A strong close on Tuesday gave the bulls a sense of relief and optimism for Wednesday. Then more negative Euro news ensured the bulls could not continue the run as we gapped-down to start Wednesday.

The bulls made an attempt during Wednesday, but the final hour saw the markets fall and gold running up. The volatility in this downtrend is incredible and making for some tough swings if you are not quick. If you miss a step, you will certainly be caught out of position, so it is best to keep positions smaller during such an environment.

Doug Kass believes we are seeing signs of stability and I agree, we are seeing “some” signs, but don’t get yourself too excited and rushing to buy. The market is not seeing enough signs that we can say a bottom is at hand. I’d much rather see a sustained rally and buy when it is less risky than to call a bottom and be wrong. Seemingly every headline is negative and the market is pricing us in as if we are already in a recession. This, to me, is definitely oversold territory, especially as the bond market continues to draw good action. Arguing with the market is futile though. The market plays by it’s own rules and does not care what you or I believe.

This means we are still not a stock pickers market, so I’m sticking to my only two long-term positions (highly speculative though) in Gastar Exploration (GST) and Dejour Energy (DEJ). I finally added some GST on Tuesday and will look to buy another increment if it falls below $3.50 else I’ll start trimming on a rally. DEJ announces premarket earnings on Friday, so I’m going to hold off until then before considering adding more. I’m still maintaining very high levels of cash.

When we lose the stock pickers market, I tend to move towards index trades. Seeing as I already have some small-cap longs in GST and DEJ, I initiated a position that I’ve been actively trading in ProShares UltraShort Russell2000 (TWM). This automatically shorts the Russell (200%), but ensure you understand how leveraged inverse ETF’s work before jumping in one of these. It is better to be more experienced before playing one. Gold has been spiking up, but showing random signs of weakness that it may be topping. We have had rumors for a few days now that margin rates for gold would be increased which would theoretically push gold down. I initiated a small short position when gold started to fall on the market rally into Tuesday’s close. I bought PowerShares DB Gold Short ETN (DGZ), which automatically shorts gold for me. Gold resumed rallying today, but tonight we finally received that margin rate hike. Gold does not seem too razzled in after-hours trading, but tomorrow will be the real test as margin calls are established. If we fall, I’ll look to aggressively add to my gold short while possibly trimming my TWM position.

The reason for trimming my TWM position is because my working thesis is that gold will fall and the markets will rally (the inverse of what we’ve seen lately). This will relieve some pressure for the bulls as they can now sell at higher prices to recoup some losses. This resistance from the bulls selling into the rally could then push us to another new low in the markets. That is when I’d start aggressively adding back to TWM.

Keep in mind, this is just a working thesis. Any big headline the market is not expecting could quickly change that thesis. I do not make predictions, I trade what is in front of me as it happens. However, I try to get an idea of what may happen. This assists in knowing what to look for so I can quickly make a trade if the signs I’m looking for do pan out. I still think the best trade is to be high levels of cash and that is my main goal at the moment.

We’ve seen a lot of damage. I don’t expect us to just turn into a bull market overnight. Stay patient and don’t rush to be invested until we see better reason to be. As always, do your own homework to see if you agree. Good luck out there.


At the time of publication, Kudrna was long GST, DEJ, TWM, and DGZ, but positions may change at any time.