Monday, October 6, 2008

Markets Devastated

Today was another historic day on Wall Street. Markets plunged again, as the "sell the news" reaction to the Wall Street bailout package passed by Congress on Friday continued in the markets today. At one point the Dow was down over 700 points (after being down 777 points last Monday). A late day rally, due to rumors of a coordinated global central bank rate cut, provided a significant rebound, even though most major indices ended down about 4%.

Apparently, Jim Cramer was on the Today Show this morning telling people to sell. Unfortunately, this is not very good advice, at least not right now. I am not a perma-bull. In fact, even though my blog was shut down for some time, as those of you who speak to me on a regular basis know, I actually have been quite bearish for the past several weeks.

The market will still have more downside to come, and the Dow will probably hit around 8,500, however, this price retracement will likely occur after we experience a short-term rally. Why am I suddenly bullish? First, again, it is only on a short-term basis (on the order of 4-12 weeks). Second, we have hit extremes on mutiple technical and sentiment indicators which are all indicating that we are about to bounce. For example, the VIX (volatility index) hit an all-time high today (56), new 52-week lows his an all-time high, and the % of stocks above their respective 40-day moving averages is only 4%. Stochastics are showing over-sold conditions, and the markets printed a "hammer" candlestick today, which is often a good indicator of a reversal in trend.

We may still go down tomorrow, and may even retest the lows that were experienced intra-day today, but things cannot get much more oversold than they are right now, and the "rubber band" that defines the price action of the markets will undergo a snap-back rally. We don't know how far the rally will go, as there are multiple levels of price resistance overhead in the forms of horizontal and moving average resistance, however, selling what you own today, or even tomorrow, would be at a time when a short to intermediate bottom might be emerging on the charts. The time to sell will be when the next rally loses steam. Why then?
Because the stock market is undergoing a major correction, and rightfully so, as this is one of the worst financial crises in the history of the U.S. Joblessness claims are only going to start ramping up signficantly after the new year. Yes, the market "looks ahead" by about 6 months, but folks, sad to say, this economy is not going to get better in the next 6 months. We will be looking at 1-3 years of economic slowdown/recession. The charts look horrific, and it will take a significant amount of time to correct the extensive technical damage on all of the charts. Bear market rallies are expected, and they can be vigorous, but don't lose sight of the long-term trend (down, down, down).

Hang in there.


Will said...

I feel like the dog in the Far Side cartoon who's got the leash on listening to his master who's going on about something but all he hears is "blah blah blah WALK blah blah blah blah WALKING." (But that's not your fault Steve)

So Steve, does 'hang in there' apply to those of us mutual-funders who were told that peaks and valleys will always happen but over 15-20 (we used to say 10) years, close to 10% average per annum return can be expected? has enough happened to say those days are over? too soon to tell?

Cocameister said...

Sorry to babble, but these are historic times for the markets.

Yes, 'hang in there' applies for the mutual fund holders who have years to wait for their returns to accumulate.

But, as I said, this bear market is NOT over. It may not completely bottom and recover until 2010-12. That's how much damage has been done on the long-term charts. If you look at a long-term chart (back to 1980s) of the S&P, you will see that we formed a HUGE double top. It is rare for markets to abruptly turn course and head back up. There will be a long basing process, a flattening out of the 200 day and week moving averages, and then, and only then, we will be able to resume a steady uptrend again. That's from a technical perspective. From a fundamental perspective, the huge economic bubble that was created in our financial and housing markets and in the economies of the emerging market countries (India, China, Brazil, Russia), has completely burst. Again, the fed can pump in all the money it wants, but things will take some time to heal. We can expect to see many more banks fail here and abroad.

OK, so bottom line, continue to dollar cost average into the funds here. For those nearing retirement, it is another story. May be best to sell most positions after the next rally and park cash in a CD or money market.

If things were to "magically" turn will know about it, and you can get back into the market quite rapidly and easily.

Jeanette said...

I was watching the news yesterday while I was working out. I felt like the walls were closing in around me...between the stock market crash, the failed reaction to the bailout, Bush saying that all we need to do is wait and have faith, and the need to drop the number sign from the national debt calculator to accomodate our 10 trillion dollar debt...are we heading for mass casualty? I really felt like I was in some kind of movie... Something like 'I am Legend.' Is anyone else scared? As Donald said this morning--we should probably be prepared for a revolution if we continue to separate the classes.
See the following:
--I want to punch him too! He keeps $480 billion while we all suffer?

Jeanette said...

This has nothing to do with anything but I love it!