Tuesday, January 20, 2009

Wall Street Drops Hard Even With Washington Events

Top Line: Stocks were on sale on Tuesday. Did you buy any? Tough to buy weakness.

Tuesday's trading included about a 20% drop in the banks, including our employer, ING. The top four volume leaders were Bank of America, Citigroup, Wells Fargo, and JP Morgan, all down 20% or more on the day. Their total volume exceeded 1.1 billion shares or about 65% of all volume on the NYSE.

The Dow dropped below 8000 once again on Tuesday so the reversal the other day from under 8000 was not the key reversal. But, here we are again. Is this a reason to sell??? What happened today that we think is important? Is the Dow under 8000 an important event today or not?

The selling was aggressive on Tuesday and the fear grew all day with the volatility indexes rising all day. In fact the VXO rose over 10 points to 56.25. A 300 point drop in the Dow was enough to push the VXO up over 20%. What else?

To us, the biggest sign is the GDX. GDX was the first to turn down which gave us a clue that the market would probably follow suit. Now, GDX looks to have put in a bottom last Thursday. That is a big hint/clue on what should happen to the rest of the market. GDX moved from its Thursday low of 27.15 to today's high at 32.51, nearly 20% in three trading sessions. This may be a little more than what the whole market may do but the direction should be correct.

The last few trading sessions, we have put our cash back into the market on the long side. Even though we suggested that the SSO may be attractive under 22 in our last post, we didn't buy it today. We decided to buy something else. We still think the SSO is a good buy near 21 with a good upside potential. We also moved the remaining cash in our 401(k) into the market.

So, after the close, IBM announced earnings that were surprisingly better than estimates. The market liked this news and pushed IBM up over 4%. This news persuaded the futures to pop a little and are still up right now as we write. The Asian markets are down some, likely in sympathy to the Dow's 300 point loss.

We don't want to waste any time on the banks this evening but you can go read about the nationalization of the banks starting with the RBS (Royal Bank of Scotland).

But, we do want to consider the possibility of a rally off these lows, maybe spurred by the IBM news this evening. When so many people just sell without much thinking, as happened today, the time to think about buying is at hand. Those people that just sell in panic or buy puts in panic or in speculation should not get rewarded for this activity after a 1000 point move down in the Dow. We say that the bears are so prevalent now that the market will have difficulty following through on the downside.

If you want to pay attention to Elliott wave, the market is trying to put in a fifth wave low of the first wave down someplace between here and zero; so, whenever the fifth wave low is in, that is a final move and suggests a strong wave 2 rally which would correct the down move from the 14k high to the 7500 low. Just a 50% correction would take the Dow back to 10,700 or so, with a normal retracement of 61.8% which would take us back to near 12K.

What we're trying to suggest is that a 300 point down day is a good buy especially considering the possibilities. Can the market go down another 1000 points or more? Of course, it can do whatever it wants to but we think a year long "bear" move deserves some recovery. When a lot of bearishness prevails seems to be a good time to think that will happen. With a VXO of 56, it's a really good time.

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