Big Gains Following Through to Asia

Posted by Ray on October 28, 2008 under Main | Be the First to Comment

Today Wall Street saw its second best point gain in history. The positive news carried over into Asia with their markets up pretty substantially for the second day in a row. Is this the end of the bear market? Not by a long shot.

While we were happy to see the almost an 11% gain in equities we were not pleased with how it happened. Just like on 10/13/08 we saw significant gains in equities, but the volume was so weak. The market rallied for a few specific reasons.

1. Mutual funds making year end trades, a very big deal.
2. Traders foresee an interest rate cut, which they will get, but they are expecting a .75 – 1% cut, some see a 1.25% cut. That speculation is being priced into equities today, it is clearly buy on the rumor sell on the news. We will see a .50 to maybe a .75% rate cut with the former more likely.
3. Short covering. When the market was up 600+ points with 15 minutes left to go the shorts started covering their positions. This creates liquidity and up tick volume – shorts don’t destroy markets crappy management does.
4. A typical bear market rally. During periods excessive downturns in the market we not only see wild volatility, but also dramatic rallies and selloffs. This was one of those rallies.

However, we did cross a couple of important bench marks today. The market crashed through the 8,500 and 9,000 mark. These levels are technically important, but they are also physiologically important as well. The important day will be tomorrow and whether the markets can hold these levels.

We expect to see some profit taking in the morning and wild swings throughout the day, yeah, we know really going out on a limb there. We fully expect to see a selloff tomorrow afternoon, but with the Fed meeting it could be another very good day. If they deliver a .50% cut then the market will selloff. If it is a .75% the market will probably stay flat to up.

There will not be any cut greater than .75% and it is entirely likely that we will only see a .25% cut at the end of the day which will send the markets into a free fall. This is all speculation at this point as futures are thinly traded at night and there are so many variables in the overnight markets.

We may have indeed hit the bottom, but the next couple of days will confirm that.