Once again we sit on the edge of our collective seats wondering if the US government will come to the rescue of the markets. The last attempt ended poorly and it looks like investors aren't taking the chance this time around and selling beforehand. What is most interesting (and quite often the case) is that investors are selling into support. For a few weeks our target has been $108 on the SPY and there is no reason why that won't be hit. As the chart above illustrates, there are a number of technical reasons why one ought to look to take profits from short trades and to look for a rally ahead rather then a further declines. One might even consider the current market psychology as one of "selling on the rumor and then buying on the news". Look out for a considerable technical bounce to the upside should the market get a clear signal from Washington that the worst of the problems are now behind us. While this will be in no way a medium term buy point, it may represent a nice seasonal long trade into the end of the year.
As I have indicated before, the bearish sentiment is getting rather high. The Vix index was recently above 50 (indicating significant fear in the marketplace), bearish news is dominating the general media and the majority of world equity markets are moving lower in unison. From a contrarian perspective, Smart money is buying (Buffett's recent purchase of GS as an example). And lastly, on a US PBS News service it was suggested that this was not the same as other market corrections, that indeed this time 'it was different'.
These are all classic signs of a market bottoming process. It is the market's goal to take the stock out of the investing publics 'weak' hands and to put it back into the 'strong' hands. It is painful, often dramatic, but very predictable.
It is during these times we can be thankful there are ways to figure out where the 'strong' hands (often referred to as Insiders) are buying. For more information on this please visit the website and take the mini-seminar on technical analysis and model based trading.
On a final note, it is important to keep in mind that the bailout of the US housing sector during the Great Depression was a very profitable venture for the government in the long run. Most people paid off their mortgages over time. So too now, most of the 'bad paper' will eventually be repaid and once calmer heads prevail, there will even be a secondary market for these loans. Not today, maybe not even a year or two from now, but one day it will be so.
That's all for this week,
Brian Beamish FCSI
the_rational_investor@yahoo.com
the-rational-investor.com
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