Market Timing Update: How Low Will the Market Go?

Market Timing Brief for 8-05-2011 WITH UPDATE

8-8-2011 UPDATE: I was correct to disagree with Jim Cramer on Friday who claimed this was nothing like 2008. If you read below, you’ll see that it is exactly like 2008. This is the same kind of “cascading crash” as I’ve called it. By the way, I do credit Jim for telling investors to get out of certain areas of the market like tech, banks and healthcare. Those were clearly targets, but those in the public eye sometimes mince words. Jim did not. But he did not seem express how technically similar October 2008 was to this decline.

This does not mean that we have to collapse back to 2009 lows, but my target is the same as it was on Friday, the summer 2010 lows. Wherever this market settles, it will likely hammer out a base. That means the first jump up will not likely be the end of the selling.

Practical Investing/Trading Pointers: Some readers who are overexposed to equities will need to cut their exposure, but this is not the best selling point. The best spot was much closer near the high. I exited the SP500 Index on July 8th in the newsletter. Now that there is much more damage, if you need to protect capital:

1. Decide how much of a loss you will allow on each position before taking profits or limiting losses. Everyone’s number is different. You can read more on “selling late” if you have not see my article before: go to Market Timing: Selling the Market Late

2. In general, sell in steps. That is called scaling out. Rushing out at levels like these will rarely prove effective. If you feel you must get out faster, then you do. But are you willing to get back in? Or are you just running?

Those are two different selling mindsets. One is fear based and the other is a tactical decision with a willingness to reverse one’s opinion when the market reverses. We have no idea where the market will turn at this point. I am saying the lows of last summer look like reasonable targets, but I do not argue with the market.

3. Gold is moving up steadily today while the silver rally is less convincing.

Practical Investing/Trading Pointers:

1. You can average into gold, but do it in scale. In this case, due to the possibility of an immediate 5% correction, you may want to add slowly every step up from here in 4 or 5 steps. How fast you do that is up to you.

Remember that gold can move several percentage in the overnight market, so you must be willing to take that sort of loss at this point in the rally. Gold could go to $2500/ounce according to JP Morgan, a target for year end! They have been right and wrong before. A target is just a guideline. So keep adding, but with gold up over 3% today, jumping in in one step is a bit dangerous.

From 8-5-2011:

1. The SP500 index (SPX; SPY) fell through the March low yesterday and we then fell through the April 2010 high. A very fast move. I warned that both of those levels were key.

Now they serve as resistance for traders, meaning traders will be edgy if we move back up to either of those levels. The selling can resume after rebounds to resistance points is the practical take home lesson.

We actually bought a bit two days ago, but because I recommended an intraday 1% stop on those trades, the losses were minimal compared to the overall damage to the markets yesterday. If you are selling late, it becomes much more difficult, which is why I write daily, not once a week or once a month. I’ve been through numerous crashes before including the 1987 crash with real money which I withdrew the last penny of on the Friday before Black Monday.

This is a worldwide liquidity crisis and I disagree with Jim Cramer who says it is not like 2008. In fact, I did the research on that cascading crash, and it was very similar in quality to this one.

Europe is in financial turmoil and today for the first time has decided to take some action in buying some Irish and Portuguese bonds. They say they’ll buy Spanish bonds and Italian bonds if needed. This could help to stabilize all markets worldwide. The markets at this point have come back from earlier losses of about 2%.

This is what the chart looked like YESTERDAY, charting system courtesy of Worden Brothers at FreeStockCharts.com:

Will the Market Hold the April 2010 High or Not?

The key for the market to recover on a technical analysis basis is to rise above the high for April 2010 of 1219.80 (yes we’re below there).

Here is where we are TODAY:

S&P500 March Low of 1249.05 Has Been Broken

The SP500 index could fall all the way to last summers’ lows, as there is no real support between here and there. I would not expect the market to exceed those lows to the downside. I am expecting some sort of bottoming formation to arise over the next couple of months from which the next rally will begin. Stay tuned here and at SunAndStorm.com, my main website.

2. Gold (GLD;IAU) has been hesitating a bit, but has not begun a correction. With the dollar showing signs of strengthening and Europe stabilizing a bit, gold could enter a significant correction in the uptrend.

I do not believe you should sell your long term gold positions, even in a correction unless you prefer trading your entire position or have to protect your assets at a certain level.

The dollar is in fact easing back a bit today because of the actions taken in Europe and that is helping gold, which would otherwise be DOWN not up. I do not believe the dollar rally is over, but the rally is definitely not a consistent one day to day. The gold trend has held up far better than the dollar in this round of what I call the “European panic scenario,” which is normally a gold UP, dollar UP and stocks DOWN pattern.

As mentioned yesterday, it’s important to know how gold relates to dollar strength and why investors can be SELLING gold and still have the price go up, so bookmark this and read it when you have time: Gold Moves with Buying/Selling AND the Dollar

3. Silver is also subject to correction for the same reasons as gold (dollar strength; USDX). SLV was down 7.25% yesterday and is down again today 1.91% about mid-day. As I’ve mentioned, silver can be expected to correct more severely than gold in a correction.

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Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.