Top Line: The market dived into the abyss on Friday morning but recovered as the day wore on leaving a nice, bullish, Higher Low in place from the prior week. In late Sunday trading, the world markets are continuing the rally.
Friday's open, while down hard, was not down as much as we surmised on Thursday evening; and, from the opening drop, the market generally moved higher the rest of the day. The overnight futures had predicted a Dow that was going to be down about 450 points but the futures improved before the open and the Dow only opened down a little more than 200. The NASDAQ indexes we follow, the Comp and the 100, were down early but rallied strongly all day and were up over 2% by the close while the Dow was up less than 1%.
And, looking at the Treasury bonds, we had indicated on Thursday that the overnight trading showed strong gains in bonds but by the time the stock market opened these gains were largely gone. The trading during the day was down and then up to about unchanged on the day.
The volatility indexes were pretty much as expected, jump at the open and then selloff most of the day to mirror the stock market. Volatility is still extremely high indicated by the level of the VXO being over 50. We shouldn't expect that the stock market is going to go down much with these levels in the volatility. Even as the market opened on Friday, these indexes were no where near where they were the prior week. All in all, not the day that was signaled on Thursday evening.
As we look out over the next few years of in the market, we see some continued volatility causing most people to slowly leave the market. Many have left already but we suspect that the vast majority will come to the conclusion over the next several years that it's just too difficult to play the market anymore, that the old dollar cost averaging or buy and hold approach doesn't work anymore.
To that we say, fine, let them leave. We'll continue to try to pick good opportunities. The problem is that if you want to stay in the market, you will need to be more nimble with your trades. Buy and hold Is dead and dollar cost averaging only works if you know when to Take your money out, you know, at higher prices than you paid. This is not that easy for most.
Our position is that there will be a couple of required portfolio changes that need to take place over the course of 2009 with more to follow. The first is in late January when the recent bulls will declare victory, saying the market is now ready to go back up. The headlines will start to read bullish again, something different than we are seeing the last few weeks. Even as the market has rallied, most of the news we hear is tainted to be bearish, not bullish.
The market needs to rally quite a bit between now and then so it needs to get going. We expect that the first week or two of January will see a huge spike with the inauguration happening right after that. We expect the Dow to push over 10K in January just in time for us to sell into the new-found bullishness.
Right now, there seems to be some optimism that the government will indeed bailout the automakers. The Fed is meeting this week to discuss reducing interest rates Again, lowering them Below what Greenspan did following 9-11. We're not sure if optimism is the word to describe how people feel about another rate cut from the Fed. Probably the kindest word would be indifferent.
The fact is clear that the Fed is accommodating and the government is aiding and abetting them. We point to these items as being the most powerfully bullish arguments there are...then there is the stock market itself showing higher lows. We do need to now start seeing higher Highs as well and then everyone will be convinced the market is "headed" higher. Again that will be when we will be abandoning our long positions, at least temporarily.