Thursday, November 13, 2008

Stock Market Provides a Difficult Test for Participants

Top Line: The stock market gave us another wild ride on Thursday. Our position is that the market made a clear bottom.

In our last post, we asked if you were ready for today's test. The stock market gives a test every day but we thought maybe Thursday's trading would provide more like a big test than a little daily quiz. How did you do?

When taking this daily test, you are never given the subject or any idea what the questions will be, so you have to be Ready for anything. With INTC's news, along with several other bearish news items, going into the opening on Thursday, stocks had every right to collapse...but they didn't.

Trading was surprisingly calm. In fact, the Dow opened up about a 100 points. From there, the Dow fell 200 points but an hour into the session was back up 100 points. The rest of the day is almost unbelievable. Over the next 2 1/2 hours the Dow dropped 400 points at which time we went on a furious rally. In two hours the Dow went up 500 points before dropping 200 points. That left about an hour to go and during that hour the Dow moved up another 500 points.

What does this mean? By itself it may not mean too much as it might be just like all of the other crazy rallies we've seen. We think this day holds much different signals than all of the other crazy days we've seen over the past month or so.

On this day we saw a new low in the NASDAQ and the SP500 but not the Dow. Remember we have been saying that our premise is that the October lows in the Dow are The lows there. Now we think that the lows today are the lows for the broader market because of the action in other markets like the dollar, gold, oil, and Treasury bonds.

All of these markets had what we would call false breakout moves similar to the stock market. As the Dow was turning, the Treasury bonds turned down, the dollar turned down after hitting a new high for the move, gold had a reversal to the upside, and oil turned up after hitting a new low for the move. The volatility indexes were both lower on the day after spiking in the morning.

This is the exact action we would like to see for a turn. Volume was not spectacular but it was decent. One other indicator, the number of new 52 week lows, were only at 776. Yes, that's a big number but a far cry from the 2900 of October 10th, the technical low.

We have read many articles this evening and watched some talking heads on CNBC, too. All of them are skeptical of the move today which we think also confirms the significance of the rally. We think it's different this time. We will know fairly soon whether we are right but it's like we have already said, the market shouldn't reward people who missed the October lows.

So, how do you know how you scored on today's test? We think there are a few ways to tell.

You Pass if you said yes to these questions:
Did you purchase anything near 8000 in the Dow? (This deserves an A, we didn't have any cash available...this is bad)
Did you calmly think the market was ready for a turn as it was dropping in the morning? (This is where we were today, mostly calm and mostly glad to have it behind us.)

You Fail if you said yes to these questions:
Did you sell any of your positions near Dow 8000?
Were you scrambling to figure out what to sell during today's drop?
Or, did you think you would unload some of your 401k holdings today if the market wasn't going to come back?

What ever your score was today doesn't mean you are right tomorrow but today was a significant test. We hope our readers had a calm day today and enjoyed the rally as much as we did.

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