Still Oversold

Even considering the big move yesterday, the markets still have room to go.  There have been too many people leaning one direction.  Many hedge funds are very short.  That basically means there is buying power out there.  Yesterday’s rally wasn’t as strong as I would have hoped based on some internals.  But, over 90% of the volume yesterday was upside volume.  That’s important.  So, it was strong.

Here are some facts on why I’ve been uncovering some shorts and buying some longs.

  1. Retail investors have become very very negative lately while traders on the floor have become increasingly bullish.
  2. The leading economic indicators I watch are at least moving sideways instead of down after many months of falling.
  3. My crazy investor indicator which measures the amount of fear by investors peaked a couple of days ago.
  4. The Fed is finally doing some creative things behind the scenes in conjunction to dropping rates.
  5. Some of my technical indicators are at points where rallies begin.

    It’s important that I stress I’m not suggesting the ultimate bottom has been put in.  But, I think it’s very likely the short-term bottom is in and this rally could last a while.  We need to stay flexible to accept the fact that they may have been the ultimate bottom but also understand this rally may fade just like the rest of them and we need to short once again. 

I see a lot of value in financials, technology stocks, and some healthcare stocks.  Still leary of commodities in the short run.


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March 2008
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