Date registered: Aug 2005
Location: Lawrence, KS (USA)
Mentioned: 0 Post(s)
Quoted: 2 Post(s)
The stock market guy I know, who sends me stuff from time to time just sent this and I thought some of you might find it interesting...
"Since the initial market crash in early October, the market has been testing and retesting the lows made on October 10. It appeared as though those lows would hold and a rally would ensue. This is historical market behavior in bear markets. However, the market has closed below its Oct. 10 lows and therefore looking for a new floor. I do not know where that floor will be, but I can venture an educated guess.
Typically, prior lows represent support levels. The low during the last bear market was 7300. Today, the Dow closed at 7552. I expect the market to be driven down below 7500 to the 7200 to 7300 level within the next couple days. At that point - and this is a crucial understanding of market psychology - there will probably be a very significant one or two day turn around, probably 600 to 1000 points up.
Here is why. There are a number of traders who are short this market. Most short traders are market technicians and pay attention to such things as support levels. If you are short, you only make money when the market declines and you lose money when it rises. Knowing the market frequently bounces off support levels, these traders will cover their shorts, meaning they will place buy orders, driving the market up and once it starts it becomes a flood. This is exactly what we have seen the past few weeks. There have been four days following drops to support in which the Dow has soared 600 to 1000 points. This is behavior in this market, so we have to pay attention to it and expect it to continue until the decline is over.
Accordingly, once the market forms a new low, we will very quickly see a short covering rally. Because of the significance of the 2002 lows, I believe it is very likely this will be the next stopping point. The big question is, "where will the ultimate bottom be?" Followed by "when?" Unfortunately, I do not have the answers to those questions. Here is what I know:
There is a huge unwinding of leverage occurring, as I have written about in the past. We are seeing an increasing number of cracks in the system. First, it was real estate. Second, it was financial institutions. Third, liquidity within the financial system. Now, it is the auto industry. Who next? We cannot bail out everyone. The consumer has just begun to cut back in the past two months. We have not yet really seen the economic impact of substantial consumer cutbacks, which will be happening in the coming months. The government does not know what to do, trying first one thing and then another. Confidence has evaporated.
Corporate profits are falling like a rock. They are likely to fall much further with a deepening recession. Currently, the S&P 500 is selling for 15 times earnings - about the historical average, but not cheap, indicating that there may yet be more downside before this bear market is over.
I do not like to recommend to anyone to sell into a falling market. I think every investor needs to evaluate their own risk tolerance, their time frame and make decisions based not upon panic, but with logic and forethought. Time frame is a very important consideration. Even if the market is going lower short term, ten years from now it is very likely that the stock market will be higher than today - maybe even to all time highs.
For those who are still accumulating money for the long term, this is the time to continue to accumulate and not sell. Warren Buffet, without a doubt the most successful investor in recent times, is buying now. His is not a bad example to follow. If you are retired and have a balanced portfolio, you should consider not selling stock funds for income, but rely upon your fixed investments, buying time for stocks to recover. I am not saying no one should sell stocks or stock funds in this market, but there are better and worse times to do it."
Don't believe everything you think