Tuesday, November 25, 2008

Mother of all Bear Market Rallies?

Has a massive rally started? For someone who put on some short exposure right at the close yesterday, it was a frustrating day. First three day rally in the Dow since August. I looked like a genius until about 7 a.m. when the Fed announced their new TALF program. (This one also may actually have some teeth) The futures were down over 100 points and it looked like a quick flip for a profit when the FED announced a huge new program on Tuesday. On Tuesday?? When has that happened? Just when you think things are becoming to easy the market will always throw a curveball. So you spend a day watching the tape trying to decide what to do. From a short exposure trading perspective, we held the resistance which is around the 865 to 872 level but the market looked like it wanted to go up all day. It felt like it wanted to go up. In fact if oil hadn't just crumbled the market would have been up alot. So for this trade the probabilities came down but I still felt they were in my favor to keep it another day. If we break that area, watch out, the market will be moving much higher. I would not be surprised if we move lower before making another run at them.

The Elliot Wave guys are not clamoring for a massive rally at least back to 1080. This is based on wave patterns. It is very complicated if you have never have heard of it so google it if you want to learn more. It is something that I don't really follow but am aware of and think has legitimacy, just not sure it is applicable enough to actually make money on. Alot of it is after the fact.

Another guy who is talking of a massive rally is Barton Biggs of Traxis Partners. He wrote a piece in the financial times. Alot of his basic points I agree with. I thought this rally was coming off the Oct 10th lows. It may be coming of the latest lows. Article is below.

It continues to be the bifurcated nature of the problem that makes fundamentals exceedingly difficult. I would much rather be reading a 10-k than reading what Barton Biggs has to say about a massive rally but never in my life has investing been more of an art than a science than it is currently. The next big fundamental play will be buying companies selling for less than net working capital. I have come to the conclusion though that you do not want to buy companies who meet this criteria at the beginning of the downturn but those at the end. Those at the beginning probably have a reason to be there. Those at the end set up for good risk reward scenarios. So until then, it seems best to nickle and dime with a small portion of the portfolio. Remember doing nothing is a completely viable option as well.


First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator...... Furthermore there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash.


Second, valuations are cheap.......stocks around the world are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom.


Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200 day moving average at 34 per cent is the greatest since July 19, 1932.


At the bottom of a panic, the news doesn’t have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news. The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.

I have been thinking that for about a month though I also firmly think the ultimate low is not in.

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