Monday, September 22, 2008

The second leg of the 2008-20XX Bear Market may be over or Argument for a Rally

Here's a quick update on how I see the markets today. We appear to have concluded the second leg down of the bear market that I feel began in the first week of this year. As you can see above, the dow seems to have chosen roughly 1000 poiont increments as pivot points over the past few years. The most important prices have been 13,700, 12,700, 11,700 and more recently 10,700. The dow has been rallying 1000 points then it drops 2000 points, rally 1k, then drop another 2k. We now seem to be at the end of a 2000 point drop in the cycle (12,700-10,700) and I think theres a decent chance the dow sees 11,700 before the end of 2008. Curiously we have a presidential election in a few months and a generally bullish season for stocks, will the campaigning and holiday distractions be good or bad for the stock market?

On the same 3 yr weekly time frame you can see that VIX spikes mach up well with market bottoms. While there is a possibility that the VIX is entering a new range (over 30) like it did back in July of last year (moved up into 20-30), it seems like the VIX doesn't like to spend much time above 30. Note that the VIX still lies over 30 (it should drop soon (bullish)):

Now looking at a shorter term time frame on the S&P, you can see how the second leg of this bear market began from a bounce off the 200 dma. I've added the fibs for refference, a 62% retrace of the move seems likely. That would take us back up to around 1325 where that 200 dma should be. To further strengthen the argument, the volume was extremely light on today's pullback. All the bulls need is a follow through day now. That would involve a day of above average and increasing volume where we take out last weeks's highs. After that I'd expect a decelerating rally for a month or so until the next leg begins. And just for refference, the most recent leg (#2) took the S&P down 21.4%. So there may be some amazing short opportunities in a few months. For now though, I'm going to be patient and try out some longs.

On the short selling ban, I think the shorts deserve every penny they made. Peter Schiff had this pretty well figured out a very long time ago and I bet he's made a fortune:

Now check out the q&a session from at the end of this Banking conference:

Imagine that Schiff sat down at a table with both of those two dopes and they agreed on a bet. That bet involved Peter profiting from mortgage declines while the bulls would profit otherwise. These bets were made on grande scales and the shorts were RIGHT. They deserve every penny, the bulls were drunk. Here's the rest of that talk by Schiff two years ago by the way.


Anonymous said...

"Because that's the way the market works."
That is an answer?

nice post pythag :D


pythagoruz said...

Yep, that's certainly how free markets work. ie. We no longer have a free market.

Thanks, X.