The following analysis is based more on trading experience than technical analysis.
The stock market is a business. The Bears, primarily the short funds (who clearly own the market right now), want to make as much money as possible. This is achieved by baiting the greatest number of buyers. I expect a strong stock market rally to kick off the holiday season. Call it Wave 4 of 3 of the Bear Market that began October 2007.
I am not interested in a discussion on the fundamental factors that will drive the rally. Talking heads might attribute it to cheaper oil, improved credit markets, stabilizing housing and employment, Obama, stimulus, better holiday sales than expected, whatever.
The market will rally because the selloff is getting tired. The shorts want to bring some buyers back into this market ~ get the mutual funds ~ and the retail investors excited again. Get the value guys comfortable again. That’s how the short funds will play it.
This selloff has been stronger than anything I’ve ever seen, but it is also long in the tooth. The worst of wave 3 is over and its time to position ourselves for wave 4.
In the short-term, there is room for this market to make new lows, or at least form a double bottom.
I’m expecting the rally to coincide with the peak of the holiday season. I read/watched somewhere that Dec 10th or 13th was an important turn date. Maybe someone has more on this?
Sure, these are unpredicatble times and past history may not be the best guide, but I would not underestimate the business of Wall St. The shorts will let this market drift higher than most anticipate.
Here’s some Elliot Wave analysis to support this view:
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2 more weeks of rally should take up past 9750 to about 10000…
I am not so sure about that. I have been seeing distribution in the tape. The bear funds are not “manipulating” the market the underlying conditions are. Many, including myself are growing worried about the scale and relentlessness of these bailouts. We may rally a bit, but I see the market going dead. Volume and volatility will dry up as we drift flat or lower for at least several months to several years. The damage at this point is too great for a massive rally.
watching the action today makes me very suspicious of much further upside. this market is being held together by whom or what at or around the 840 level. what investor would chase stocks higher in this environment? there is certainly something else at work here and its hard to put your finger on it… but it is creepy and turning my stomach. this action is not healthy in my humble opinion. im short a few stocks but have eliminated my S&P position and OIL position to watch the action one more day. if the action tomorrow is like todays… im going heavily short.
build too many crappy houses. get a bailout
loan deadbeats money for houses, get a bailout
liar loans, another bailout
make inefficient cars, heres to another bailout
crappy investments, dont worry we got your bailout…
It’s interesting that currently majority of “investors” are bottom fishers. I’m waiting when they’ll give up.
I don’t plan to dismiss the ease of major support penetration. Only in imaginary land you can call it a bull trap.
This market maybe tired of selling, but you need lots of willing buyers to push this market up. If you are a long term investor, why buy stocks when many corporate bonds are yielding 20%!!!
Deleveraging is a painful process…just like get caught on a massive shorts squeeze and a margin call, there’s no way out except to take the loss.
Survival of the fittest…traders who can best adapt to this new chaotic market will thrive and possibly be the new George Soros or Buffet.
December 12th is a full moon, but not only a full moon, but a special, so-called, super moon (Closest to the earth then.). Generally more earthquakes and the likes are predicted. For the markets moon phases generally act as turning points. Could that be the start date of the 4th wave up? Or will this 4th wave be steep and fast and the 12th could turn us the other way?
Just another small indicator or perhaps better said, key date.
Book on Moon Phases and Stock Markets
I totally agree with you Craig. I am more or less a permabear. I see the S&P at about half it’s current level within a couple years. But right now, I have been more bullish than I have been in several months. Shorts have gotten too comfortable selling the rallies. The sentiment on these message boards is a good indicator. Everybody seems to have either gotten short or is dying too.
I expect to see another 1000 points at least on the DOW. The Citi bailout was a gov’t put on the mkt. Because of the precipitous fall of the banks, many of them have substantial upside before meaningful resistance. Look for the rally to continue led by the financials.
Expensive put.
Looking at the Treasury market, it seems like there is abject terror out there. Almost any glimmer of hope would be an improvement in senitment. As for me? I’m thinking turkey and dressing and friends and family. Out a here until Monday. Happy Thanksgiving to all.
Welcome back stranger.
Mohan posted a great chart of 30 year T bond yields and its correlation to equity prices. I posted some thoughts there and am reposting a portion here on why the rally seems bullish to me.
I have no idea where the market will be tomorrow or next week or next month. The recent market action seems bullish to me. I am not long or short. I am in cash. I have been intra day trading and going flat at the end of each day. The intra day volatility swings have been enough excitement for me.
But here are some things I think may give this rally legs into the end of the year. Again, this is prefaced with the disclaimer “Of course this is just my opinion, I could be wrong”:
1. Vix is contracting. Almost went under 60 today, and did not break out when the market was down 160. 50dma is around 56, and some are calling a double top on the Vix and a trip back to the 200 ma in the 30’s.
2. During the Oct bottom, new lows were at a historic 3,000 or so. During the latest bottom, new lows were nowhere near that. A positive divergence.
3. 2002 lows held thus far on the weekly and likely monthly charts. I think that is more important than the daily breach from Thurs.
4. We still remain very oversold on a weekly and monthly basis. I think that needs to be worked off before we head lower. Need to trap more bulls.
5. Seasonality is coming into play and institutions that are long only, and comprise a majority of the money in the market may want to put money to work.
6. Optimism about the new administration and potential stimulus programs, and bailout of GM.
7. Armageddon trade appears to be off from last Thurs. With the latest Fed programs and actions (injection into Citi, backstopping their toxic assets, buying consumer and MBS, leveraging the Tarp funds, etc) Washington has done an about face from the inaction of last week, and are taking all the steps that were not taken during the depression. Sure this will lead to problems down the road, but there is no reason we can’t rally now.
8. Financials have been beaten with an ugly stick and have a lot of room to get back to their 50dma. News flow is beginning to be a little more positive for the group. — Carlos Slim took equity in Citi during the slide last week.
9. Sentiment is so negative that any somewhat positive news can spark a large rally. Geithner nomination is a case in point.
10. Technician John Bollinger is short term bullish. And he has 3 charts. J http://www.cnbc.com/id/27911135
11. What could rally the market further? Obama announcing he will not raise any taxes for 2 years. Modification of FAS 157 (mark to market rule). Further refinement to short rules. Waiving capital gains tax for 2 years on investments made in equities. Tax credits to private equity funds, pension funds, and other private pools of capital to invest in certain equities.
Lets be clear, this is a rally within a bear market. I am not a Pollyana. Even EWT recognizes “corrective” moves from the primary trend. This could be one of them. Good entries, stop losses, and money management are critical. My opinion on the rally could change in 12 hours. I reserve the right to be flexible. But the very short term trend at the moment appears to be higher, and if that is the direction the market wants to head, who am I to argue? Buying out of the money puts when the VIX hits 40 making them reasonably priced, isn’t arguing. It is remaining cautious for the drop that could happen any given Monday.
Good trading to all.
As always, high quality post. Thanks Brian!
As a permabear, it is the possibility of Modification of FAS 157 that I fear the most. I even fear the rumor. If that happens, I hope it is during the trading day.
Some great analysis here, guys.
But when I step back and just LOOK at the charts I see downtrends.
I don’t see tested bottoms.
As has been pointed out, we don’t have nice charts right out of Edwards & McGee, but hold the two year chart out at arm’s length, and tell me why today’s prices are a bottom? A test of these that holds… then we can talk.
To me, till then, it is all counter-trend rally.
Craig
You nailed it based on todays action.
Hats off to you.
Well, my thoughts here are longer-term and are not confirmed by a day’s action. I am actually looking for another push lower before the rally begins around Dec. 10 or so.
Craig:
What is the target range for the downward move preceeding December 10th ?