Monday, October 13, 2008

3 Steps to a Market Bottom

There is a reason why Market Bottoms are known only after it has occurred.

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Step 1:
Not only does the $BPSPX need to stay above the 10d EMA, but the BPSPX 10d EMA also has to at least stop trending down:

Also, the $BPCOMPQ needs to stay above 20 .

Step 2:
VIX 10d EMA has to stop pointing UP.

A decline in the VIX would mean a return of investor confidence.

Step 3:
SPY 84-88 needs to hold.

SPY (AMEX:SPY) also gapped up today, so the gap fill would be around 88-ish.

So while today's market action looks encouraging, we really won't know whether Oct 10/08 was the bottom until at least a week later.

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Saturday, October 11, 2008

Some Scary Times Indeed


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The BPSPX is a measure of only 500 stocks, but the BPCOMPQ is a measure of the Nasdaq composite index, which is over 2000 stocks. Never have I ever seen the BPCOMPQ this low. Obviously I was wrong in my call in the previous post. I think it would have been the right call in more normal markets.
In more normal markets, VIX would never close up for 5 consecutive session after it broke above the 45-ish level
Since we are no longer in normal markets, I do have some fears about where this market is going, and where it can go. I've started reading about the causes for the Great Depression. There is no one single cause for the Great Depression, but there were quite a few contributing factors:

1. Significant number of banks failed due to excessive loan defaults.
2. Panic run on the banks.
3. Inability for businesses to obtain loans due to increasingly conservative lending practices at banks.
4. Lack of credit, which led to progressive slowdown in capital investment, factory orders, and consumer spending
5. Decline in global trade
6. Sustained decrease in business profits, which led to increased unemployment.

I do wonder what would have happened if Lehman Brothers was either bailed out, or forced into a shotgun wedding with one of the other bigger banks. I am starting to believe that if Lehman Brothers were not allowed to fail, then we would not see the magnitude of the current crisis.
I do believe that Bernanke and Paulson both see the current parallels with the conditions in 1929 that led to the Great Depression. Consequently, the Federal Reserve is doing all that it can to make sure there is credit available for businesses to do what they do to keep the economy going, and to recapitalize the banks via the $700B bailout and plan to partially nationalize the banks. So all is not lost.
But, I do wonder why Paulson & Bernanke allowed Lehman's to fail, but not AIG, WaMu, or Wachovia.

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Thursday, October 02, 2008

Market Assessment, Oct 1/08


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Although short term technicals might not work very well in current market conditions, the above resistance level @mid-116's jumped out at me right away. Breaking above it for any sustained length of time may give the bulls some "bullets" to attack at the daunting number of resistance levels above that......!

BPSPX is now at around 25, which is the same level that was reached in the mid July short-term bottom. So, crazy as this may sound, I think we are close to another short-term bottom. By no means am I making any calls of the market bottom. That said however, I see some signs that the pieces are in place from which a short-term, dead cat relief rally can occur. Bearish pessimism is at a 52-week high (if you can measure such a thing), and the number of stocks making new All-time highs is at an all time low. VIX is also at levels not seen since 9/11/2001.

But really, the defeat by the House of the Bailout Plan was certainly a black swan event that no one even remotely fathomed could occur, and I think it may have caused a few of the bigger market participants to liquidate. A clearing of the slate, or flushing of the toilet, if you will.

However, caution is of utmost importance here. I would liken the Houses's second crack at the Bailout Plan to an FOMC interest rate type of market moving event. I think the House is scheduled to vote for it in the afternoon. If the House defeats the Bailout Plan again on Friday, then sell everything you have, pack your bags and hide in your bunker for the next few years. If the House passes the bill, it's still not clear how the markets will react - just like the reaction to an FOMC interest rate event.
There might be a trading opportunity, but it might be just as well to watch from the sidelines for now.

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