Expect A “W”…Not From The Economy, From The Market

We hear all these letters thrown around to describe what our economy looks like or will like going forward.  The latest one is a “W”.  That’s basically interpreted as a double dip recession.  I’d describe it as a “V” that eventually moves sideways.  Regardless which letter it represents, I think we should be concentrating on how the stock market will react to the economy and what letter stock prices will represent.  I think perhaps a “W” is the correct letter.  Not in the big picture but in the medium term.  We started a correction a week ago, we’ve bounced in the last couple of days, and now we may fall again, only to eventually work our way higher.  That’s the “W”.

In the past two days, we’ve seen two pretty good up days on the surface.  But, when we dig down deeper, we see that today’s rally was even weaker than yesterday and both of them certainly don’t erase the damage done on Monday.  I commented on Monday that I expected a rally on Tuesday and Wednesday simply because it would be a reflex rally.  After you get a down day like Monday where almost all of the volume is downside volume and there is so much supply and very little demand, a rally for a few days is quite normal.  But, the rallies in the past couple of days are nothing to write home about.  So, I expect this recent rally to fail based on the internals (short-term).

Ultimately, I think higher stock prices are in the cards because of the economic surprises.  I hate to sound like a broken record but the “gap trade” I mentioned several weeks ago may still be in play.  The market is falling based on technicals and based on everyone questioning economic growth not only here but China.  When they question that, they sell creating a gap that we can take advantage of.  Perhaps this is the 2nd edition of the “gap trade”.

The 940-960 level on the S&P 500 still looks like a logical level for the correction to end up.  But, don’t think the bears aren’t nervous.  We wake up with futures on the Dow Jones down 100 points and finish up 61.  There still seems to be a buy the dip mentality.

As far as my crazy investor indicator, we’re at fear levels we haven’t seen since March.  That’s another encouraging sign for me.  This is generally a contrarian indicator.  In good markets, you buy from scared people and while investors aren’t panicked, they are becoming concerned.  If we churn around for a while and correct a little but we see investors get really scared and we see all the oscillators I watch work off the overbought condition, that’ll be the green light to get remaining cash invested.

For now, I’m exercising patience.  I haven’t made any (equity) trades in the past week or so because I still think the whipsaw risk remains high.  In fact, had you sold on Monday when the market was already down 200 points, you’ve already missed out on about 130 points to the upside.  So, be prudent, patient, but forgiving of day to day moves.

This post published at www.karleggerss.com

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5 Responses to “Expect A “W”…Not From The Economy, From The Market”

  1. 1 On the Money August 19, 2009 at 3:41 pm

    Interesting post, thanks. Also interesting news a few days ago that the German and Japanese economies are climbing out of recession – though, of course, they are two of the few countries that still actually manufacture anything.

  2. 2 J George August 19, 2009 at 4:41 pm

    I have been wondering how to invest in lithium. Is that a good thing to do considering all the battteries that will be needed in cars? How about Rockwood Holdings (ROC).

  3. 4 AE August 20, 2009 at 9:22 am

    Perhaps its time to focus on individual stocks rather than the stock market. All sectors have been very highly correlated on the way down (last year) and on the way up (this year). That tight correlation may be coming to an end. Economic data is likely to get “lumpy” after the initial strong (statistical) rebound. In this environment, we may see sector rotation and the markets could be gyrating. However, individual stocks (or sectors) could diverge from the market. A perfect time to play both sides (long and short). Just a thought!

    • 5 keggerss August 20, 2009 at 12:57 pm

      I agree the data will get lumpy but not for another 6 months or so. In the meantime, I still like indices. Not to say you can’t own individual companies. I just prefer to spread out right now.

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