Stock update - Jan 23

The above is a weekly chart of the SPY (an ETF which tracks the SPX). We believe that the scenario as shown above will play out.

Our rationale is as follows:

1. oversold on the daily timeframe

2. neutral territory in the weekly timeframe

3. oversold in the monthly timeframe

We already had the big crash (capitulation) in October and November and now the market is just going sideways. This sideways meandering is sort of a reflation trade, because all the asset markets became extremely oversold in Nov. 

o In the first up leg from Dec-Jan, some of the sectors reflated. e.g. shipping, commodities, energy.

o In the next leg up  lateJan-mid Feb, we expect some of the tech names to reinflate e.g RIMM, GOOG and probably some of the commodities which missed out earlier like oil.

We expect this action to frustrate both the bulls and bears for a month or two. From a psychological perspective, this is essential action. Since the dot com era, screaming stocks have caught the imagination of people worldwide. Stocks moving 5-10% in a single day is now considered normal. Similarly, the crash of last year, made the bears extremely rich.

From a technical standpoint, we believe the 20, 50 day moving averages and the 20, 50 week moving averages should create enough confusion and wild whipsaws to frustrate both the bulls and bear for a while. From a sentiment standpoint, bears will keep claiming "commercial real estate is the next shoe to drop" as they have since December and the bulls will keep claiming that "everything is factored in". 

From our perspective, the market lost a lot in value in a short amount of time. We are now making up time. Hence, the rangebound nature. This frustrating experience is essential to wean individuals off the stock market. When the bear market is finally over, we bet the number of people with distaste for the market will be overwhelming (yes that may include us too). Ofcourse, one may assume not to get shaken out and wait for the bottom to buy boatloads. We fully expect the market to grind everyone. On a lighter note, the quicker people lose love with the market, the quicker it bottoms. 

Case in point: The oil yahoo message board.

http://messages.finance.yahoo.com/mb/USO

or a visit to the comment section on Mish's blog (one of my favourite writers too).

http://js-kit.com/pop_comments.cgi?ref=http://globaleconomicanalysis.blogspot.com//&path=http://globaleconomicanalysis.blogspot.com/2009/01/unprecedented-crisis-in-us-uk-australia.html&label=Add%20New%20Comment&title=Mish's%20Global%20Economic%20Trend%20Analysis&admin_bg_color=%23DDDDDD

"Mish, I just listened to your Howestreet interview. I can't wait for your blog on US China relationship! I think one of the biggest risks to US Sino relationships is now Geithner's big fat mouth!" 

So now every trader is an economist, some even austrian at that? From a moral/ethical perspective traders add no value. Trading is a delta stealing strategy. We have a nation full of financial people. So much for sweating hard and earning money.

 

That being said, we believe there will be another crash on the cards. Our best guess as of now is in the March-April timeframe. 

The purpose of this post was to illustrate the point that before this bear market is over, the periods of grind will increase probably to an year or so (2010-2011)? and a lot of volume, both green and red will leave this market and distaste will grow.