Great Trades

The month-end window dressing bounce we were looking for didn't materialize today, as the derailing of the "bad bank" idea (that helped cause the financials short squeeze rally earlier this week), at least for the short term, along with a 3.8% GDP drop last quarter, the largest drop since 1982, brought in enough selling to overwhelm the window dressing.

With the break of key support at the October 10 low of 840 in the S&P 500, our trading model stopped out of the small long position and has gone back to 30% partially short, 15% in the S&P 500 and 15% in the Russell 2000. We're replacing the Dow with the Russell 2000 (IWM ETF) because the Russell 2000 chart looks more susceptible, and has more than twice as far to go to revisit the November lows.

The rally earlier in the week relieved the extreme oversold conditions from last week, meaning the bigger risk in the short term is to the downside. The market could go significantly lower, to new lows, before hitting extreme oversold conditions again.

January 2009 has turned out to be the worst January ever for the overall market, with the S&P 500 down over 8.5% on the month. On the positive side, gold and silver had a very strong January, with gold up about 6% and silver up over 12%, which bodes very well for our long-term junior mining holdings.

Open Positions: 15% short S&P 500, 15% short Russell 2000

We got the sharp pullback today we were looking for, so our trading model has covered shorts and reversed to long the market again, but only partially. Our trading model has reversed from 30% short to 20% long, 10% in the Dow and 10% in the S&P 500. Month-end window dressing could help the market bounce back short term.

Open Positions: 10% long S&P 500, 10% long Dow Jones Industrial Average.

As we expected, financials have led the market's bounce back rally, aided by significant short covering. However, our trading model was early again to get fully allocated. It would have done much better scaling in more gradually, so we are adjusting the model to use smaller increments when scaling into new positions.

Today, our trading model has sold out of longs and is shifting back to short the market. The 100% long position (200% long for speculative traders) is being replaced by a 30% short position, 15% in the Dow and 15% in the S&P 500.

For active traders, Bank of America (BAC) has proven to be an excellent trading stock, moving up over 50% from its bottom at the beginning of last week, and up over 20% today alone at its high. It will likely continue to be an excellent trading stock, but the near elimination of its dividend (and thereby removal of a significant portion of its long-term investors), the high short interest, and the unknown effect of government interventions make the back and forth difficult to predict.

Open Positions: 15% short S&P 500, 15% short Dow Jones Industrial Average

Just as our trading model was a little early getting short for the beginning of the year, it was a little early reversing to long before yesterday's selloff. We'll continue to fine tune our model to try to get better timing. However, we believe the market is set up very well for a nice rally now.

With the market averages selling off and bouncing off important support levels, and then rallying to form a hammer candlestick pattern for the day, a good bottom indicator, today was a key reversal day which should reverse the trend of the market and start the next rally. There's a huge amount of pessimism about the market now and lots of new shorts, particularly in the financials sector, where there have been lots of negative headlines.

Rumors about Citibank and Bank of America getting nationalized and wiping out shareholders sent both stocks down over 15% today, despite the market reversal. Both companies have their quarterly earnings reports before the market open tomorrow, and as long as they're not horrible surprises, the squelching of the rumors should spur a huge short squeeze in the sector.

Many novice shorts have shorted financial stocks, either directly or through inverse ETF's, in a bet that the major banks' shares will get wiped out. We don't think they will be, at least not in the very near future. The government bailouts nationalize their losses, but they don't wipe out the shareholders as many expect.

With Financials extremely oversold, our trading model added a 100% long position in Financials today, giving it 200% long exposure. Only the most speculative traders should use leverage to get to an over 100% allocation. Others would do well just holding on to 100% long.

For those looking for an individual stock to trade in this rally, Bank of America (BAC) is likely to move up strongly from its severely oversold (and overshorted) condition as long as their report in the premarket isn't a disaster.

Open Positions: 50% long S&P 500, 50% long Dow Jones Industrial Average
Also, for speculative traders, an additional 100% long Financials (XLF is the Financials ETF)

While the S&P 500 finished slightly higher today, the Dow Jones Industrial Average finished down 25 points, for the 5th straight down day. Both indexes successfully tested support and bounced higher.

Today, our trading model added a 50% long position in the Dow Jones Industrial Average (or its exchange traded fund, the DIA ETF) to the 50% long position in the S&P 500 started yesterday, getting the model 100% allocated to the market.

Open Positions: 50% long S&P 500, 50% long Dow Jones Industrial Average

In 2006, we didn't like the fundamentals for the U.S. stock market, so we decided to "cease active trading in the U.S. stock market" on expectations of "a tougher market for traders in coming months/years." We did "a strategic reallocation from the overall U.S. stock market to undervalued commodity stocks." Unfortunately, we didn't anticipate that the collapse in the U.S. financial markets would have such far-reaching ramifications, devastating commodity stocks along with the rest of the stock market.

While we continue to hold our portfolio of undervalued commodity stocks for the long term, as we believe commodity stocks will be big winners when the global economy recovers from the current recession amidst decreased future supply combined with recovering demand and high inflation, we have resumed active trading of the U.S. stock market in our trading accounts. We believe that for the foreseeable future, the overall U.S stock market will be a great market for active trading, and not such a great buy and hold market outside of commodity stocks.

We resumed active trading of the overall U.S. stock market in our dormant trading accounts 3 months ago (on October 10, when we had a buy signal), focusing on the market indexes rather than individual stocks, as the wide swings in the overall market have overwhelmed most stock picking in this volatile market. During this time, we've been developing our trading model based on a variety of technical indicators to time the significant turns in the U.S. stock market. We've had tremendous success with this model to date, as it has predicted every significant turn in the market over the past 3 months. It's still a work in progress, and we continue to fine tune it, but we plan to post its changes to market allocation to establish a published track record.

Our trading model began the year 100% short, and today covered the short and reversed to 50% long. Unless otherwise specified, the trading model will use the S&P 500 (or its exchange traded fund, the SPY ETF) as a proxy for the U.S. stock market. Today's reversal signal is based on the hourly charts being very oversold, so it's not as strong a signal as a daily signal, and thus is only a 50% allocation and could be changed quickly. We plan to only post allocation changes in market off hours, and we anticipate that there will be anywhere from 1 day to several weeks between changes.

Open Position: 50% long S&P 500