Sunday, November 30, 2008
Today, everyone thinks the market is going to fall. Nearly
everyone, and that is a signal for contrarians to start buying.
Will they? On November 19, we all thought the market would hit
bottom. There was a floor that had been set in the last
recession, five years ago, that we believed could not be broken.
The market did not go up on the 19th. It fell through the floor,
and kept falling on the 20th.
I saw the double top last year. I was cautious in my positions
during the rollover, and I was unable to find another entry point
along the ride down. The problem was that I was looking for a
turnaround, and most observers were as optimistic as I was.
The double top was about as obvious as it could be. I also saw
the fall through the floor on the 19th.
Then, Thanksgiving week, there was a rally. A rally, yes, but it
stopped short of the 20-day moving average, and volume declined
all week long. At this point, the market is heavily overbought.
So, while it would be nice to believe that the rally will
continue, it is at a strong resistance point.
There is no doubt that we are playing with a bear market right
now. Business Week published an article this weekend,
"A Technical Analysis of the Recent Bear Market," describing
the double top last year and the plunge through support on
November 19th. Tomorrow morning, many people who read the
article will be trying to get out of the market any way they can.
There is a potential for a very strong downward movement here.
The Conde Nast Portfolio published an article this month, "The
End of Wall Street's Boom," in which Michael Lewis traced the
origins of the current financial crisis back 30 years, to the
savings and loan crisis, and to government and financial
responses to that episode. Michael believes that the currently
depressed markets will be so for up to a decade. (To see the
whole article, click "View All On One Page," at the bottom of
the first page.)
The Great Depression didn't happen instantaneously. October
24, 1929, was not even the beginning. There were sell-offs
before that day. There were rallies, and further sell-offs on
October 29 and later. There was increased government spending
in 1930. But the bottom wasn't reached until 1932.
Economists and politicians are urging radical, rapid action, and
yet they all agree it will take time for the general markets to
turn around. Bottom line, everyone believes the markets will
continue to fall. Pundits who dare to predict a bottom are
saying it will show up anywhere from 6 months to 2 years from
now. So while I am concerned that I may have missed the boat on
the big profits, it looks like I can still get in on a trend that
has some legs. Because the economists and politicians, all
students of the Great Depression, know what doesn't work, but
nobody knows for sure what will work. We haven't beaten a trend
like this before.
So, I have to do it. I've been trained. I have to order what
I see. I am ordering puts on the market tomorrow. And I'll
limit my risk. If the market rises immediately, my orders won't
trigger. If the market falls and then rises, what traders call
a fake-out, the positions will stop out with a minimal loss.
Hopefully the market won't fall, but it if does, I should be able
to make some profit out of it. I'll be watching closely.
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