Click chart to enlargeThe chart above is a chart of Mosaic, but it may as well be any chart for the purpose of this post. You can see the clear break of the trendline and moving average that occured back in late July / early August. That was the beginning of the end, so to speak. Since then, most stocks have been going down in a channel, with the exception of early October. They got so oversold in early October, that they've spent the last two months basically going sideways (consolidating). Now stocks are just making it back into their downtrending channels. Channels are not nearly as reliable on the way down as they are on the way up, because fear can accelerate a lot faster than greed. A better measure of how oversold the market is on the way down are the moving averages. On the chart above, we drew a 100dma, because MOS responds best to it. The 200dma is actually the most common moving average used by technicians to mark major multi-year changes in market direction.
It won't be until a good number of stocks break through their 200dma's that we can even consider that the bear market may be over. This isn't likely to happen for quite a long time. We thought it would be a good idea to remind people of this, because if the current market rally continues, it is easy to get caught up in the hype of the "new bull". There is no new bull, and there won't be for a long time. No matter how bullish the news gets, and how strong the market gets, and how tempted you are to go "all in", just be cautious, because we've seen some very convincing bear market rallies suck people in and then end in complete disaster.
This post may be a bit premature, as this warning should come when the market reaches a state of euphoria, after the bear market rally has extended itself considerably further.
The market remains oversold enough that a Dow rally of an additional 2,000 points is conceivable. Even with a run like this, we would still be in a bear market territory. We will continue to post updated charts such as the one above if the market continues to rally in order to keep the bigger picture in perspective.
10 comments:
Snot
Thanks for posting this chart. I find the charts with linear regression/ channels to be the most helpful for mid-term investing. Some of the charts I've looked at recently are too short time-wise. Can't see the forest because of the trees.
hk22
I'm still 100% cash. We're in the middle of a series of channels, so I don't want to jump in. I'm happy with making 2-4% each month. That doesn't sound like much, but it should give around a 30% annual return. Simply put, I can't afford to lose, then chase my bet. If I feel like I'm white knuckling a trade, I just won't do it.
We may have a 1 to 2 month window where the market will stabilize, and even go up. Who knows. But I firmly believe that problems inherent to the financial system will surface in due time.
Last comment: The Fed says that consumer credit needs jump starting. Pray tell, but isn't it over spending by the consumer that got us in this mess? They want to give Dick and Jane more rope with which to hang themselves?
Fed borrow Trillion from CHINA to bail out our bank and let Dick and Jane spend more to stimulate the economy. We are walking on the rope and if we stuck up with CHINA, they pull the rope and we all DIE...
Snot, i just had to follow up on your observation that there is a 186 Trillion in credit default swaps in the other thread.. Sorry for the double post..
Unfortunately snot it dosen't work like that, even for Goldman. All they can do right no is pray as there is no way out if it goes against them.
The thing about those derivatives is that the numbers are so ridiculously high because the leverage was so high. People bought swaps to hedge a worst case scenario, total failure of a holding. This failure had a certain percentage chance of happening for any given stock, but when applied to the market as a whole the odds were close to nil. As a result you could buy a CDS on a billion worth of debt for a few hundred grand, or in balance sheet terms near nothing. Companies like AIG could hold 5 Trillion in liabilities because using the law of large numbers they knew that they could only get called on an infinitesimal percentage of that at any one time. They took in tiny amounts in premiums in comparison to the liabilities possible so none of these trillions we read about are real money. The problem is that now that every debt is defaulting simultaneously those numbers are rapidly becoming real. They will never get paid of course, because the money dosen't exist. All the money in america only amounts to to about 3 trillon (bank accounts, stocks, cash everything) so paying even 1% is impossible. What will happen is that every company on the hook will go bankrupt, the holders lose out, the govt that guaranteed the debt will have to default (Nice move Bush) and in the end we will probably have to do away with all debt and just start from scratch with a new currency. Thanks for the free house, wanna swap this chair for a loaf of bread....
Conorsh said it right.
The tough times are ahead of us not behind. (that includeds the bottom by the way)
If you haven't read this yet, please do so. It will prepare you for the worst. Don't ignore it.
http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf
Snot,
Why are you still long knowing that it will get worse and the bottom is not in yet (if there is a bottom, look at Japan for 20 years)
If long, I wouldnt go long on ddm or sso, I would go long on Chinese stocks.
Conor and hk22,
We sign on to the school of thought that the market is such an efficient machine that it instantly reflects all relevant information.
We have nothing against signing on to Dow 3,000. However, if it's a foregone conclusion that the market is headed a lot lower, why isn't it already there?
Because they keep injecting adrenaline everytime is about to collapse.
And of course that will just get it worse in the long run.
Obama's speech today didn't impress me either. He keeps mentioning those 2.5 mill jobs like is a done deal.
We need more jobs than that and a better plan.
Off topic:
Good Short-actually Great Short
JRCC
However, if it's a foregone conclusion that the market is headed a lot lower, why isn't it already there?
Hope.
How many people have you spoken to who have always thought that this moment is the bottom for the housing market and have thought that at every moment since the drop began. Soft landing, remember that phrase? The same goes for the markets although with houses its a straight line descent and the timescales of expectation are longer so the overall opinion of the masses is easier to see. On the markets people might expect it to go down tomorrow or next week, but overall the opinion is that this is roughly the bottom. If we knew that there was really a further 50% drop ahead we woudl all be short...
here is the chart for JRCC
http://s426.photobucket.com/albums/pp345/hk22_2008/INDIVIDUAL/jrcc.jpg
I agree with hk22's short entry target. I arrived at that point using different TA. There is technical support for another 17% leg up, and that roughly corresponds to a 3% rally in the S&P, where also hits a technical resistance point. These targets could easily be reached today or friday.
Post a Comment