WhipItAround.com

The market was able to break out of its 85.5 - 92.5 range on the S&P Spiders (SPY) this Friday.  Key areas of support will be 92.5  and 90.0-90.5 on SPY.  If we break below these levels, the rally will not last.  I would consider it healthy if the market could trade down to support levels and build energy to possibly make a sustained breakout to the 105 area on SPY. 

Don’t be fooled by this New Year new administration rally.  I have to imagine that most of the forced sales and liquidations are behind us, which means there could be more buyers than sellers as money gets redeployed from the treasury market and money managers place their bets for the New Year.  Trust me there are a lot of low IQ money managers out there that believe the stock market looks like a bargain basement right now.  Based on historical numbers and the sterioid/levered economy of the past, stocks do look cheap, but you have to plug in future earnings levels to arrive at true valuation.  If the S&P rallies to 1050 and run rate earnings settle in at 65 on the S&P, this would represent a p/e ratio of 16.1x.  Earnings will probably trough in the 50s but i’d consider 65-75 more of a future run rate for earnings.  Remember that during deep recessions, p/e ratios trough in the single digits as they did in the 1940s, 1950s, and 70/80s.

I am 100% positive that this rally cannot take the market higher than 11k on the dow and 90% sure it cannot take us past 10,500 on the Dow so do not be fooled by this rally.  If the 92.5 level holds as support go long FOR A TRADE ONLY WITH STOPS IN PLACE BELOW THE SUPPORT LINE.  2009 will be a traders market just like 2008.  I am not intermediate term bullish but I recognize the fact that the market could trade another 1000 points higher or so based on technicals and a lack of sellers.

Everyone wants to compare this recession to the average recession but this is far from the average recession.  We have not seen anything like this since the Great Depression, so all these talking heads on cnbc need to shut the hell up and stop calling bottoms based on the average recession.  forget about the average length of a recession, the avg stock market decline and every other average that gets thrown out there.  last week i read The Great Crash of 1929 by John Kenneth Galbraith and the similarities to the Great Depression are uncanny, however, I do not think we are headed for the Great Depression.  The major difference is that the banks were allowed to fail back then and there was not FDIC insurance.  Also, the Depression administration raised taxes during the Depression which was like pouring salt on an open wound.  I would expect something in between the 1970s recession and the 1930s Depression.  Be prepared for another leg down in the market at some point during the year.  I’m not sure what the catalyst will be.  it could be Q1 or Q2 earnings, but i have to think atrocious numbers are already expected for Q1.  maybe the catalyst will be when the market realizes there is not a 2Q/3Q recovery and earnings still look awful.  or maybe the catalyst will be a weakening of the dollar and higher interest rates as foreign investors slow down their purchases of treasuries as they spend their current reserves on their own economic malaise. 

I am looking forward to 2009, as I believe there will be some incredible trading opportunities for the savvy trader/investor.  I have made a new set of trading rules for 2009 that i will post in the near future.  so far, the year is off to a good start for me, as i was net long going into the new year.  i purchased 2000 shares of SSO on 12/31 (sold 1000 Friday), shorted 100 VNO (Vornado Realty) and was already long 250 of SRS.  On Friday, I purchased 250 shares of AAPL, which I sold prematurely, 500 shares of USO which I sold for a miniscule profit.  Currenly I am long 250 SRS, short 100 VNO and long 1000 SSO, as I think commercial real estate will continue to underperform even if the market rallies. 

Also, I recommend everyone consider using Think or Swim as their broker.  The trading software is incredible and they give everybody a $100k papertrading account that is just like your real account.  it’s a good way to test your strategies in a real-time scenario.

Currently, the market is overbought and i think Monday will be a down day.  The rally was led by the Russell and the Russell was the weakest index on Friday, indicating the market is probably due for a mild correction or consolidation before we rally higher.  The smart money and volume will return this week so pay attention to key support levels.  if key support levels are broken, the market could take a beating.  It sounds simplistic but i am near term bullish while the SPY is above 92.5 and bearish if the market falls below 90.0.  Dont chase stocks at these overbought levels…..i would wait for a pullback or some consolidation before getting long.