Tuesday, October 28, 2008

Violent Rally...ahhh

Top Line: You might have heard by now that the stock market decided to rally on Tuesday. For tonight, we will leave it at that, but we do see more upside coming.

This rally is now being tauted as a one day bull market suggesting you should have sold at the end of the day or at least by Wednesday morning. This talk is just what we have been looking for from the world...skepticism about upside moves.

The best open on Wednesday would be a selloff for a little while and then find no more sellers so the market then moves up. If the market opens up, then there is a danger that it will not hold and we would consider some changes. This evening the Asian markets opened strong but have since backed off. They're still up on the session but weakness has shown up which has now pushed the US futures down.

The biggest event of the day on Wednesday will be the Fed's interest rate cut of 50bps...ok, maybe it will be the rate cut. There could be other items of more interest but the interest rate cut will rate right up there...yeah, yeah, we do feel pretty good this evening after that rally today. That doesn't mean the humor is any better.

We remain bullish for the near term. Why? Our "tells" are in the confirmation of the up move by the Treasury bond and volatility drop offs. For the short run, we repeat our thought that the Fed's rate cut will be positive for the market even though it may have been priced in on Tuesday (today). Plus, we have the election next week.

After today's rally, there remains a risk that the market could be setting up for another harsh down move. Yes, the technical picture remains a little murky due to the extreme volatility so we need to pay particular attention to our tells, the VXO and the TLT.

Let's see how Wednesday goes...


Anonymous said...

I just read the post and see that one statement needs clarifying, that of the "tells". The T-bond (we use the TLT as a basis) was down significantly indicating that safety was not a concern on Tuesday and investors were more interested in taking on riskier assets like common stocks.

If the TLT's go up with stocks, that is a dangerous sign for stocks. Tuesday TLT went down hard confirming the stock rally.

This morning, TLT is up a little as the market has opened down. The rest of the day should see both of these reverse with TLT dropping and stocks rising.

As for the VXO, volatility index, it fell hard on Tuesday, rightly so with that huge rally in stocks. Today it is up a bit on the selloff in stocks...

By the time I finished writing this, the market has already come back...This is a perfect setup for a nice follow through day (yes, follow through to the upside).

Mining stocks along with oil and gold are up even as the market opened weaker.


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