Tuesday, January 13, 2009

Bear Market Rally Exhausted

For those of you who don't know: during the Great Depression US Stock markets initially tanked in 1929, but didn't bottom out until 1932. In-between these years however there were great bear-market rallies and many of the experts at that time were consistently telling the masses that the bottom was in and the crisis was nearly over. This (over time) started a new boost in confidence, investors reentered the markets and stocks rallied (for a short period of time) - only to turn around and begin a new (more severe) down leg just a few months later - crushing investors along the way... This trend repeated itself for several years.

Which brings us to to day... If you recall back to Oct - Nov 2008, remember the severe volatility, complete loss of confidence and the sheer panic that set in during that two month period? Stocks were smashed, gold was creamed and the dollar rallied as the Volatility Index rose and people fled to safety.

This sheer panic settled down after huge losses were incurred and conditions became massively oversold - thus causing investors to reenter and buy some "bargains". Eventually, after volatility settled down, even the financial talking heads gave their "all clear" and told folks "time to get back in"...

Well dear readers, from the looks of things, seems this recent bear-market rally is nearly exhausted and more crushing is heading our way...

If you look at the chart of the DOW below - note how the index cratered in Oct followed by a dive in the Price Oscillator (PPO Line). We had a slight upturn in November only to be followed by a lower low (7,449) late in the same month. Since that time we've had a lot of sideways action, broke back above 9,000 and the PPO has consistently headed upwards (a positive sign) - until just recently - take note of the recent PPO turn downwards. Could this signify something is about to change with 4th quarter reporting now due out?

During that very same time period discussed above, the dollar (chart below) gained strength as people became liquid and flocked to the so called "safe-haven". Note how the PPO line in November rose and became "overbought" - ultimately leading to a sharp selloff and decline in mid December. But also note how the PPO line is rising again - illustrating potential new strength (albeit probably short-term) as the Stock Markets begin to look unstable once again...

Same goes for Gold (chart below). Short term, looks like we're headed lower once again - as the dollar increases and stocks once again tank... Note the PPO falling (not a good sign for gold)

Lastly, lets take a quick look at the Volitility Index (VIX). Again, covering the same period, note how the VIX increased in Oct and Nov 08 (as the markets tanked). Take a look at the PPO highs - followed by the trend lower - until the beginning of Jan 09 anyway - see how the PPO is now indicating an new upturn.

Bottom Line:

Now I'm not a trained chartist, but I am equipped with a bit of common sense and from what I can garner, these charts are highlighting the fact that we're in for a new round of volatility, falling stocks, falling gold and a rising dollar.

More thoughts: If we take out 7,200 on the DOW (last seen in 2002) sometime in the not too distant future (which I think we will), the next stop (support) is 6,500 last seen in 1997.

DOW: Wheres the Floor?




Anonymous said...

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Another bear trap.


Markets will bottom.