Is This Rally the Real Thing?

Judging from Monday’s intensely bullish market action, it’s getting tougher and tougher to believe those who say that this is just a brief respite in a bear market. Unfortunately, I happen to be one of those grinches.

More foreclosures as well as personal bankruptcies still loom on the horizon. Unemployment has been temporarily buoyed by the government hiring people to conduct the 2010 census and the fact that the Fed’s printing presses are operating on double-overtime leads to questions concerning inflation and a sinking dollar. And if all that isn’t enough to scare you, what would happen if the US consumer stopped buying foreign goods, causing China to retaliate and stop buying our debt? I shudder to think… but none of these concerns seem to be troubling investors as they’re all tossing their hats into the bull ring.

Let’s look at some of Monday’s bullish chart action.

Bullish indications
The volatility index (VIX), a gauge of fear and uncertainty, has been sliding steadily and is now trading below its key psychological level at 30. Trading at 943, the S&P 500 just broke out of current levels. It’s free to rise until its next resistance point at 1000. Following a similar pattern, the Dow broke out today, too. Next stop is 9000. The only cause for concern is the Dow Transports. Although the index gapped up today and is currently at 337, it needs to break 345 before it can go higher.

The real bright spot is the Nasdaq. It opened above its previous high and took out minor resistance at 1800. Next area of congestion is at 1900 followed by major resistance at 2200.

A synthetic long play
One way to play this is to consider options on the Nasdaq 100 tracking stock, QQQQ, which is currently trading just above $36. The ask price for a September 36 call is $2.40 per contract. This means that instead of paying $3600 to buy 100 QQQQ shares, it will only cost you $240 to buy the option. (One options contract represents 100 shares of stock.)

Last Thursday we looked at how synthetics can be used to replace the underlying stock. A synthetic long consists of buying an at-the-money call and selling an at-the-money put both with the same expiration date. So, to make a synthetic long out of the above QQQQ call, we could sell one September 36 put at the $2.10 asking price. This gives us a net debit of 30 cents per share (or $30 per contract) to put on the trade. The break-even point here is $36.30 which means that the stock has to be above it at expiration (or anytime in between) for you to profit. However, if the stock falls below it, you’ll start losing money. Although this play is much cheaper than buying the equivalent stock position, there are margin requirements so be sure to check those out with your broker first.

If you want a longer expiration date, consider the December 36 synthetic long. The asking price on the call is $3.19 and the bid price for the put is $2.90, yielding a net debit of 29 cents per share. Personally, all things being equal, I’d go for the longer expiration date.

Sector notes
Almost every major sector ETF is trading well into the green with many breaking out of their current bases. This goes for foreign ETFs too, especially emerging markets and BRIC countries. All of the major currencies are rallying except for the peso, the yen, and the greenback. In fact, the US Dollar Index Bearish Fund, UDN, is breaking above $27 resistance.

Let’s hope all this good news indicated by the charts holds up for the longer term thus proving me wrong. Who said to sell in May and go away?

Comments

[socrateazz:]

Who lives in reality? I wonder! what is truth? What is actuallity? Is propaganda really that strong? Are the masses that blind? All will be revealed in the end. Get high on the stock market! Might as well! Being drugged by propaganda still feels good. Has worked throughout history. Unfortunantly, the more brainwashed a society becomes, the deeper into an abyss it goes. Fortunately, the future is tomorrow and not today! I see people looking after themselves. The media has two pressures causing them to print certain ways. First they know if what is printed is too negative toward the Democrat leadership, they will be punished by IRS. Why do you think the tax laws are so vague? And why is does everybody with leadership on the Democrat side tend to end up with seemingly invulernabillity when they seem to be so full of manipulative tax cheats? I think they own the IRS and a few other organizations. On the other side. I think the Democrats have even more dirty pool. I would not be surprised if somebody was to investigate and find the dealerships chosen to be dumped were dumped because that dealership advertised on the wrong radio or TV shows. I would bet on it. If I were a betting man. The goal is to sink all the inappropriate groups and support those who are politically appropriate. Talk show groups are inappropriate because they do not tow the line properly supporting the power group who is actually those who complain of others misuse of power. The goal seems to be: Cut out supports and the truth will collapse into the proper leaders own reality. God have mercy on all, for fools are treading on melting ice.

Jun 02 06:53 AM

[Dave Wrixon:]

To ask a question like that you must have been hitting the Coke!

Jun 02 06:55 AM

[tunaman4u2:]

Seems like a really manufactured push from Fridays dubious close & Mondays rise to get over the 200 day MA to get technicians to buy in as well... They'll probably get to 9K before a pull back but lots of "Less Bad" news is coming... 10yr & Oil cruising more than the consumer will slow things down... mortgage rate jumps are going to take a lot of people out of the RE recovery game too. I thought we'd be range bound 8K to 9K for a few months

Jun 02 08:27 AM

[jpiretti:]

Price is reality. There is no other reality in the market but price...although both are fleeting. As far as your dealership/vengeance theory...according to the FEC, 88% of US dealerships contributed to the Republicans the last cycle, so even if 100% of the dealerships that were dumped (by the corporate parent, not the admin.) were registered Republican, it would not be statistically significant...but good luck on your "Big Bad Wolf" theory.


On Jun 02 06:53 AM socrateazz wrote:

> Who lives in reality? I wonder! what is truth? What is actuallity?
> Is propaganda really that strong? Are the masses that blind? All
> will be revealed in the end. Get high on the stock market! Might
> as well! Being drugged by propaganda still feels good. Has worked
> throughout history. Unfortunantly, the more brainwashed a society
> becomes, the deeper into an abyss it goes. Fortunately, the future
> is tomorrow and not today! I see people looking after themselves.
> The media has two pressures causing them to print certain ways. First
> they know if what is printed is too negative toward the Democrat
> leadership, they will be punished by IRS. Why do you think the tax
> laws are so vague? And why is does everybody with leadership on the
> Democrat side tend to end up with seemingly invulernabillity when
> they seem to be so full of manipulative tax cheats? I think they
> own the IRS and a few other organizations. On the other side. I think
> the Democrats have even more dirty pool. I would not be surprised
> if somebody was to investigate and find the dealerships chosen to
> be dumped were dumped because that dealership advertised on the wrong
> radio or TV shows. I would bet on it. If I were a betting man. The
> goal is to sink all the inappropriate groups and support those who
> are politically appropriate. Talk show groups are inappropriate because
> they do not tow the line properly supporting the power group who
> is actually those who complain of others misuse of power. The goal
> seems to be: Cut out supports and the truth will collapse into the
> proper leaders own reality. God have mercy on all, for fools are
> treading on melting ice.

Jun 02 09:59 AM

[RTF 360:]

Bull Markets climb walls of worry.
So much for retreat.
Why a target of 10,000 ?
Over 7,000 DOW points lost since the 14,000 top
3,500 DOW points for a half way back reteacement.
6,500 low on the DOW PLUS 3,500 = 10,000.
No brainer.

It'll print 10,000 for the simple fact of share leverage.

The question you want to ask, "Do I squander this last chance at share leverage after destroying technical resistance for the past 49 trading days ?"

Equities are safer than Oligarchy Bankster Treasury Bonds.

The TRUE flight to quality is equities over Treasuries

Jun 02 10:31 AM

[jpiretti:]

I am always amused when individuals wax philosophic with flowery prose on how the world outside of their head is delusional when the simple fact is...their on the wrong side of the trade. I feel I can say this because for the majority of this advance I have been hedged. One of the 4-5 long term indicators I use is a 20 month moving average (in on 7/03 @ 974, out on 1/08 @ 1380)..although the monthly RSI has breached above 30 ( first time since 4th QT. 02'). I am a CMT, so I tend to be more mechanical, but all this political/societal talk to claim the markets are "wrong" is a side show and quite useless. The markets are never wrong by definition. If you as an investor are on the wrong side of the market, is it so comfortable to be "right" and insolvent?

Jun 02 10:51 AM

[User 207783:]

Actually, there is another scary fact re: China. As of last month, Brazil replaced the US as their #1 trading partner (per NPR). The question is: how far can we slide, before the Chinese consider our trade expendable, and sell our debt anyway?

Jun 02 10:51 AM

[jpiretti:]

Brazil might have taken #1 as far as inport suppliers (they were #9 to USA #4 in 08'), but not trading partners. Brazil was not even in the top 10 in 08' (Singapore was #10 with 15% of USA's level @ #1)


On Jun 02 10:51 AM User 207783 wrote:

> Actually, there is another scary fact re: China. As of last month,
> Brazil replaced the US as their #1 trading partner (per NPR). The
> question is: how far can we slide, before the Chinese consider our
> trade expendable, and sell our debt anyway?

Jun 02 11:16 AM

[Larry House:]

Be careful of word games. Is the rally real? Obviously. It happened/is happening. Is it a rally without stop or retreat? Very likely not. Invest accordingly.

Jun 02 12:08 PM

[TradingHelp...:]

You would be right if there was a perfect correlation between equity markets and GDP/economic progress. But there is not. It is perfectly feasible that one, equity markets, would 'out-perform' the other, the economy, over the short to medium term. And also, quite possibly, the market was so oversold in March that half of the rally we have seen, maybe more, is just correcting the mis-pricing. Also, we have seen unprecedented monetary easing and stimulus. This wall of money has, is and will continue to help liquidity, the life-blood of markets. I am not saying the economy is in good shape, it's structurally flawed but the defeatism and conspiracy theories circulating around Seeking Alpha presently have just gone too far. Please someone name a recession that the US economy didn't recover from and subsequently return to growth? Exactly.

Jun 02 06:11 PM

[Konrad:]

China can cry all it wants at the issues in the post-industrial powers' markets.

Considering that the vast majority of its industrial production which has recently been buoyed by subsidies depends on external demand and most of it work force is operating on substance based labor...it hasn't got much place to cry.

Yes they hold our debt. However god forbid the post industrial powers unite economically against the developing world.

China is walking a thin line right now and I'm sure their educated know it.

In economical crisis situations it comes down to the military and logistics which the U.S., Japan, and G.B. have in droves.

China is hungry yes, however their best means of levying up the economy lay not in veiled threats of cashing in, but in stealing our intellectuals...(Which the U.S.A. has not got enough of)

Jun 02 09:24 PM

[E Nuff Sed:]

Babak reports that a long term indicator called the Coppock guide is now flashing a buy signal.
www.tradersnarrative.c...
An interesting comment in the heated discussion on the blog is that this must be the most hated rally ever as it caught so many by surprise. This must be extremely painful to the bears on the sidelines who must be by now praying for a pull back so they can get in.

Jun 02 10:32 PM

[Donald Ingram:]

This nothing more than a six month "dead cat bounce".
The trap door will open this Fall (appropriate) Sept., Oct., Nov., and the market will fall. Right on past the March low. How low? Don't know!
There will be a "last gasp" rally post Christmas season into early Spring 2010 before it totally capitulates at Dow 1450.
This signals the begin of the long, slow, painfilled recovery.
Gold will go to the Moon in price, along with silver and agriculture.

Jun 02 11:10 PM

[rockingandr...:]

Buy signal? GM going bankrupt, and the state of California in the hole 20+ billion....Gov. Schwanigger pleading for a Fed. bailout...more states right behind him....this is a buy signal.....

You gotta be kidding.....

Jump on the ruoelete wheel and see where you land....

On Jun 02 10:32 PM E Nuff Sed wrote:

> Babak reports that a long term indicator called the Coppock guide
> is now flashing a buy signal.
> www.tradersnarrative.c...
>
> An interesting comment in the heated discussion on the blog is that
> this must be the most hated rally ever as it caught so many by surprise.
> This must be extremely painful to the bears on the sidelines who
> must be by now praying for a pull back so they can get in.

Jun 02 11:11 PM

[E Nuff Sed:]

What has the budgetary problems of California or the GM bankruptcy to do with investing?
India, China and Brazil are not going to stop growing because California or GM shot themselves in the foot. This is no reason to sit on your wallet and miss out on a great rally which may still have another 10% to go.


On Jun 02 11:11 PM rockingandrolling wrote:

> Buy signal? GM going bankrupt, and the state of California in the
> hole 20+ billion....Gov. Schwanigger pleading for a Fed. bailout...more
> states right behind him....this is a buy signal.....
>
> You gotta be kidding.....
>
> Jump on the ruoelete wheel and see where you land....
>
> On Jun 02 10:32 PM E Nuff Sed wrote:

Jun 04 03:56 PM