Trade Ideas for 11/24/08

The market rallied Friday afternoon after all, much to everyone's relief. It certainly took its time, though, and several sectors, such as the financials, even put in fresh lows before turning around. In my opinion, this doesn't bode well for the recovery. If, as many believe, there's a lot of pent-up demand for stocks, why didn't this demand manifest itself sooner?

One sector that bucked the trend was gold, which soared from the get-go. The biggest winners in the sector were the gold majors, i.e., the largest gold mining companies in the world, such as Gold Fields (GFI, +36%), Goldcorp (GG, +27%), and Barrick (ABX, +31%). In the hottest phase of a gold bull, the gold juniors lead the way, followed by the mid-tiers and majors, then silver and finally gold itself. Right now the order is almost in reverse, and gold has been in a near-term downtrend since the spring. There's no evidence that gold is not going to hit a lower low before it rises to a new all-time high. But rise it will—and sooner than later—for any of a number of reasons, the most important technical one being that gold is in a long-term structural bull market (along with the rest of the commodities), and this in contrast to all other sectors of the market that come to mind. Therefore, while gold may be held for the long term, sectors such as technology and retail must only be played for short-term bounces.

The question facing us now is, did we just begin one of these short-term bounces? The short answer is that we wait for the market to show us. The long answer is that one could argue for and against the likelihood that a bounce will come. On the con side, the market just hit a lower low, and the downtrend thus far has been textbook: lower highs and lower lows. Therefore, to think this time will be different is to be delusional. Furthermore, every rally attempt thus far has been short-lived despite promising initial momentum. On the pro-bounce side, we hit a lower low, and in a way, that means the other shoe has dropped. It can be interpreted as an all-clear signal. Shorts will be booking their profits as many were targeting the October 10th lows, taking away one source of supply. Psychologically, a double bottom flummoxes enough people that one could say the market has done its job of maximizing the pain. If a meaningful rally materializes, we could see gains of 30+% in the major averages.

Gold soared above the re-up price, so we stick with the original lot. This burst of momentum will surely dissipate soon, and gold did hit its 50-day moving average at Friday's close. Ideally gold does a shallow pullback for a couple days and then shoots up again. The near-term target is the 200-day moving average of ~$900/oz. Alternatively, gold could be rebuffed sharply by its 50. To hedge your bets, consider booking some profit.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
GLD	74.27	78.85	+6.2%	75.44	Consider booking some profit now that gold has attained its 50dma.	Chart

Cheniere still looking good, and a couple others that are nicely positioned to take advantage in the event of a sustained market rally. No gold-related recommendations since we already have one in our current holdings, but if you're looking to add, I'd look at mid-tiers such as El Dorado Gold (EGO) or SLV, the silver ETF.

Trade Ideas for 11/24/08

Ticker	Entry	Exit A	Exit C	Chart
LNG (Cheniere Energy)	2.94	2.49	N/A	Chart
ACM (Aecom)	21.84	19.75	18.95	Chart
AN (AutoNation)	7.01	5.99	5.36	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.