Thursday, January 15, 2009

Important Reversal From Just Under Dow 8000

Top Line: The stock market staged a pretty good turn around during the day. After being down 200, a 300 point rally erupted over a two hour period before closing up just a bit. This could be the turn we have been looking for or it might just be that options expire tomorrow (Friday).

With all of the news from AAPL on Wednesday evening to Citi and Bank of America on Thursday. The entire market fell out of bed at the opening bell and couldn't mount a rally until midday when the 300 point rally came out of nowhere. If you would have purchased AAPL in the after-hours on Wednesday, you could have bought it for around 75 and on Thursday it traded up to 84. This is the emotional sell-off we mentioned in our last post.

The Update has been focusing most of its portfolio in commodities which have led the market down over the past couple of weeks. But, we had moved into some cash late last year so that we could have some more flexibility. We didn't think that we would be using it the way we have the last few days. We thought we'd be shorting into the rally by now but that has not happened.

That is what is nice about having some cash, you can take advantage of opportunities that avail themselves like we have seen over the past couple of days. We paid very nice prices for these stocks and should have good upside potential. Well, we think they're good prices. Only time will tell. We don't think we'll have too long to wait.

One of the problems with trying to predict the day to day market movements is that you can't always know exactly how the moves will develop. Based on Elliot wave, there are several possibilities at the moment but we were pretty confident that the market would go up before it went down. Now that it has moved down, first, we are more confident in the rally.

Our position is that the market will have a surprisingly strong rally this year. We still don't like the position the market is in but with the recent sell-off, we think the market will have strong rally going into the next few weeks. If the market bottomed today, with the Dow dropping briefly below 8000, then we could make it back to 10K by early February.

Why do we think the market may have bottomed today? The more oversold it gets the closer we are getting to a bottom and today's reversal seems important in that process. In our last post, we mentioned the volatility indexes. Tonight, we bring you a couple more. Even with the break of 8000 in the Dow, the number of new lows on the NYSE was 81. So, there are very few stocks leading this decline. In fact, many stocks we look at are no where near their October or November lows. Yes, you're right, we're really not all that close to the actual intraday lows of November 21st.

We have previously mentioned the Treasury bonds and tonight we want to bring in the high yield bonds as well. These bonds act very similar to stocks. By comparing these bonds to the movements to stocks, you may be able to learn something if they aren't moving now. The stock market has dropped over 10% in the last two weeks and the high yield bonds have hardly moved. So, what does that mean? Taken by itself, it probably wouldn't mean that much but taken with the other items, it gives us more ammunition to think the rally may be starting right now.

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