Your question about FAZ is what most traders ask.

The idea that there will be no correction in the market at it proceeds up to 1600 and beyond, would make me somewhat skeptical. A 50% retracement of the gains of the past two months is most reasonable.

As to whether you should continue to hold FAZ, why did you enter the trade to begin with? Has that reason changed? If the reason you entered the trade has not changed, then why do you have doubts about the trade? When you buy a position, it is like a farmer planting his field in the spring. He is at the mercy of the weather because he cannot go out and unplant the field. Either he will get a crop or he won’t.

Looking at a two year chart of the S&P500 there have been at least 7 distinct rallys to lower highs followed by 7 distinct declines to lower lows. This is the 8th such rally. The moving averages, 100 day, 200 day, 12 month, 24 month, and 36 month have been turned down for over year now. This is an entrenched down trend. The previous low of 2003 has been significantly broke with months of closes below that level. There is a giant double top between 1998 and 2009. The fact that some of the financial stocks have gone up hundreds of per cents in two months is not an indication of a bull market, but a bear market rally. Bull markets go up at a slow, steady pace, and have sharp corrections, 15% or 20% along the way, back to whatever the trend line might be, but higher highs and higher lows. Bear market rallies have sharp rises followed by slow grinding declines, lower highs and lower lows.

Looking at a two year chart of SKF, as a proxy for FAZ (since it does not have a very long track record, it becomes apparent that the staggering profit potential appears for very brief windows. To make money with FAZ, you have to be in it and sell when it spikes. A 50% retracement of the previous high of $115, would be $50 to $60, making your risk of $1,600 worth $10,000 to $12,000. That would be a good reason to get into FAZ.

Now I don’t know what the market will do, even at the open. I don’t know what it will do in a month or two, and I certainly don’t know what it will be like several years from now. And neither do any of the reporters, bloggers, or talking heads on CNBC. The S&P500 could go to 1600 by the end of the year, just as Abby Cohen has predicted every year for twenty years. If you don’t change your prediction, someday you may be correct.

Let’s examine some fundamentals. The market and bulls are giddy with excitement right now. That isn’t typical of the bottom of a bear market. I bought gold and silver from 1998 to 2003. My fellow traders felt that I had lost my mind and that they should no longer associate with me. My 1998 investment lost 33% of its value in less than a year and it was a third of a years gross income! It was very painful emotionally to be called a fool and feel like one. But I still have that gold and silver today, and I don’t feel foolish or stupid. I wasn’t scared out of my position. My point is this: just about everyone is saying the shorts will be eaten alive as the market rallies to new record highs. That is an extremely bold view for a market bottom.

The housing market continues to have record foreclosures, and housing values have continued to fall for nearly two years. Unemployment is at record levels and the monthly declines are in excess of 500,000 a month. Even the bank stress tests are for a time when unemployment will be 10%! Rather than the dubious honor of passing the test or having to raise $75 billion, what about that unemployment of 10% that they are testing for?! And that’s probably conservative! Auto sales of all brands are posting year over year declines of 30% or more! People are only buying necessities: food, clothes, paying utilities, and IPods, of course. People aren’t buying houses and cars. People aren’t refinancing there houses (if their FICOs are 750+ and there house is worth the mortgage amount) to pay off credit cards and buy new things, but simply to get a lower rate. These fundamentals are not “stable”, they are still getting worse. Getting worse at a slower rate is not STABLE!

Two more issues that are creating fundamental deterioration are credit card defaults at record levels, and pending commercial real estate defaults. I can go on, but I am too much of an optimist.

All of these fundamentals directly affect financials. People cannot borrow money at low rates. Lines of credit are being cut for the credit worthy. People aren’t seriously pouring money into 401k equity mutual funds, the money is leaving these funds. No savvy investor is going to margin up on the long side of the S&P500, so there is not going to be leveraged buying of stocks to drive the market.

Savings rates are increasing for the first time in nearly 30 years.

There was a very unsettling increase in the interest rates of yesterdays 30 Year Treasury Bond auction. A one time event? Maybe.

I’m not a bull or a bear. I’m trying to make money. The press, owned by public corporations is under pressure by the owners of the companies they work for, to put a happy spin on current events. It’s only human nature. The CEOs of the public owned companies are under pressure from the government to put a happy spin of current events. The politicians who have sold our great, great grandchildren’s futures out, have got to put a positive spin on what is going on, or they won’t get elected. Who has an incentive to tell you the truth?

If I tell you things are bad, and no matter what I do, with your money, things are getting worse, are you going to vote for me, buy the stock in my company, read my news paper, or watch my 24 hour a day business TV show? Won’t you listen to me if I show and tell you what you want to hear?

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