Almanac Investor Alert
Behold, the Bear Market Bounce 3/20/2008
Weekly Changes
DOW 12361.32 215.58 1.77%
S&P500 1329.51 14.03 1.07%
NASDAQ 2258.11 - 5.50 - 0.24%
Recent market action can either be construed as a bottoming process or a bear market fake out; only time will tell, but we are leaning towards the latter. When the market seems to shift direction, it is important not to lose perspective. We are in a bear market and the economy is more likely than not in recession. The major indices have posted four consecutive losing months. At the recent market lows, the Dow was down about 17%, the S&P 19% and NASDAQ 24%. Trends of this magnitude are not easily reversed.
Dow 12000 is currently the front line in the battle between the nascent bear and next bull. Should 12K hold, and significant support is established here, the bear may be short-lived. However, should it fail, the next support level is around 11K. We do think that there is going to be a buying opportunity this year, but not just yet. The job market continues to deteriorate and inflation continues to percolate, stoking the fire of stagflation. There is still too much downward pressure, too much uncertainty and most importantly too much optimism (despite recent negative sentiment readings).
Recent moves in the equities markets are typical for a bear market. In the recent issue of the Almanac Investor, we offered the following observation in the Market at a Glance on the top of page 16:
Technical: Bearish. The massive 417-point move on 3/11 did little to alter the technical reality that the Dow has now entered into a confirmed bear market. In fact, the recent move up smacks of a fake out similar to the 489 point and 447 point moves in July of 2002. 12K has become an important support level – if it fails to hold Dow 11K is definitely in play.
This proved prescient as a second 400 point advance followed March 11’s gain only five trading days later on March 18. Moves like this often are a fake out or trap and precede significant declines as was the case in 2002. During the first big move, investors watch from the sidelines; the second one a short time later forces money back into the market. Investors think that the train is leaving the station so they get back in. This is the nature of the bear trap. No one wants to be left at the station.
The equities market is a dangerous place right now. We have contended for some time that the Federal Reserve holds the key to the health of the stock market. Should the Fed lose control of the economic situation, whether in reality or even if it is perceived to be the case, then a major market washout may occur.
The Bear Sterns bailout, yes it is a bailout, is cause for alarm. As Norwegian playwright Henrik Ibsen so eloquently opined over a century ago “Those heroes of finance are like beads on a string, when one slips off, the rest follow.” Will Bear Stearns be the only causality? Possibly, but we think that the financial reckoning resulting from years of slack oversight, negligence and abject greed has yet to be realized. Until faith in the U.S. financial systems is restored, risk for a market meltdown remains elevated.
Downside protection is in order for all investors. There is a litany of ETFs that offer adequate protection. Refer to the ETF Lab pages under the Bear/Short sector for the complete list. Don’t fight prevailing market trends, patience will be rewarded.
STANDARD TRADING GUIDELINES!
BUY LIMITS ARE GOOD TILL CANCELLED.
ALL STOPS EFFECTIVE ONLY WHEN THE STOCK CLOSES BELOW THE STOP PRICE.
ALWAYS SELL HALF ON A DOUBLE.
Please Trade Carefully.
Jeffrey A. Hirsch, Editor
J. Taylor Brown, Director of Research
Stock Trader's Almanac® Almanac Investor Copyright © 2008 Wiley Periodicals, Inc., A Wiley Company.
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Pursuant to the provisions of Rule 206 (4) of the Investment Advisers Act of 1940, readers should recognize that not all recommendations made in the future will be profitable or will equal the performance of any recommendations referred to in this Email issue. The information presented in this Almanac Investor has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of the editor, its employees, or affiliated companies may, in some instances, include securities mentioned in this Almanac Investor Alert. Additional disclosures can be found at www.stocktradersalmanac.com.
