Friday confirmed my prediction, bear market ahead

As we have predicted, the DJIA faced resistance at 10400 level. On Friday it went down more than 260 points out of bad economic data and poor cooperation reports. We said before that if the Dow fails to achieve 10400, there will be a big bear market waiting ahead. With the confirmation on Friday, this is very likely to be true, unfortunately. My personal guess is that the market is going to decline to about 8000 and then come back again at the end of the year.

I have already reduced my long exposure and begin to bet against the market. This is going to be a tough summer for investors. Be patient and I am sure the market avalanche will turn out to be a good buying opportunity by the end of the year when the bulls coming back.

What are we expecting in July?

The Dow Jones Industry Average rallied on Wednesday after two consecutive months of decline. The Dow surged 274.66 points and ended above 10,000 out of the optimism of the US economy. so, is this optimism justified? Is today's trading a bullish sign? My opinion is not just a 'NO', but not yet.

If we take a look at the historic data, we will find that there has never been a bearish market that lasted more than three years, not even the 1929 market catastrophe. The longest market contraction happened during the 2000 technology stock bubble, which lasted about three years and followed by a big bull market (Shown in the graph below). If this is true, then we can expect to see a bull market soon because it is almost been three year since the market started to tumble during the end of 2007. Therefore, for the worst,we have yet 4 or 5 months left to see the bull coming back. However, we do not need to be that pessimistic. The martket is very likely to rally before the end of this year, if certain conditions can be met.


As for now, I am sticking with my bearish view about the market. I have always held the view that the market will have another big tumble in 2010 after a bullish year in 2009. I was proven to be right as the market went down in May and June. Despite today's big surge, I am still very bearish. Today's big increase is very likely to be a retaliatory surge after the market touched resistance at about 9700. However, it is going to face another price celling at about 10,450. If the market fails to achieve this level in the next couple of days, I will say there will be a big market decline. The Dow could be as low as somewhere around 8500 before the expected bullish market coming in the end of the year. However, if the Dow rises above the celling price in the coming weeks, it is very likely for us to jump right into the bull market I just talked about.


Until then, my suggestion is to be consevative and be prepared for another market dip.

Hedge Fund Analysis on John Paulson's Paulson & Co (2010 Q1)

I have posted John Paulson's Q1 performance before (click here to see), however, this analysis is dedicated to give a more detailed analysis of the performance of this New York based hedge fund. Please note that most of the Data comes from Alphaclone, unless otherwise indicated.

Total Market Value (as of the end of March): $21.16 Billion

Top Sectors: 59% Financials

13% Basic Materials

11% Services

6% Energy

5% Healthcare

Top 10 Holdings

1. SPDR Gold Trust (GLD): 16.2%

2. Bank of America (BAC): 14.2%

3. Citigroup (C): 9.7%

4. Anglogold Ashanti (AU): 7.8%

5. Comcast (CMCSA) 3.9%

6. Suntrust Banks (STI): 3.8%

7. Boston Scientific (BSX): 3.4%

8. Capital One (COF): 3.3%

9. XTO Energy (XTO): 2.9%

10. Kinross Gold (KGC): 2.7%

Recent Trades

5/21/10
buy
XTO Energy Inc [XTO]
$42.95
2/19/10
buy
Capital One Financial [COF]
$37.75
2/19/10
buy
Comcast Corp Class A [CMCSA]
$15.92
2/19/10
buy
Suntrust Bank Inc [STI]
$23.01
2/19/10
sell
Liberty Med A [LSTZA]
$46.98
2/19/10
sell
Sun Microsystems [JAVA]
$ 9.49

We can see from Paulson's portfolio that he held a large position in Gold in the first quarter, which indicates he was still very bearish about the market. As seen from the performance of the DJIA in May, Paulson was absolutely right. Paulson also showed interest in financial groups such as Citi Group, Bank of America, and JP Morgan chase. Unfortunately, these stocks weren't performing very well in May. My guess is that Paulson still holds them in the second quarter and therefore suffered some loss in May.

Paulson is famous for his bet against the CDO market in 2007, to read more about his story, you can refer to The Greatest Trade Ever, written by Wall Street Journal columnist Greg Zuckerman.

Taken from the Alphaclone
"Paulson & Co. (PCI) is an employee owned hedge fund sponsor. Founded by John Alfred Paulson, the firm primarily provides its services to pooled investment vehicles. The firm invests in the public equity markets across the globe and employs strategies such as merger arbitrage, long/short, and event-driven strategy to make its investments. It employs fundamental analysis to make its investments. Paulson & Co. was founded in July 1994 and is based in New York, New York."

May turned out to be a tough month for hedge funds

The US stock market tumbled in May as a result of the Greek problem and uncertainty around the financial reform. Many traders predict that the golbal economy will get into another recession.
As the DJIA dropped about 1000 points in May, investors suffered serious losses and poured money into bond market seeking for protection. The 10 year government bond raises in value in May and yielding as low as 3.28 on June 1, 2010 .
The individuals were not the only losers in the previous month, so did the hedge funds.
Here is a glimps of thier performance through May 20, which is rather disappointing .

Paulson & Co
Advantage fund -6.9%

Viking Global fund - 3.4%

Citadel Investment -2.0%

Moore Global fund -7.7%

SAC Capital Advisors -2.9%

Och-Ziff Capital Management Group
OZ Master Fund -1.69%


Hedge funds lost an average of 2.7 percent last month according to Bloomberg News.