Thursday, January 15, 2009

Tarpedo Trough

Today did turn out to be a good flush after all, followed by a strong volume rebound for stocks higher.

The key tell early in the day was the fact that so many quality leadership names were trading up in various leading industry groups, even while the World's banking system was ditching somewhere into the Hudson.

I don't know if we'll manage to make higher-highs on this turn, but I think we will see more than just a small counter-wave reaction. And some of these stocks will make higher highs.

1st) There are too many good charts existing at the moment in quality, growth names; exhibiting decent bases and in some cases already breaking out (although earlier breakouts before today did not manage any follow-through).

2nd) There are too few New Lows on this decline. Back in September the market had somewhere around 1600 new lows for the NYSE (meaning over 40% of stocks traded that day were making fresh 52-wk lows). Today there were only 147 NLs on the NYSE and 119 on the Nasdaq (3.8% and 4% respectively). This is a very good indication that the floor is not ready to fall-out on the vast majority of names, even if the common-stock Tarpedo ripping through the banking sector renders shares there essentially worthless. The rest of the market is consolidating at worst.

3rd) Bad news and lower expectations have been in full bloom lately, which sets up the psychology for O to grab the horns of his new term at the trough and nowhere higher. It is clear that his team is managing expectations, which means it is better for anything and everything ill to be known NOW...on Bush's watch. The news flow beginning next week will have a little less ill-charm; for a while.

The complexion of the market on this pullback has not been entirely beautiful, but quality has hung in there on the charts in the face of the Financial's return to the woodshed. This is why I only buy leadership - to try to avoid the head-chops.

Remember, the '29 crash which ultimately saw the market bottom in 1932, managed a 52% bounce from mid-November '29 until May 1930 (see chart below). Our market can be hell-bound to 2011 (or 2041), but that doesn't mean the first bounce/retracement from the initial lows cannot have a substantive rally - primarily due to the incredible volatility coming off the November low (think of wild oscillations which begin to finally subside. Until they subside, the counter moves are still quite strong...later when volatility dims, price action just grinds down until no one wants to play anymore. There will not be good-looking charts out there at that stage).

If you think that stocks are in trouble now but we will see strength sometime later this year (like 80% of the investing heads who speak on this), then you might be as full of shit as a Christmas turkey. The crowd can be a very dangerous place to hang out in in an emergency. The second half of the year has me a little nervous myself.

Of course, we will see and I may be wrong, wrong, wrong. In either case, I just prefer to ride the wave and not try to shape it. Not to get too caught up in scenarios, but staying flexible instead.

Nice plane crash often do you get to say that?

Bounce of the 1929 market - Mid Nov '29 to May '30:

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