Monday, October 13, 2008

Nearly A 1000-Point Rally. Whaddya Know!?

When I wrote in last Friday's post that "Just a decrease in the amount or severity of the bad news (second derivative) could propel a near-term 1000-point Dow rally (not necessarily all in one day)," I have to admit that I wasn't expecting it would all come the very next trading day. Although I like to think that my expertise lies in long-term investing, my shorter-term calls of late haven't been too shabby. Our SSO and QLD positions are up 36% on average after 1 1/2 trading days. Since patting oneself on the back in this business is a sure kiss of death, I'll leave the self-congratulations at that and move on. Luck, intelligence or intelligent luck, we'll take it.

As I also wrote in the Friday post, "If we do get the rally, I won't be shy about closing out these positions as this is not some grand market bottom call. In fact, the more powerful the rally, the more likely I'll be to rebuild the short side of the portfolio." With today's 11.5% rally in the S&P 500, let's just say that I'm now 100 S&P points less bullish than I was just yesterday. The earnings outlook hasn't changed in my view since last night, so valuation, which was finally getting interesting, is now 11.5% less compelling than last night.

With that in mind, I'm certainly impressed that the market rallied strongly into the close and closed right near its high. Inve
stors have regained their confidence (at least for the moment) that the entire global monetary system isn't about to implode. Just as they rushed out of the market in fear as it was collapsing, they are now rushing back in -- this time in fear of missing the rebound.

Whether we've seen the lows of this cycle remains to be seen. Let's not forget that just as bull markets are marked by retrenchments, bear markets are marked by the occasional rally. These rallies are called "sucker rallies" for a reason, and they can be powerful. Following the October crash of 1929, the stock market experienced a nearly 50% rally over a 5 month period before continuing its crushing descent.

Will this rally be short-lived, or will it continue into year-end? There's no way of knowing, but I have no intention of overstaying my welcome. I suspect this move may well have more legs to it, but I also suspect that our recent QQQ and S&P positions will have a fairly short shelf-life in our portfolios. At a minimum, we'll begin scaling out of them very soon should the markets move higher still. Should the rally continue significantly higher, I fully anticipate once again ratcheting up some short positions.

One area that I'm very upbeat on that was left behind by today's rally is gold-related equities. The global flight-out-of-safety that we saw today left gold with a nearly $18 loss on the day. Governments around the globe are publicly announcing that they will print whatever amount of money is necessary to prevent the global financial system from imploding, yet gold is nearly 17% off its high, and gold mining stocks (particularly the junior miners) have been a complete disaster of late.

Events in recent weeks have served to remind the world of gold's value. Mints around the world are unable to keep up with demand for gold coins, and central banks are likely to cherish what gold they have left. On the supply side, exploration is becoming tougher and more expensive, and production is far from robust.

Gold prices and stocks are sure to be volatile, but both look very attractive at the moment, and I'll very likely be putting recent gains and some cash to work in this area imminently. My preference is to have exposure directly to the price of gold as well as to gold mining stocks, but new money will most likely be going into the mining equities given their recent drubbing. I believe that many of these stocks (particularly the juniors) will be triple-digit percentage winners from these levels.

Disclosure: The Rubbernecker is long gift horses and short all of the bottom-calling pundits.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.