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.

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A Decent Relief Rally, but It May Fail

Posted by Ray on October 9, 2008 under Main | Be the First to Comment

Yesterday we saw 4 reversals in trading on somewhat decent volume, but the market still closed down after being up nearly 200 points. This is an indication that there is more selling pressure to come, especially since the Fed has made such strong moves to quell market concerns.

Even good news, such as unemployment and the fact that the government may buy into banks have not lifted the markets in a noticeable fashion. We hate to be the doom and gloom people and do like to see the market go up, but we feel a sense of duty to tell you what we see happening. The data still says the markets go lower.

We like 40% + cash positions still and would be selling into strength. Friday and next week will prove interesting and we believe you can buy into the markets at a much lower level. We did get some of our day-to-day predictions wrong, but cumulatively we were correct in what we predicted.

We are not rooting for a crash, but it needs to happen. We need the markets to have a swing down and close on its lows with heavy volume. That will represent a bottom and then begin to dollar cost average in as volatility will remain high for sometime to come. This, of course, is barring unforeseen problems such as further bank failures or worse.

I cannot believe we are going to even say this, because he is oh so wrong so often, but Cramer is correct on his predictions of the market. Where we do not think he is correct is in his long-term money. We think you should move some of this to cash as well, the 40% mark is a good place to start. It makes no sense to say that short-term money needs to be moved, which it does, but long-term money should suffer.

At 40% cash you have enough in equities to catch the recovery, whenever that occurs, and enough to dollar cost average back into the market to mitigate potential losses. Right now, it just make sense…unless you think that the Fed typically puts in money to bailout banks, money market funds, bonds, commercial paper and arbitrarily cuts rates overnight.

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