Big Drops = Big Bounces

Wow.  What a day.  Friday, we saw a market that was down 700 points in the morning and rallied quickly to even only to end down about 100 points.  But, it gave us a glimpse of the power of a future rally.  So, from the bottom Friday morning until now, we are up about 1700 points on the Dow.  Quite impressive.  Can you imagine selling everything you had and capitulating Friday morning.  I’m sure there were many out there that did exactly that.  I’ve been pointing out and stressing here and on my radio show that a rally would come and it would be strong.  I also pointed out that the whipsaw risk would be high as it still does.  DO NOT make major moves here.  Hopefully, you have some exposure to stocks.  We’ve kept it low and it’s kept us sleeping at night.  But, what do we do now?

Here’s our job now.  We need to monitor this rally.  Here’s what I want to see.  I want to see it build on itself.  I want to see people feeling like they are missing the train.  Broad sector participation, increasing volume, advance decline ratios going up, some 90% upside volume days.  I want to see all of that.  If we do, we could be in for a several month rally.  If we don’t, you’ll have to sell short on the way up very quickly.  Keep in mind that the volume might be a little light today because of the holiday and the bond traders were away on vacation.  Here’s how I’m going to play this.  I’ll let the market prove itself to me and add utilize my cash on good deals in the more volatile areas.  In other words, I could have bought in this morning trying to get cute.  But, we’ve seen up days evaporate before.  When this bailout package was first proposed, the market when up about 1000 points in 2 days.  That was a Thursday and Friday.  That was quickly followed by a 300 point drop in the Dow that following Monday.  So, be careful.  What I’d rather do than jumping in the first few 100 points is to get some consistency and persistence and then buy more volatile stuff.  That will make for a safer trade that’s just as profitable as being early.

Today was the first 90% upside volume day after seeing a lot of 90% downside volume days last week.  But again, let’s see if this continues.  After a huge move like this, many will go home and change their selling plans if they were planning on selling.  As I’ve stated here and on the air before, if you are heavily invested and wished you would have sold last week, remember how you felt last week.  Take some off the table.  For the rest of us who have a lot of cash and are looking to put it to work, let’s get some follow through.  After a 900 point rally today, constructively it would be appropriate and nice to see a weak sell off tomorrow or the next day.  That would just be profit takers.  But, a day like today can really change the perception of the market from risky to opportunistic in just a matter of hours.  Amazing.


1 Response to “Big Drops = Big Bounces”

  1. 1 Lee October 13, 2008 at 4:24 pm

    I think we’re at the bottom of the first waterfall.

    The Dow Jones Industrial Average (Dow 30) closed at 8579 on Thursday and 8451 on Friday, and then rallied more than 11% today to close at 9387. This looks to me like the start of the next sucker rally in the bear market.

    I don’t think that this is the bottom, and I don’t think that the bear market is over.

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