Insights & Advice

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In Like a Lion, Out Like a Lamb

This week was different. Sure we had more than our share of bad news—80,000 lost jobs in March, UBS, a European banking giant, wrote down another $38 billion, corporate earnings have fallen for three straight months and Fed Chief Ben Bernanke acknowledged for the first time Wednesday that “a recession is possible.” And yet the markets finished the week substantially higher.

On Tuesday the Dow, NASDAQ and the S&P roared out of the box. All three indexes finished up 3% plus and held those gains throughout the week. Very different from the huge up and down swings that have rattled our bones and jangled our nerves up to now.

At the same time, the VIX (the CBOE volatility index which measures the gyrations of the S&P 500) has dropped from 32% to 23% since its March 17th high. That’s important because the higher the VIX the steeper the market’s losses have been since January 1. For the rest of the week, the markets were actually lamb-like in their quiet, ordered pace.

The dollar acted a bit different as well. It stopped free-falling and actually moved up a couple of days against the Euro and other currencies. Then there was the stock/bond ratio (S&P 500/10-year Treasury bond). It is an index I watch because it measures investor’s preference for bonds over stocks. Since mid-March stocks have been doing better than bonds. That too has sent my antennas quivering.

I have already pointed out in prior columns that commodities, the place to be during this market correction, have turned down over the last few weeks. In my mind, there is no coincidence that stocks have moved higher as gold, silver and other commodities declined. There seems to be an inverse relationship between the two asset classes right now. So for the short term, stay away from commodities and ride the market higher in stocks.

How much higher? Roughly 30-50 points on the S&P 500 until we hit 1395-1420. There, alas, we will have reached the upper limit of our trading range. After that, we hold our breath.

We’ve successfully tested the bottom (S&P 500—1270) twice now since the October ’07 peak of the market. We may have to endure that downward trip once more. It will depend upon any number of factors but mostly on what investors don’t know about what they don’t know.

You see, the markets are moving up because all the bad news that came out this week had been expected and therefore already discounted. It’s the surprise that bites you in the butt that gets you every time. And I’m not at all sure that there aren’t some nasties lurking out there in the weeds. Things like increasing late payments on credit card debt, home equity loan problems and shaky financial institutions.

Could the markets actually break the upside trading range and move higher, a reader asked. Mo Def, (Most definitely) but unless you are Houdini-like in your ability to trade in and out, don’t add money to your holdings quite yet. I advise patience, wait and see what happens at the top of the range. If we break out there will be ample upside for everyone and if it fails, think of how much money you will have saved.

Posted in A Few Dollars More, At the Market