Here's How This Week Could Unfold

Traffic has surged to my blog as of late and I’m sure it has to do with lots of people being very nervous about what is going to happen in the markets this week, as well as searching out others' views on the markets.

I myself did a lot of surfing this weekend and I have to say that those making the case for a rally are few and far between. Most are very negative and with good reason as it doesn’t seem like it’s going to get better anytime soon. Asian markets aren’t looking so hot and I suspect we’ll open down unless the futures did something while I slept.

Here’s what I think are the two most likely scenarios that unfold this week and I’m going to keep this short and simple, as things change so fast in this environment and charts aren’t worth a whole lot right now with all the forced liquidation.

1. We tank. Tank very hard, putting the bottom somewhere around 6800-7000. Remember the markets are a forward looking machine. Whatever you see going on in the markets now is where the market thinks the economy will be in 6-9 months. If this drop happens in 1 or 2 days I think we’ll slowly start to move higher and I doubt you’ll see many analysts calling a bottom. If it’s a slow bleed to these levels then we’ll probably have another 10% drop from there.

2. We move higher with what will be labeled a bear market rally, or a trader’s rally. I positioned myself last week with some long positions, as I believe this is the most likely scenario. Otherwise I wouldn’t have gone long. I did this simply because most people aren’t expecting the markets to go up and some don’t ever think the markets are going to rise. In my experience, which is still limited when measured against others, the market does what the majority doesn’t expect, and most people are buying puts right now.

If we move higher from here I suspect we’ll get back to the 9500 level, and I reserve the right to change that projection depending on how fast we get there. If it happens all in 1 or 2 days it won’t stick.

However if it’s a slower grind up it might have a little more lasting power and could move higher, but ultimately will roll over heading down to form what I believe will be the big move, taking everybody to the cleaners, lights out, never invest again, bear market capitulation finale.

These are the thoughts I’m wrestling with inside my brain and I thought I’d share. Thoughts, opinions, objections?

Comments

[Timmy the T...:]

So ,

The market may tank and then again it may rally.
Hmmm.....

2008 Oct 27 08:01 AM

[Barquish:]

Funny thing is that the Sovereign Wealth Funds who are denominated in USD with the current 25% drop have actually ended up being somewhat balanced wit the USD appreciation against the value of the currencies of the origin of the funds.

I think that this market situation may have additional elements to it that were not quite in any previous market crash insofar as the fact that Chinese and Middle Eastern money are providing a significant contribution to the US market.

2008 Oct 27 08:17 AM

[Le French:]

Fluffff.....

2008 Oct 27 08:20 AM

[formerhawk:]

What goes up must come down, and what goes down will go up again. Look at the soaring 90s. Late in that decade John Bogle of Vangard wrote an article about return to mean. In it he predicted a return to mean in this decade resulting in a 3-5% roi. Look at the S&P and you will see a return during this decade of about 3-4% (if you were lucky and got out) or more likely negative growth. Bogle's estimate of returns in the 90s were 12.5%, at least 2.5% higher than what was considered normal. Now we probably have an overdone down trend from the mean. Your article looks at short to mid term and not long term. Long term I forsee a return to mean(average mean lies between 4-10%using years from 1929 to present) in the middle area of the range of mean returns (maybe7-8%) for the forward looking decade. I might add here decade for the stock market is a misnomer. There appears to be a 30 year cycle of 15 year bear and bull cycles. Of course as in all things that are subject to mathmatical probability the exact start time and end time of these cycles is random so that 15 year cycle can be between 13 and 17 years. The current bear started sometime in the late 90s (go back and check Buffet's returns at that time, he never invested in tech) probably about 96 or 97. Given that the next bull market cycle should start between 2010 and 2014. Market timing is impossible but market trending may be predictable.

2008 Oct 27 08:47 AM

[global87:]

Another--It could be bad but--Not really sure

2008 Oct 27 08:49 AM

[Master Blaster:]

It's evident that this whole crash is a result of the decreasing oil prices. In fact, all markets seem to be dominated by the same. Oil goes high, market goes high. Oil goes low, market goes low. Oil goes low, dollar goes low. We are being attacked by hatred. They have defeated our Safety by the ruthless attacks of 9/11. This resulted in the loss of our belief in our Safety. Now they're attacking our economics, and winning. Their intent is to destroy this nation. Unless we find a way to gain back and institute all invention patents that would reduce fuel usage that have been bought up by the Oil Giants, we are looking at total defeat. We've all heard of the gadgets that would make any car get 50mpg. Then that's the last we hear of them. The patents get bought so that the world continues its dependance on oil. Our government should step in and spend some of this money on forcing the patents to be available and implemented. The only way we can win.

2008 Oct 27 08:58 AM

[Chubbs:]

Impossible to predict the future.

2008 Oct 27 08:59 AM

[fg144331:]

I'm sure your increased traffic is due to the nice, interesting and newsy articles that you write. You are on my 'watch list'. Thanks for some good reading.

2008 Oct 27 09:41 AM

[Jimbo:]

Given the frantic advertisements regarding fuel mileage by most auto manufacturers, I seriously doubt that some unseen "evildoers" have "bought up the patents". I am 79 years old and I recall those rumors being attributed to the oil companies at least fifty years ago. The thesis regarding a financial attack in lieu of a violent terrorist one seems more credible to me. The Bin Ladens of the world are not poor, uneducated victims but rather hold advanced degrees from some of our best institutions, many of whose faculty actually despise the U.S.

2008 Oct 27 10:00 AM

[axelrod608:]

Well, look for some BIG selling in Nov and Dec. Two weeks ago, the crash was due to hedge funds selling to pay for August withdrawals. The withdrawals for the past two weeks will be paid with money from selling in Nov and Dec. There could be another selling spree a month or two later to cover withdrawals precipitated by the Nov/Dec selling.

After that I doubt there'll be any money left in the hedge funds that will want out. At that point all the scaredy cats will have run away. So look for a bottom sometime late in the 1st quarter.... if earnings are better than awful. But that bottom could be a very long one.

After what's happened, I can't see very much money coming back to the market until the volatility gets back to reasonable levels.

2008 Oct 27 10:00 AM

[empiricst1:]

I tend to agree with you about a trader's rally, but am almost just as expectant of another big, bad, bear move. The fundamentals are bad, getting worse, and are hogtied to Pualson. Unfortunately, Paulson is not very good at what he does(Incentives for big banks to acquire others w/no requirement to lend?), and still pays attention to his ideooogy instead of good hard econ.

2008 Oct 27 10:12 AM

[secmaven:]

The tech bubble crash of early 2000 did not turn around until early 2003. And that bubble affected a small percentage of the consumers in this country. The housing bubble and the credit bubble bursting affect every consumer. The resulting crash will certainly take longer than 3 years to find its bottom. We are only one year away from October 2007 when the DJI hit is record high. As thousands and thousands of stocks continue to be lousy investments by comparison there are only three or four precious metals. Remember secmaven's maxim "In every market there is something that goes up." Precious metals will be that something during this bear market as the governments of the world digitize more and more fiat money into being.

2008 Oct 27 12:53 PM

[Smarty_Pants:]

Good chance that the markets will be rather subdued until the FED decides what they will do with interest rates, then all heck will break lose through the end of the week.

Some stocks might go up, others might go down. That's my prediction, and I'm sticking to it.

2008 Oct 27 03:05 PM

[moonbat1775:]

I'd like to predict the future;
but surely if I do,
the One who owns the future
might pull a switcherroo.

2008 Oct 27 03:30 PM

[Smarty_Pants:]

It all depends on how you look at things:

Optimist: The glass is half full.
Pessimist: The glass is half empty.
Engineer: The glass has a 100% margin of error.

2008 Oct 27 04:02 PM

[Smarty_Pants:]

There once was a trader named Annie,
Whose hunches were simply uncanny,
She risked all her pay,
Margined long Fannie Mae,
And now she must live with her Granny.

2008 Oct 27 04:06 PM

[enna77:]

you do not seem very bright. I suggest u start buying qqqq, and spy, 10k every 2 weeks

2008 Oct 27 04:33 PM

[enna77:]

you do not seem very bright, i suggest you buy (spy)., 10 k every 2 weeks, you will be rich in 5 yrs , good luck

2008 Oct 27 04:39 PM

[Moon Kil Woong:]

I think most everyone agrees the market is currently downward skued meaning it's favored to go down everyday a high percentage of the time balanced by the risk it may go up a lot a smaller percentage of the time. Look at Black Scholes and efficient market theory. It still applies.

2008 Oct 27 11:59 PM

[thang:]

I did Investment Analysis in third year Uni, and it was all random walk theory, multilinear regression, efficient markets and zero sum game, and all that has gone out the window. It all actually depends on greed, risk aversion and insider information. What is happening is a whole series of catastrophes, stuck lending, valueless derivatives crystalizing into market value, collateral disappearing, banks going bust, inflation combined with low interest rates, and general mathematical chaos.

What a bang with which to start the new century.

Best of luck to everyone in our uncertain future...

2008 Oct 28 07:13 AM