point of view, I am gradually lightening up on my holdings, since while a rising tide lifts all boats, a sinking tide does the opposite. As I reported on Thursday in my special post on Agnico-Eagle, Goldcorp, Brett Resources and Cline Mining, I took the uptick in gold stocks as an opportunity to do a covered write on AEM.TO – Agnico-Eagle Mines Ltd. and G.TO – Goldcorp Inc. With the drop in gold stocks on Friday, that appears to have been a prudent strategy.

I sold BBR.TO – Brett Resources Inc.; I like their story, but I like cash even more, so I sold at a large profit. I’ve got stink bids in on CMK.TO – Cline Mining Corporation, since I like their story as well, and would like to own more on weakness.

This was a good week for me. The crash in the general markets on Thursday didn’t hurt one bit, as we finally saw a rational “flight to safety”, and gold and silver stocks were up. They pulled back a bit on Friday, but for the week, and the year, I’m still on the positive side of the ledger, so I’m quite satisfied.

With volatility apparently returning, I may want to stay a bit closer to the computer screen this week.

Thanks for reading; see you next week.

And Happy Mother’s Day.

{ 2 comments… read them below or add one }

artonpaper May 9, 2010 at 8:10 am

You mention Stink bids. What is this? (Is this common verbiage?)

Great insights and writing style.

JDH May 9, 2010 at 1:05 pm

Thanks. A “stink bid” is simply an order placed at well below current market value. For example, I might like a stock at $15, but it’s trading at $20 today. I can put in a buy order at $15, and if we have a big market move downward, my “stink bid” gets filled.