Top Line: The market seems to have put in a short term top on Monday. After 1300 points in two weeks, the Dow probably needs a break; but, remember, surprises are to the upside.
The market opened with a thud in the morning and while it struggled to get back to even a couple of time, in the end, the sellers took control in the final half hour. With such a strong move over the past two weeks, the market needs to sell off just to reduce the bullish sentiment that has developed. The market needs to create a reasonable doubt among the buyers, "Will this market go back down and test the lows from two weeks ago?" We like a little backing and filling.
During the afternoon, there was another Fed "announcement" that they would begin buying some ten year Treasury bonds. The Treasury bonds across the curve jumped on that news. The TLT, a fund of long term Treasury bonds that we like to follow, went from 102 to 105 in about a half hour. Last week when the Fed said they would buy long term Treasury bonds right after the FOMC meeting, TLT went from just over 101 to 108 in about ten minutes. Just for perspective, the TLT was 123 in December.
With the first wave of the rally probably done with a Dow gain of 1300 points we can get a sense of how we think the market is giving us clues on its direction. We are taking a stab at the big moves we see in the next several months. The first thing is that this is a "corrective" move that is correcting the drop from the highs of October 2007 to lows of March 2009, a total of about 7700 points. These are ballpark figures but we think that a corrective move of 61.8% or about 4750 points. That puts the Dow at the low (6470) plus that correction (4750) which gets us to an estimated 11,250...about. That's one estimate. Here's another...
The market has given us a first rally, which has been powerful. This 1300 point move suggests another look at the future. We think a corrective move is a three wave move, at least that's one possibility. The first wave is up and the second corrects the first and the third moves up strongly, sometimes it's called a wave C or as some call it a "fill".
Our estimate for the first wave is based on the 1300 point first rally. We expect the full first wave to be about 3500 points with the second wave correcting that move down about 1000 points, maybe 1300 points. Then the third and final wave would take the Dow up a similar 3500 points. So, if you start with a low of 6470 and add 3500, you see our first wave would take us up near 10K and then a pullback to 8700 or 9000 with a final push back to 12,500 which is our estimate for this move. Yes, we are looking at 12,345 in the Dow on 9-9-09 (based on our SP500 estimate from the Sunday evening post).
So, if you're trying to figure out if the rally is over, these numbers should give you a bit a perspective of where the market could go. We would say that somewhere between 11K and 13K is a good guess. Doesn't seem possible, does it? Enjoy.