Wednesday, January 23, 2008

Capitulation





Well, folks, I don't know if you were paying attention today, but it was a WILD ride on Wall Street. Yesterday, we were down to 1270 on the S&P. We closed down a little more than 100 points after the fed rate cut, but it was still a bad day. Apple got hammered after hours, and the futures were very negative again this morning. We opened down 250 points, rallied a bit, then were down by 350 points on the Dow in the early afternoon. It could've been disaster. The guys on CNBC this morning were saying that we need to hit yesterday's lows to make a double bottom and head upward (experts feel that there is no such thing as a "V" bottom, only a "W" or double bottom). At 12:50 EST, we did it. We hit 1270 again. The volatility index was spiking through the roof again. People were panicking. Oh, the drama! Do we go through and head down in free fall? Or, do we bounce on yesterday's low and rally upward?!?!

Well, rally we did! From those lows, the market (DOW) went up 650 points!! Unbelievable. The rally was led by the financials. The XLF (the financial ETF) was up 7%. Even beleaguered Citigroup, was up 10%.

On Mad Money tonight, Cramer said that this was a real bottom. The financials are down about 50% since their highs last summer. It looks like this is the turn.

Should we listen to Crazy Cramer?
Well, I have found other data to support that we have reached a bottom.

Consider these facts:

-For two weeks straight, 0 out of 42 Fidelity Select mutual funds had out-performed the return on cash (90-day T-Bills) over the prior quarter. This has happened 10 other times since 1986, with the S&P 500 showing a positive 3-month forward return all 10 times by an average of +7.8%.

-The smallest of options traders, buying 10 options contracts or less at a time, have finally turned excessively bearish. Last week they spent 24% of their volume buying put options, the most since mid-August (this is what is referred to as "dumb money").

-Other options gauges are showing similar levels of heightened uncertainty, with the 10-day average of the equity put/call ratio (via the CBOE) showing its 2nd-highest reading in history, behind only immediately after 9/11 (more "dumb money").

-Short sales by the public eclipsed short sales by specialists by nearly a 20-to-1 ratio as of earlier this month, a new all-time record (more "dumb money").

-Open interest in "smart money" OEX options has tilted heavily toward the call side. This has been a consistent predictor of future market strength.

-Corporate insiders continue to buy heavily.



Remember this day. Look at the chart of the S&P above. You see the turn that has occurred. This is a tremendous buying opportunity.

1 comment:

Fat Bottom Boy said...

How often is a double bottom turn around formed in 2 consecutive trading days? Not so sure.