Monday, October 27, 2008

Waiting Again

Top Line: The stock market took another late day dive on Monday similar to what it did on Friday. With the Dow just under 8200 there shouldn't be much downside left. The rate cut expected on Wednesday may be an inflection point for a major turn.

A check on the general stock market analysis shows that the world expects the market to go down hard and fast so be prepared to buy then. We here at the Update actually said that a while back but need to take the contrarian approach and expect that most will be wrong. Any further downside will take the wind out of many bulls' sales but we recommend not paying attention to those feelings...

In fact, the Update wants to remind all of those analysts out there that this market is not the same as the 1987 two day crash. This crash has happened over a longer period of time with similar price consequences. The Update suggested that the October 10th trading could have been the clean out day that we were looking for, sans the volume. There's the problem, and we mentioned it back then...low volume is a problem.

The market continues to look weak, especially when it couldn't hold those nice gains during the day on Monday. The weak opening on the heels of Friday's late day drop led to a powerful rally. Late Friday the Dow traded as high as 8550 and then fell to close at 8380. On Monday morning the Dow opened down around 8200 for a 350 point drop from late Friday.

From that 8200 the Dow rallied for several hours and traded just at 8600 so we saw a 400 point rally during the day. That looked pretty strong but then the selling started in earnest and by the end of the day we saw the Dow drop below the 8200 floor that had held since the lows of October 10th.

Does breaking the shelf of support create a black hole to the downside? That is the question on the chartists' minds. We think a more balanced approach to technical analysis is required. The major indexes have new closing lows as of Monday even though the Dow is well above its October 10th lows. Of course, with the type of volatility we have seen lately, several hundred points in either direction doesn't seem out of the question anymore.

Generally the Dow is the last to put in a low but with the financials being supported by the powers that be, maybe that's not going to happen this time. We are not sure these types of analysis are appropriate.

The stock market is being hammered from several fronts and most analysis is bearish. The general view is not always the incorrect view but being bearish now seems to be a little late. Where were these analysts last October?

This evening, the Asian markets are moving up as we write and that should give the world a little better Tuesday than what we had Monday. The Fed starts their meeting on Tuesday and announces on Wednesday.

We had an idea come in from Erick. He pointed out this article in Barron's on convertible securities. Since we don't follow convertibles, we read the article with interest. There are so many good values out there...this looks like a good one, too.

We're waiting for the Fed to act.

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