Enjoy the Rally But We Will Revisit the Stock Market Lows

We have had a very volatile three day period, and it does look like we have put in a bottom after a classic, stock market capitulation.

1. Thursday, October 9, 2008: S&P 500 opens at 988.42, and falls to 909.92 for a loss of almost 8%, a major drop.
   
2. After market, Thursday, October 9, Before Market on Friday, October 10: Great fear, and the sky seemed to be falling.
   
3. Friday, October 10: Market opens with a gap down from the previous close and opens at 902.31. Market falls intraday to a low of 839.80 (loss of almost 7%) but recovers and closes at 899.22.
   
4. Monday, October 13: Market finishes capitulation as there is a massive rally, opening at 912.75 and closing at 1003.35, for a gain of almost 10%
   

Expect Rally for now But We Will Re-Test Stock Market Lows



We had been in extreme oversold conditions and we appear to have had a classic stock market capitulation.

We can expect the rally to continue for a while. We speculate that the rally range may reach resistance at 1077 (previous 61.8% retracement from 2002-2003 Bear Market low of 768 to top of 1576) to around 1200 or so (near other resistance).



The S&P 500 around the 1265 area is also the resistance level set during 2003.

If we look at the longer term six year view, we notice that there is a lot of congestion from 2003 to 2006. With the S&P currently at around 1003, this means that most people who bought stocks after 2003 are under water. With the recent stock market capitulation, many individuals and hedge funds and institutional investors have sold much of their stocks and may choose to unload those that they failed to unload around this resistance area.

Re-Test The Lows

Stock market bottoms do not often occur in a V shaped bottom. We expect the S&P 500 to test the S&P low of around 839. We will not know whether this bottom will hold, or whether we will start a new lower trading range.

But with the S&P Bear Market Low from the Great Dot Com Bubble at 768 (2002 to 2003), maybe the market might eventually re-test those lows too?

Let us wait and see what happens at each support or resistance level.

Today's S&P 500 Chart

Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.


Stock Chart



Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.

Time for a Stock Market Short Covering Rally?

The Stock Market as represented by the S&P 500 has been going down for sometime and the S&P 500 is now at 970.97.

Is it time for a (short covering) rally?

The current levels appear to be low enough for some bargain hunters to step in, and the shorts to start covering, starting a rally.

1. The S&P 500 (as of close of Wednesday, October 8) when displayed on a Point and Figure Chart , shows a Bullish Pattern, the Long Tail Down. (BULLISH)
   
2. The Stocks above 50 Day Moving Average is an extremely low 1.20% (BULLISH)
   
3. The Stocks above the 200 Day Moving Average is an extremely low 4.20% (BULLISH)
   
4. The New High Low Index ($RHSPX) is a very low 0! (BULLISH)
   
5. The Ratio of Stocks Above 200 day Moving Average to Stocks Above 50 Day Moving Average spiked to a very high 3.5 (BULLISH)
   
6. The S&P 500 is overextended from the 52 week high and is down around 38%. This is a rare occasion and one year forward returns at these levels have been market beating returns. We have not been at these levels since the great bottom of 1974. The over extension is even worse than the bottoms in 2001-2003, 1987, and 1970. (BULLISH)
   

Maybe it is time to trade or accumulate stocks or equities for the long term?

One Year Forward Return on S&P 500 Stock Market Looks Historically Positive From Here

The Stock Market as represented by the S&P 500 Index had a bad day, going down 60.66 points to 996.23 for a loss of 5.74%.

Historically, today is a unique day.

Previously, this blog made a study of the S&P 500 from 1950 to March 2008 and looked at the one year forward annual return based on the S&P 500 index in relation to the 52 week high and 52 week low.

We calculated a special value called HOLU which maximizes the distance away from the 52 week high, and minimizes the distance from the 52 week low.

From 1950 to March 2008, there are only 59 trading days where the HOLU value exceeded 30%. And the average one year forward return during those 59 days was a market beating 22.13%.

Today's HOLU Value is 36.79%, with the 52 week S&P 500 low of 996.23, and the 52 week high of 1576.09.

The highest HOLU value during this period was 44.11% on October 3, 1974.

The longest time period where the HOLU value remained above 30% was from August 14, 1974 to October 9, 1974 with the exception of two days in this period where the HOLU briefly went under 30%.

Time to Accumulate?

Based on this, now might be a good time to be a contrarian and start accumulating index funds or ETFs.

However, the market could still go lower and possibly approach the record 44.11% HOLU value on October 3, 1974.

But for the true long term investor, having a cost basis around this level or lower could be a profitable move.

Today's S&P 500

Time to Start Accumulating? Where's the Bottom after Today's Massive Drop

Today was not a good day in the stock market, as the S&P 500 went down -8.8% from 1213.27 to 1106.42 (-106.85). The market broke below the previous low of around 1133.

Where's the Bottom?

Based on Previous Chart analysis, there could be a good chance that the bottom of 1070-1077 could hold. If the market easily breaks through this level, the market would truly be in trouble.

But we believe that the 1070-1077 level could hold.

If the market does get there, we will not necessarily go straight up. The Bottoming process takes time. In fact, we believe we could have a very volatile, very violent trading range, and we could even have a bear market rally all the way up to 1270, 1330 or even 1387 before re-testing the low.



The average bear market decline is said to be around 30%, and we are currently around 30% below the recent high of 1576.

1077 is also the 61.8% retracement from the 2002 low of 768.63.

Should we get back in the market?

While the market needs time to recover, it is possible that we are near the bottom.

It is difficult to time the bottom, but there are some possibilities:

1. It might be time to start slowly accumulating some index funds. One can invest a little bit at a time over the next year or so. Over the long term (10 years), people could say that this could be a valuable buying opportunity. However, we may have to withstand the great volatility ahead.
   
2. Start looking over potential buys for the long term. While it is not wise to try to catch a falling knife, keep stocks on your watch list.
   
3. Make sure you are not taking too much risk in your discretionary portfolio.
   
4. It might be time to review your goals. What do you want to do with the money you are investing? And when do you need it by?
   
5. Remember to diversify.
   
6. What sectors would be good to own at this time? Cash rich companies? Consumer Staples? Determine your strategy.
   

Today's Chart

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

Crude Oil and Natural Gas Chart, Support and Trendlines

The Chart above shows Crude oil support levels at $100 a barrel and $87.71 a barrel. The 50% and 61.8% retracement from the three year lows matches horizontal resistance, which is good validation.

The bottom chart shows the ratio of Crude Oil to Natural Gas. We see the trend line of this ratio. If the ratio of Crude Oil to Natural goes back to trendline (around 12:1), then that means either Crude Oil continues to drop or Natural Gas increases or a combination of both.

Today's Chart