What a week it was, again.  As I begin to write this, at 10:30 am, Friday January 30, the S&P 500 has just broken to the downside at 835.14, down 1.18%, taking us below Tuesdays close and within four points of last Fridays close.  This is significant.  As I’ve pointed out recently, the dominant trend for the major stock indexes is still down, punctuated by a sequence of lower highs on 12/19/08, 11/04/08, 01/06/09 and possibly this past Wednesday, 01/29/09.  The bull argument that we had established a bottom on 11/20/08 was supported temporarily by a series of higher lows and modestly higher highs which peaked on the pivotal date of 01/06/09, which marked the resumption of the downtrend.  Support stands at 800.0 on the S&P.  If and when we retest that low and fail to break below it convincingly, then the bull argument for a bottom will have some support.  If we breach that support level, meaning we need to close below and for more than one day, then we’ll hear screams of look out below.  A look at any chart six months or longer indicates a much poorer outlook than the optimists would admit.  The 3 month chart could easily be used to argue a bottom, but again, the series of lower highs dating back to October 2007 and the weak and failed mini-rallies since November keeps me on the defensive.  I see more downside risk than upside.  Any long positions should be carefully selected and strategically protected.

 

Let’s talk about what is working.  Let’s look at gold, as represented by the gold ETF, GLD.  What appears to be a true bottom was formed on October 23, when GLD closed at 70.65 and November 12, when GLD tested that low and closed lower, at 70.00.  The following day GLD closed at 72.15 and has not looked back.  Volatile, yes, but a very strong and obvious series of higher lows and higher highs has sustained the rally.  The next higher low was 74.52 on 12/15/09, 80.39 on 01/15/2009 and possibly yesterday, 01/30/09 at 89.50.  The ETF has surged again today, currently intraday at 90.71.  The trend was also defined by the higher highs as follows: 80.91 on 11/24/09, 85.43 on 12/17/08, 88.95 on 01/26/09 and possibly today, especially if we close above 90.  Up until this week, GLD was still in a primary downtrend which was started in March 2008 with the intraday high of 100.44 on 03/17/2008.  The significance of this week is that we have reached the resistance level at 90.00 established between September 18 and October 10 with a series of intraday activity and closes around the 90.00 level which the ETF failed to successfully breach and surge ahead, instead failing miserably and sliding to the absolute low of 66.00 intraday 10/22/08.  Here again, the rise in GLD and other precious metals ETF’s from late October to today has been exciting and profitable, but this is a critical point.  Failure to convincingly breach this level, and I would love a close above 91.00, would allow for a short term pullback immediately to the 82.00 – 87.00 range.

Next up, another favorite of discussion, oil as measured by the ETF USO.  Technically speaking, I think oil has bottomed.  From July 12 and a high close of 117.48, USO and it’s counterparts had been in an unmitigated slide, culminating on 12/24/08 and a close of USO at 29.024,  a loss of 75% for that 5 ½ month period.  Dare I call a bottom?  Yes, with reservations.  Technically, USO has bottomed.  Following the rally from 12/26/08 to 01/06/09 where we saw USO jump from the 12/24/08 low by 28%, it subsequently sold off, bottoming on 01/20/09 at 28.66, then a small rally, followed by a close this week, 01/29/09, at 29.22.  Our three closes, 29.024, 28.66 and 29.22 form a support level at 29.00.  Continued support will affirm my conviction that oil is oversold, has accounted for the global recession, and will soon rise to a level most oil experts expect to be between $50.00 and $70.00 a barrel.  BUT, should that support level fail, as some believe it will, the bottom could anywhere, even, some speculate, a return to sub-twenty dollar oil.  THAT translates into 50-75% losses from here which is hard to fathom.  So any exposure to oil must be accompanied by sufficient protective measures and vigilance.

 

On the bond side, my recent old friend TBT has done a spectacular job for me since December, rallying from a two week bottoming process between 12/17/08 and 12/30/08 with the low close of 35.85 on 12/30/08 to a high close 01/30/09 of 47.79, supported by a series of higher lows and higher highs.  TBT, the ProShares UltraShort Lehman 20+ Yr ETF, has prospered while the mass inflows to the treasury market, caused by the “flight to safety”, turned the other way and, quite predictably, saw a “flight FROM safety” and back into other stuff.  Last months treasury 35 billion dollar treasury auction, which had bonds sold with  NEGATIVE yields, should have been a hint to investors that treasuries of all stripes were overbought, and prices had to come down, thereby bringing yields up (remember, bond prices and yields are inversely correlated).  So, from that bottom of 35.85 to the recent peak of 47.79, assuming of course you bought at the aabsolute low, TBT returned 33%.  Is the run over?  I think not.  The ETF as recently as mid-November traded in the low to mid-sixties, which means a possible profit from here of 30-35%.  I do not expect a straight line, and do expect a pullback soon, so as with all investments, protect your capital.

On the long side, especially in corporates, both investment and high-yield, safety continues to be the focus.  The investment grade market, as measured by the Vanguard Total Bond Market ETF, has traded recently at 77.00, almost right back where it was one year ago, when it closed at 78.35 on 01/31/09.  But remember, it traded as low as 67 in October, a full fifteen percent lower.  High-yield, as measured by the iShares iBoxx High Yield Corporate Fund, HYG, has recovered from it’s recent lows in the 65 range but is still a far cry from it’s year-ago close of 98.88.  The message being that even bonds, treasuries, investment grade corporates, and high-yield, can provide losses, sometimes significant, and require vigilance and risk management.