Why We Rallied 900 Points

What made the market go up yesterday almost 900 points?  The second biggest point gain on the Dow Jones ever.  Here are a few reasons for it and why it could go on a little longer:

  • The stock market was oversold with almost every stock trading below its 200-day moving average.  This isn’t typically the case.
  • Credit markets aren’t panicking anymore, just fearful.  In other words, spreads are tightening showing the credit markets are thawing out.
  • My Crazy Investor Indicator has shown great fear for some time.  This usually produces some type of rally.
  • Volatility is at record highs so volatility comes not just in the form of downside but also upside.
  • Many people are bearish and have sold out and those that haven’t are wanting to sell the rallies.  Putting on our contrarian hats we would say that the rally could go further than we think.
  • Asset allocation funds and pensions, etc. are now out of whack.  Because stocks have fallen so much, these asset allocation model accounts need to be re-allocated by selling bonds and buying stocks.  I’ve heard most are out of whack by 4% or more.  That could produce some demand for stocks for a while.
  • Investors are pricing in a .5% cut by the Federal Reserve.
  • Some of my oscillators have been making higher lows even though the market was making new lows.  This is a positive divergence.

You put all this together and you get a rally that is very large and bigger than we’re used to.  But, given the volatility we’ve been seeing, we shouldn’t be surprised to see more 500+ point up AND down days on the Dow going forward.

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October 2008
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