Equities are so oversold there is 'almost' nowhere to go but up.
Could be a decent rally if we do launch (notice I am now using words like 'could' ...lol)
God help us if we break down from here.
I am staying bullish and remain long.
The KBW Bank Index has fallen roughly 80 per cent from its highs of February 2007. To put that in perspective, the Dow Jones Industrials fell 89 per cent from 1929 to 1932. There are three financial components in the DJI. American Express (AXP/NY) has fallen 77 per cent; JP Morgan Chase (JPM/NY) has been the star, down only about 60 per cent. The dog has been Citigroup (C/NY), down an astounding 95 per cent. Bank of America (BAC/NY), not a DJI component, is down 88 per cent. The three DJI financial components could all go to zero and the DJI would only lose about another 300 points. Such is their reduced influence now.
What is an investor to do? Cash pays nothing or next to nothing but would at least ensure that you don't lose. Bonds have been strong performers in the past year, but with mounting forecasts of deficits and growing debt, the ability to raise funds without also having to raise interest rates is highly unlikely. Bonds are now very expensive and are a potentially risky investment. While the US dollar has enjoyed a strong rally over the past several months, the rise has been largely artificial as it has been due to repatriation of funds from forced liquidations.
Despite the weakness in the markets seen this month, we continue to expect a rebound in the stock market of some substance. The rebound may not be as strong as expected and may only last about a quarter. Investors will certainly have to be nimble to survive in that environment. The S&P 500 is still showing positive signs for us. We may be forming a large head and shoulders bottom pattern. Another way of looking at this is the 2002 bottom played itself out as a series of three bottoms - July 2002, October 2002 and finally March 2003. While the time frame this time is shorter our bottoming may be somewhat similar. Still we need to not see new lows and we need to break above what may be the neckline near 925. Targets would be at least 1200/1300.
The real danger is that the lows of November 2008 break. Then there is serious potential for all hell to break loose as the markets plummet to new lows. This cannot be ruled out. Following past cycles as we do only gives us some sense of direction, not necessarily magnitude. The first part of the 2009 does have positive cycles but the cycles do turn negative again once we get past April. Investors should be looking for a positive sign of a turnaround but be very aware of the danger that lies below with new lows.
