The DOW closed up over 200 points today with the S&P 500 gaining back over 2% overall.  The day started off with merger news of Google paying $12.5 Billion to acquire Motorola Mobility.  This made the markets happy which translated into a steady stream of buying from the minute the European markets closed until 4pm.  The volatility index closed down 12% today which signaled that comfort was starting to sit back into the market.  Tomorrow my VIX August calls will expire (pretty confident they will be well into the money) and I do not plan on rolling them over for more downside protection. 

Now there have been people saying this is just the eye of the storm.   I have heard we have another big leg down to under 9,000 on the DOW.  I personally hypothesize (and hope) they are wrong.   The markets have told us stocks are oversold because corporate insiders have been buying more than they have since March 2009, companies have been issuing stock buybacks, and M&A activity has immensely picked up.  On top of the Google/Motorola deal, Transocean announced it was paying double the market price for Norwegian driller Aker Drilling.  I even wrote about how Donald Trump, who rarely invests in stocks, start purchasing equities because he thought they were incredibly cheap.

Sure there are a bunch of unknowns out there which means the market most likely will still be choppy; however, from a valuation standpoint, many companies were trading at ridiculously cheap levels.  Now there are some arguments for the bears.  Europe banks still could devalue based on any more debt scares out of the region.  We still have a US governement money burning problem which is going to be magnified being 15 months out from an presidential election. 

Even with these unknowns, companies are overall reporting solid earnings, the US dollar still is relatively cheap, China and emerging markets are a much bigger percentage of overall global demand, and oil is still trading in the high 80′s.  These are a couple reasons that I recommended buying stocks after their huge selloffs in the last week or so.  Some names traded close to their March 2009 lows and the doomsday fears seemed much more intense than the fears we felt even last week.

If you had cash on the side and bought some of these names that just got hammered after earnings, then you are sitting pretty well this last week.  Bank of America traded down to $6.50 and sits 30% above that price today.  Walter Energy went to $85 today after being at $70 a week ago.  SodaStream has bounced back from $41 to $50 today.  All of these names that I said buy at the time of the most gloom have made out on a lovely 20% or more gain in a couple trading days.  That makes Monday Night Football that much more fun to watch!  Dividend names have been incredible sitting within basis points of their 52 week highs.  And I wrote over the weekend about how the biotechs have been hammered in this decline.  Human Genome, Vertex, Celgene, and Pharmasset were all up 3-5% with Celldex up double digits and Dendreon up a whopping 22% today.   All of these names are very typical examples of overreactions by investors.  These are usually the times that you can make a bunch of money quickly without nearly as much risk; you just have to be confident enough to buy when their is blood in the water.  This sometimes can be hard to do.

Remember you can never call the bottom or top of a market, this is why we never buy or sell all in one fell swoop.  I did not say last week that we had bottomed, I said “I am confident that we are much closer to the bottom than the top.”  Because of this it was much easier to buy stocks that I felt were undervalued.  If I was wrong and the markets sold off further, I could buy more.  But in the meantime, I made some very healthy profits. 

Cheers,

Vinny

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