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January 29, 2009

Missed It

It seems the optimism surrounding Obama's stimulus package ran into a brick wall at today's open. Equities gapped lower and just kept falling. The session unfolded as the antithesis of yesterday's action and caught me flat-footed with regard to getting short. Given yesterday's dynamics, I expected no more than a mild pull-back today. The primary factor preventing me from shorting into yesterday's approach of the 65DMA on the SPX was the fact that selling-on-strength was practically non-existent on SPY. An interesting takeaway from today's action is that the leader in the buying-on-weakness category was OEF, the S&P 100 ETF. It seems big money is chasing large caps in anticipation of an extended rally. Another positive takeaway for rally believers is the tame volume we saw under today's drop.

stock index chart

The possibilities from here have no clear front-runner. Do stocks put in another mild session under the 65DMA and then break higher? Does selling pressure suddenly appear and send the SPX below the triangle to new lows? We're looking at a setup that's about as ambiguous as they come. My personal view is sufficiently muddled to motivate me to keep my trading portfolio flat. Under threat of depilation by waxing, I'd admit my bias still leans towards rally, but I simply do not have my mind well enough around the situation to trade it.

Gold took a big step toward convincing me to stop stalking another selling wave. The metal rallied stongly along with the buck today. I'm going to suggest that we gold bugs learn to dissect the behavior of the dollar index from our expectations for gold price movements. Remember that the DX is a trade-weighted index, and our largest trading partner is the European Union. Approximately 40% of the DX is weighted by the euro. Guess what? The euro is trash, too. Perhaps moreso than the buck. Therefore, it is possible for the DX to rise along with gold simply because the euro is falling hard against both.

Despite today's $20 pop, I'm sticking to my guns with regard to the gold play. Until we break above the downtrend line... which may very well happen tomorrow, who knows?... I will not be approaching this market from the bullish standpoint. I believe the gold bull will eventually take the metal to $3,000 or more. There is plenty of upside to catch, and I do not want to risk frittering away tradng power by being caught in false optimism, even if it means sacrificing some upside.

In the course of my daily readings, I came across an article which explains why Obama's stimulus package won't work, and suggests a superb alternative: forego income taxes for 2008. It's a brilliant suggestion because it puts $1.2 trillion back in the hands of the people who can make the best decisions about what to do with it. An income tax refund will also cost no more than the tax-and-spend route after consideration of interest payments the Treasury will have to make to fund it. Unfortunately, there are two insurmountable obstacles to the implementation of the tax break. First, Congress would have to be disciplined enough to cut the Federal budget by several hundred billion dollars per year. Second, putting the money directly into the hands of taxpayers means taking away Obama's power to reward his buddies via spending programs. Nevertheless, the mental exercise helps reveal the inefficiencies of government at "work" since it is patently obvious the tax refund is a superior plan, yet impossible for our government to achieve.


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