Wednesday, March 11, 2009

The Great Debate Starts

Top Line: The stock market decided to rest after its big up day on Tuesday. There could be more resting on Thursday before a good rally begins sometime in the next few days.

We can never be sure that a low is in and the point reached in the last week Could be the low of the move from 14K in the Dow back in late 2007 but it's a good guess at best. The reason it is not just a guess is that we had such a significant rally on Tuesday. In hindsight, two days worth of it, there is a much better chance that it is a good low but we won't know until later. What we do know is that these are some good prices in many assets. Which ones are the ones that represent value? That question is all about judgment and will only be known in the future.

A couple of years ago, the housing market had become the center of the world for a lot of people. They were speculating in Florida real estate or taking money out of their inflated home equities, or just plain envious of their neighbors' ability to take advantage of the new lending practices. That has all changed and fear has spread to the markets where people have taken their money of the market, too.

Putting money in a money market fund yields very little if any interest but that's where people are keeping the money they have taken out of the markets. The consumer has slowed spending on many items including housing for a variety of reasons, but most of them involve fear. The hope of the country rested on the shoulders of the newly elected President and that is a large task. That hope seemed to cresendo right at election day when the Dow was around 9600.

Since the Dow has dropped 3000 points since then, a lot of hope has vanished. What we read is that people are just Hoping for a rally and that Tuesday's rally shows that hope has returned. The articles are very bearish however as they point to continued optimism for stocks, suddenly everyone has turned into a contrarian. This optimism is Not what is supposed to show up near the lows or at a turn, so these articles seem to be signalling more downside to come.

We have been watching the market fall most days in the past couple of months and Tuesday's rally is what we have been waiting for. We know that as the market goes up, there will be plenty of bears to go around telling us this is the top or that's the top and you should sell now. This is what we were talking about in yesterday's post, that there will be a lot of blather about whether this is it or not.

To our way of thinking the market is Extremely oversold, witness the 30% selloff in about four months and the 50% selloff in just over a year. The market has been due to bounce from somewhere and it did. Yes, it's possible it will try to go back down to test the low but if it does there will be very few participants in that move and the best prices have already been seen in most securities. But, this bounce is going to be a very strong one and will carry much further than most think.

Many people look at the Dow so that's what we will do. The Dow's 200 day SMA (Simple Moving Average, illustrated in bigcharts using indicators) is near 10K which is over 3000 points away and a couple of days ago was over 3500 points away. Only a 50% move will get us back to that level and we don't think it will stop there. We think the move will be much more than that and it will be quick.

You're wondering how we can be so bullish when the economy stinks. We are not talking about the economy. We are talking about the market. Once the market starts rolling, the market will really get going. The economy may follow the market out of the doldrums but it doesn't really have to and right now it doesn't even matter. When the market was rolling around 14K, who was concerned about it going down? It did go down and the economy followed, not the other way around.

Imagine all of the folks who still have stocks if the market would move up. They would be utterly delighted that they had not sold and so would people like us who have bought over the past several months. This would generate a lot of good feelings about the economy that it could actually turn it around temporarily. Just imagine the proud politicians as the sit around congratulating themselves on righting the ship. Just imagine the people who will want to be part of the great 2009 stock market event. "Who me, no, I sold out back in March when I knew it was going to go down to 4000." Are you kidding? They will be out buying stocks and telling people they were smart enough to buy in March, no matter when it is.

Forget about the debate, and concentrate on the direction of the market. Speaking of the market, it looked like you weren't going to be able to get GDX under 30 since it opened above that this morning but it did manage a quick gift trip down for you. Otherwise, Wednesday is the perfect setup for more upside.

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