Tuesday, November 04, 2008

The Election is Behind Us, Finally

Top Line: The Dow jumped 300 points, following the other world markets up. Today is one of those days when people start questioning their belief that the stock market is going to zero.

We are concentrating on the election this evening but we received a couple of comments via email today which we thought we would address in tonight's post.

Question #1: Don't all the wild and violent moves normally indicate some sort of inflection point?

Yes, normally with such violent back and forth moves, the market is struggling with the current trend and trying to turn back the other way. We think that there will be more violence ahead but we do think the low has been put in back in October. All of the October violence was just ahead of today's election. We do think that the gas prices dropping in the last few weeks has changed some minds about the election and the economy. Here in MN gas is under $2 a gallon.

Question #2: Without getting to ahead of ourselves, what is the medium term outlook (1st & 2nd Qtr '09). Rally post election regardless of who gets elected and then what? In stocks? Out of stocks? Is Dow 8,000 as low as markets are expected to go in the next 3-5 years? Fleck mentioned a possibility of sliding down again.

Ok, there are a few questions in there. Let's start with our position for the next couple of years and maybe that will answer the question being asked. We had expected a low in the market in September or October this year and, for the moment, that seems to have played out pretty well. Now, the market is climbing out of a deep oversold condition caused by public fear. The rally has been fierce over the past week with the Dow up nearly 18% since last Monday's close.

So, you want us to drag out our crystal ball...Again??? Well, if we were to guess the future, we would say that the market will rise for several months, but with some significant pullbacks which will shake out some of the bulls. We want to stress that this up move is Counter Trend meaning it is going against the grain of the overall Bear market.

Once this up move ends, which we expect will last at least until April next year, the Big Bear market will step in and destroy values. To guess how high this up move will go, we have already suggested that would be somewhere between 10,500 and 12,500, possibly higher. After that, we expect a severe long term bear market that lasts maybe 18 months which will be a slow burn but take the Dow down well below 8,000. But, we are getting ahead of ourselves.

Let's stop with the answer to that last question since the question is more, What to do, rather than what the market's end points are. Here is the key point of the market. For several years we had significantly low volatility and now we are going to go into a period of time with significant volatility. This will not require you to trade but trading may be the best way to capitalize on the volatility.

We are putting our readers on notice this evening that we will be trading much more the next few months than we have done over the past year. We look back over the past year and realize that we were short for most of the year but with a short period of bullishness which gave us about 750 points. No, it doesn't sound like much but it did enhance our return for the year. We expect that you will not be interested in trading as much as we will want to so we'll have to work something out.

We just heard that the presidential election has been decided in favor of the Democrats. With that we will end the post and wish you luck.

[Editor's note: Check out the new additions in the left column.]

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