I started looking at various market indexes this morning and wondered how it was possible that the stock market could be 50-60% off of its lows (but still 30% from its highs) with fake government unemployment numbers approaching 10% and real unemployment above 10%. In terms of failed institutions, we have lost Bear Stearns, Lehman Brothers, General Motors, Chrysler, Citigroup (effectively), AIG (effectively) and Washington Mutual (by far the biggest bank failure ever). Large regional banks such as Colonial and Guaranty have failed and the market doesn’t even care.
Yet, when it comes down to it, it seems that the amount of money available for investment in stocks has not been reduced. You would think that the greatest economic decline since the Great Depression would have removed money available for investment in stocks.
I think the answer is that we have been and are currently in a new paradigm for the time being. If you look at my simple diagram, it would seem that the money lost due to bad investments, housing depreciation and lost jobs (just to name a few) would flow out of the pot of money available for stocks and bonds and reduce demand for stocks and bonds.
However, in response we have the government pumping money into the market. It is being done directly into the failed institutions (e.g, money to AIG) and indirectly through programs such as “cash for clunkers.”
In fact, if the government money is larger than the outflows, more money money could actually be available for investment in the stock market than pre-crash.
At some point the government money will go away either due to voluntary action by the government or involuntary action (such as the inability to sell more treasuries) and the result will likely be another crash for the stock market. This could be a week away, or it might be 5 years away. Who knows? That is the hard part about bubbles. They can last much longer than you expect and they can pop very quickly.
In the 1990s, we had the Internet bubble, in the 2000s, we had the housing bubble and now we have the government bubble. Those bull markets ended badly, this government bubble will end badly too. But, for trading purposes, it doesn’t mean that this government bubble can’t run for months or even years longer. While the foundation might be poor, it doesn’t mean that we can’t have a bull market based solely on government money.
There were many traders that lost a lot of money shorting Internet stocks in 1999. Ultimately, those shorts were right but because their timing was off the result for them was lost money and anger (not surprisingly, we’re seeing a lot of anger and lost money from short sellers right now).
Going forward, my plan is to view the market through this government bubble paradigm. The goal is to enjoy the bubble while it is here (rather than getting angry and yelling that it is market manipulation, PPT, etc.) but not to be early in shorting the market when the bubble pops. This is easier said than done, but trading the market is always a challenge. At least it provides a map and a framework to work within.
With that out there, let’s move on to this week’s analysis.
When I look at SPY and QQQQ, I see new highs set last week after 2-3 week consolidation period in which the market burned off overbought conditions. The next stop for SPY is about $108 and for QQQQ I see resistance at $43.50. I don’t see anything on either chart indicating weakness.
I mentioned weeks ago that I was using LQD as an indicator of when the move higher might be over. LQD is been slowly marching higher since March in a very neat and orderly fashion. The trend continues.
INDEXES
I like IAT long at $20.
I’m watching XLU to breakout above $30.
I’m watching for a breakout on USO over $39 and a breakout on UGA over $36. It might be a good idea to use the breakout on both of them as a confirmation before getting in.
Watching for a breakout on SLX above $49.
Watching for a breakout on IAI above $28.
INDIVIDUAL STOCKS – LONG IDEAS
The first breakout on ADM failed. If ADM breaks over $29 again, it is likely to hold the second time around.
Watching for a breakout on AKS over $21.
BJRI on a breakout above $18.
CLNE cleared $10. I would be looking to pick this up at around $10.
Waiting for a breakout on HERO above $5.
NPK is moving again. I’m looking to get in at around $85 and I would use the $81 level as my stop.
Looking for PCX to breakout above $10.
Looking for a breakout on TXT above $15.
INDIVIDUAL STOCKS – SHORT IDEAS
Might be a little early looking at BLK, but it is getting near its all time high in the $225 range. If there is any quick burst up to those levels, I would want to get short.
Again, perhaps a little early, but I’m watching for JPM to make a run near $50. Especially if this gets overbought, I’ll be looking to short it up there.
