Some thoughts on the stockmarket

Discussion in 'Trading' started by Cutten, Jan 23, 2008.

  1. Cutten


    Here are a few considerations:

    1) Sentiment is very negative, both in the media and as shown by put/call ratios and the VIX (spiked to 37.5 intraday, and closed above 30). The market panic got headlines across mainstream media, and the public has noticed - I have had non-market people ask me what is going on, a typical sign of market extremes.

    2) Price has moved down very far, very fast, by historical norms. A crash has already occured in Asian and European markets this week. The S&P as of Tuesday morning was down just over 20% from its highs, in a little over 3 months. That is comparable with extreme moves leading to market lows in prior bear markets & panics.

    3) The market became heavily oversold recently. It went below the lower Bollinger Band, it is significantly below the 50 day moving average (1445) and the 200 day moving average (1488).

    4) Valuations are reasonable in outright terms (PE below 16), and extremely attractive relative to bonds (earnings yield of 6.3% for stocks vs 10 year bond yield of 3.41%).

    5) The likely recession is now fully discounted by pretty much everyone in the market. The market has not yet discounted the potential for further government action, or for good news from other (non-subprime) sectors of the economy.

    6) The Fed is now in aggressive rate cut mode and responding to the slowdown concerns.

    These are all factors which, when taken together, typically give the potential for a large market rally. Even a move just back to the 50 day moving average i.e. nothing more than a bounce in a bear market - would be a 10% rally from current prices.

    The final part of the picture is that very few people right now are anticipating or positioned for a strong rally by the market. The sentiment has changed markedly from the last 2-3 weeks. Back then, rallies made people complacent - the thing to do was short that complacency. Now, dips will make people fearful of a rerun of the recent carnage - and the thing to do will be to buy that fear.

    So, my plan is simple - any time the market is down a bit, and especially if it is down on the open, I will buy. For risk control, on trading positions we can place a stop say 20-30 ES points below the recent lows. However, I also think this is a great level to ditch your cash & bonds, and go 100% long stocks. There are many great growth stocks, companies with excellent long-run prospects, that are off 25%+ and can be bought for the cheapest in some time. Cash is now yielding 3.5% and the 2 year note is a ridiculous 2%. If you are staying 100% in bonds or cash now in your investment portfolio, then you are a either a madman or a masochist.

    Exploit the fear - go 100% long (or more) stocks, buy dips & fear spikes, buy all bad news, and prepare for a run to S&P 1400. You have the ideal opportunity Wednesday open in the US, due to the selloff in Apple. Most investors & traders will be "fighting the last war" and think this will trigger another selloff. IMO it will simply be a classic down open, up close. If this happens then it is the first confirmation that we have shifted from bearish to bullish market action. So - either buy the dip open, or wait for the close and buy if it is unchanged or up. This also gives a nice risk control - if tomorrow *is* a nasty down day by the close, then I'm probably wrong and it would be premature to do trading buys (although I think investment longs here are still good).
  2. Good analysis but you are on your own there
  3. Daal


    you are right cutten. if the market sells off from here i will be very surprised
  4. Cutten


    Well the down open was a buy, as expected. But then we got heavy selling intraday, back to the lows. As long as Tuesday's lows hold, that is not bearish by itself, but it does show there's still a lot of negativity around.

    In bullish market phases, when the market is down a lot intraday, it will normally have a strong rally into the close. So the last 2-3 hours will be critical - if the market is shifting to bull mode then it should rally from here, and close above 1300 or even unchanged. If it fails to rally and closes 1285 or lower, then that'll be bearish IMO.

    So basically follow the momentum from the afternoon session, that should be the "tell" for the next few days.
  5. gobar


    its all depends on earnings...

    like aapl today taking the market down..

    if MSFT misses the earning then dow 10000 will be reached in matter of weeks....
  6. dozu888


    Fundamentally there is a big bullish case for the bull run.... I think the market is digesting the technical damage right now... this was a break down from a pretty significant head/shoulder type of formation.... (I am not a believer of H&S, but my point is too many people are under water from the recent past, and these people need to surrender completely before we can go back up)

  7. Markets have nothing to do with recession, tail-spinning economy, and sky is falling. It’s about manipulated fear, doom and gloom, which people gave into.

    This is all about downside greed and making money. It’s attended via implanting false stories about recession, dispersing fear and fright and using doom and gloom from our retail crowd.

    It has been proven today 1/23/2008 that markets can still keep going down despite a stimulus package and despite a hefty Feds rate cuts. Cowards will be slaughtered no matter what since they can’t do much about it anyways.

    Some well run companies have been cut down 30-50% in prices like AAPL, FCX, PCU, FSLR, GOOG, BIDU, and host of them are bleeding in red ink on my monitor. It’s about concentrated scheme by big institutional sellers to bilk the average Johnny lunch buckets.

    Once again Wall-Street has shown its true colors.

    You can’t fool me though.
  8. Hmmmmm...AAPL, FSLR, GOOG, BIDU...lots of whining and crying....

    day7793 = Stock_Trad3r
  9. Cutten


    The S&P is at a critical point here. It feels as though there is a bit of a buy program building, every time the market tries to sell off, it gets a bid and pops up a little again. I think if we break above 1295 (short term resistance was 1290) then we could see a potentially very powerful rally in the last 2 hours.
  10. Mvic


    Agree with all your points and am looking for at least 1365 myself on a bounce. The one issue I have is that there is still a great deal of uncertainly in the credit markets and things are not improving but deteriorating with more downgrades expected from the credit agencies. This could set off a domino effect if it is not managed competently and so far I have seen no sign that this is being focused on as an area of extreme concern, other than by state insurance regulators which are somewhat limited in what they can do. The fact that we keep hearing that everything is fundamentaly sound from theose who should know better also gives me pause. Also the Sox and the QQQQ both made new lows today which I wasn't expecting The Sox has been the tell since it broke its multi year trend line and the target that it is suggeting hints at much lower levels.

    I want to see us above 1302 before I am back in long though.
    #10     Jan 23, 2008