Put Options

The GMI and GMI-R remain  at zero.  Thursday was the eleventh day in the current QQQQ short term down-trend.  There were 30 new highs and 578 new lows in my universe of 4,000 stocks on Thursday.  A lot of the new highs are being achieved by bond funds and the new inverse ETF’s that rise when the market falls.  Still, the number of new lows is a lot less than the 730 and 1,011 registered on January 8 and 9.  So the current decline is not driving as many stocks to new 52 week lows. The Worden T2108 indicator is at 21%, still above the level reached in recent bottoms.  The decline last August ended with the T2108 at 7.7% and the decline in June, 2006 ended with it at 13.6%.   T2108 is the percentage of NYSE stocks that closed above their 40 day moving averages…….

I made money today in the declining market as my put options gained.  I remain largely in cash though, given that the market could bounce strongly at anytime.  When the GMI rises to around 3, I will consider going long again, or I will add to my shorts after a failed rally.  Remember, no one can consistently predict when a trend will end.  We just have to wait for the turn to manifest itself.

Last week I received an email from my brokerage company saying that they noticed my account was in cash and, would I like their help in investing my money.  I have been safely in money market funds collecting interest, and they want to lure me back into this declining market.  The little guy doesn’t have a chance against the army of pros who think timing the market is impossible.  The Fox business shows on Sunday were also filled with pundits saying that we should scoop up the many bargains in this market. So, with the GMI at 1 and the majority of pundits looking for bargains, this is not the time for me to be long stocks….

I ran a scan using TC2007 to see which ETF’s did well since the S&P500 peaked on July 16.  Since that day, the S&P500 has declined  7.5%.  Was I surprised that in that same period a lot of Proshares UltraShort ETF’s climbed more than 20%.  These new inverse ETF’s go up when their relevant index declines.  The UltraShort ETF’s are designed to rise 2x as much as the relevant index falls.  So, look at the top 10 ETF’s (out of 551) since July 16:

It should be clear that during the time when the general market indexes were falling 5-7%, these UltraShort indexes rose 20% or more.  The weakness in real estate, basic materials and financials is to be expected. But note that the market really stuck it to the "value" stocks.  This term is an oxymoron; value is a myth and only in the eyes of the beholder.  We should not get stuck holding onto declining value stocks, which may become even more valuable as they fall and fall and fall.  Bill O’Neil has said, all stocks are bad unless they are going up.  So, if I do not have  a margin account in which to short stocks or do not want to buy put options in my IRA, I can buy the UltraShort ETF’s and hopefully profit as other long term buy and hold investors wring their hands and curse the declining market.  Thus far, my IRA account has come through this decline unscathed, retaining all profits from the past year.

When will this decline end?  Nobody knows. But there will be plenty of time to go long after the turn is reflected in the GMI….

See my disclaimers below.