Making a Move from Worried Bear to Cautious Bull

Credit markets are showing glimmers of improvement. Note the following quotes from MarketWatch.com:

The cost of short-term dollar loans dropped more than expected Monday, a signal that money markets are slowly returning to normal after threatening to derail the global financial system earlier this month, economists said.

The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.05875%, down sharply from 4.41875% on Friday. The one-month rate fell to 3.75125% from 4.18125% on Friday.

Later Monday, U.S. Federal Reserve Chairman Ben Bernanke, in testimony prepared for delivery at a hearing before the House Budget Committee, said he was encouraged by signs a severe credit blockage was easing after massive efforts by governments around the world to recapitalize major banks and guarantee short-term bank debts.

On Friday, three-month Libor posted its first weekly decline since July. The rate had pushed as high as 4.81875% on Oct. 10.

In yesterday's Weekly Review post, I described how the Alert HQ stock market statistics showed an improvement after last week's rise in stock prices. The important indicator showing how many stocks have their 20-day moving average above their 50-day moving average held steady and looks like it could be forming a low.

I know that one data point does not make a trend; however, combining the technical situation with the credit market data as described above has me thinking that it is time to start moving to a slightly more bullish stance.

As a result, I sold the remainder of the ProShares Ultra Short QQQ ETF (QID) and the Ultra Short Midcap 400 ETF (MZZ).

To complete my turnaround from worried bear to cautious bull, I opened a modest position in the ProShares Ultra S&P 500 ETF (SSO).

These actions were carried out mid-morning so I managed to avoid some of the losses eventually realized by QID and MZZ by the end of the day as well as pick up some profit from the run-up in SSO.

Am I convinced we are in for a booming bull market and that the worst is behind us? I am not so bold as to assume that to be the case. I merely feel that the market seems to want to move upward now and, since I have a small trading account, it behooves me to listen to Mr. Market and act accordingly.

In a triumph of possibly misplaced reason over trading instinct, I held on to the ProShares Ultra Short Consumer Services ETF (SCC) and was punished for the effort. All recent evidence (bad retail reports and rising unemployment, for example) points to the fact that consumer spending has been falling and that we can expect it to continue falling, resulting in a very week holiday shopping season. This should tend to drive this double short ETF up. Monday, though, investors were having none of this idea. In a rising market, all news is good. We'll have to see how earnings season impacts this ETF.

Disclosure: long SCC and SSO

Comments

[blacksilver:]

That bull is walking on egg shells right now,one SNAFU might put the market into a deep dive.

2008 Oct 21 09:40 AM

[Michael Comeau:]

I also recently joined the "cautious bull" camp. My spidey sense indicates an unusual amount of fear in the market, which tends to mean it's time to begin buying. I'm scaling in slowly by shorting out of the money puts (high volatility is my friend!) on stocks I like.

In fact, at right around the lows this month, my mother called me demanding to cash in her IRA and put everything into CD's.

2008 Oct 21 09:44 AM

[Michael Comeau:]

Just wanted to add - when bluegrass musicians at a Vermont country wedding are talking about the market - you know the fear has hit Main Street.

2008 Oct 21 12:03 PM

[daytrader:]

blacksilver,
thank god for you!i have a large,for me,position in qid,i'm just a bit player.you made feel better.i feel these upside moves are dead cat bounces in a secular bear market.good luck to you,too,blacksilver.

best regards,
daytrader

2008 Oct 21 12:10 PM

[alajac:]

That big rally was on p-poor volume. This baby is going DOWN BIG.

To those who search in vain for 'job growth',
GET WITH THE 21ST CENTURY:
ROBOTS AND COMPUTERS
DO ALL OF THE ACTUAL PRODUCTIVE LABOR.
All that is left is arts, crafts, service,
and sh*t work that isn't profitable to automate
as long as there are $8/hr wage slaves
lined up for miles for every $8/hr job opening.

You can't get bank transparency when the government is guaranteeing the losses. FDIC and every other kind of government guarantee has to go.

Make the banks earn the bailout by giving them the money via equal-dollar distribution to every legal US resident ($700B divided by 350M=$2000 ea.) Then no other stimulus is needed. They'll have to get transparent and extend credit to earn the deposits.

When all governments issue new currency in this manner, there will no longer be an illegal immigration problem.

Write-in Alan Jacquemotte for US President

to show support for this plan,

and your disdain for the other candidates, who, unlike Alan,

didn't see this coming and don't know what to do about it.

2008 Oct 21 03:27 PM