Good, But Not Good Enough

Don’t get me wrong, it’s really nice to get back 2/3 of what was lost yesterday.  From the surface, it looks like a classic bottom.  Panic selling followed immediately by panic buying.  The classic “the train leaving the station” mentality.  Also, new bull markets and the end of bear markets usually come out of nowhere when nobody expects it.  In other words, investors have no reason to buy.  Too many people agree that they should be selling and have already done so.  That means eventually the selling gets exhausted and markets are buoyed up.  That’s what a bottom looks like.  Is this it?  I don’t think so.

When we dig deep into the numbers from today’s rally, it fell a little short.  Yesterday, we saw down volume was 98% of the total volume.  Today, up volume was about 88% of total volume.  It would have been nice to see real strength.  It was strong, but not strong enough.  We’ll take these days for sure but we’d have to see another day similar to this to get me real excited.  And then that would have to be followed by even more buying.  That’s what a bottom looks like.  Remember that I pointed out a few months ago that up 300+ points on the Dow usually come in a bear market going back to the 1990s, not in bull markets.  So, we have to be leery.  This market has burned too many people and has had too many headfakes.  Now, I didn’t sell anything today.  I’ll ride this wave as long as I can but I suspect we’ll have to jump off real soon.  

Today, the Jewish holiday started so volume was lighter as traders took today and tomorrow off.  We had some consumer confidence numbers come out this morning higher than expected which was startling to me and I’ve pointed out before this is correlated with the market.  Higher number, higher market.  But, why would it be up 500 points on just that kind of news?  That’s what volatility is all about.  It’s not just volatility to the downside.  Volatility means it goes up and down a lot.  That’s why I’ve been saying whipsaw risk is high.  If you jumped off and panicked yesterday, you feel real dumb right now.  Fear remains high and I suspect we could get some more rally from this but do not abandon your sell strategy, whether it’s price stops or conditional stops.

I want to make sure everyone knows what I meant yesterday in my post regarding allocation.  I was pointing out that there are some unbelievable deals and some of those should be bought if you have a ton of cash and not enough stocks.  But, if you had too many stocks and were not sleeping well at night because of it, then you have to continue to scale out by using time stops or selling some on good days like today.  Again, it’s all about your allocation right now.


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September 2008
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