Do Or Die Time

Here we are again.  One of those inflection points.  You can feel the momentum building.  Many bears are starting to sound bullish.  The “bottoming process” is in they say.  The stimulus package(s) will help.  The economy is at a bottom and will turn up over the next few months.  We’ve rallied 1450 points on the Dow Jones from the bottom.  The worst has to be behind us.  Or, does it?  Let’s first look at some technical levels & the economy, and then I’ll discuss what I saw from today’s rally.

I mentioned a while back I thought the Dow Jones could get to 9100 during this rally.  Last Monday when we were down 700, it didn’t look like it would get there but we’ve had a nice recovery and shaken off some pretty bad news.  So, here we are.  We got to 9026 today before finishing at 8934.  According to my calculations, we closed pretty much right at the 50-day moving average.  We haven’t been there in months.  Sounds good until you consider its kept coming down due to…well….math.  Stocks fell fast in October so those moving average lines are catching up now. Nevertheless, we’re here and going above that would trigger some buys.  No doubt about it.  In addition, we closed above the 30-day moving average and its starting to turn up if you squint your eyes.  So, we’re kind of trapped in between the 30 and 50-day moving averages right now.  The volume hasn’t been spectacular but it has been improving as we’ve gone up.  In addition, the relative strength indicator is above 50 and looks to move higher.  So, technically, there is some improvement.

As far as the economy, we saw a slight uptick last week in some of the forward looking indicators even though we had that horrible jobs report on Friday.  If we can get some consistency there, then maybe the market is justified for going higher.  Remember though that those are forward looking indicators so that doesn’t mean the economy has bottomed yet only that it has the potential of bottoming sooner than we thought.  But, it’s way too early to be calling a bottom in the economy.  I’ll keep you updated on that front.

As far as today’s rally, it was primarily based on a ton of money potentially being spent on infrastructure from the new Obama administration.  It gapped up at the open and stayed strong throughout the day.  There was a selloff into the close and the volume started to pick up as we were pulling back but all in all it was a pretty good day.  Volume was mediocre, but the breadth was good as advancers outpaced decliners 3 to 1.  We may be building something but even if you were getting more bullish, we’re overbought in the short-term.  If you look at the percentage of stocks above their 10-day moving average and look at a faster moving stochastics indicator, they are getting to a point where a pullback is around the corner.  So, if we’re trying to turn bullish, here’s what we need.  We need a very low volume pullback.  This would show not many people interested in taking profits and selling pressure going away.  That should be followed by another round of higher volume buying.  If we get that, we’ll see a bigger rally than we’ve seen during this entire bear market.  Don’t forget that weak pullbacks are healthy and will actually extend the rally.  

I’m using the word rally above, not bull market because you typically don’t see bull markets start like this.  They don’t gradually start.  First of all, you get selling exhausting.  That means nobody wants to sell anymore and the selling runs out of gas.  That’s followed by ferocious demand for stocks.  We’re not seeing that.  We’re seeing a very orderly rise currently with moderate volume.  In addition, we have a lot of fundamental items on the list that we have to deal with.  So, a trading rally is what it looks like at this stage.  Just remember though, the Great Depression had a 50% rally from the winter to the next spring (about 6 months).  So, we can have tremendous rallies and still be within a bear market.  That’s why we want to keep participating in the markets in both directions.

Keep your powder dry right now for a pullback as we’re overbought.


1 Response to “Do Or Die Time”

  1. 1 Jay December 8, 2008 at 6:14 pm

    Should my long stocks represent my long position in this rally, or should I go ahead and put in a position in a market wide ETF (SSO)?
    Thanks for the advice1

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