Are We Approaching a Bounce in the Market?

Once again, on Monday, the market sold off in the final minutes of trading. The Dow was still positive with just 15 minutes of trading left. I know because I contemplated leaving for the gym, but then I thought I better stick around to see how the market closes.

I don't know where all those sell orders came from, but in the last 15 minutes of trading, the market totally fell out of bed, such that the Dow fell -200 points by the bell. Volume wasn't especially high today, it was more like another example of too few buyers willing to step up. Frustrating.

click to enlarge

If you look at the chart above, you might notice that the S&P 500 is now -25% below its 50-day moving averge (blue line). Raymond James noted that "since 1928, there have only been five other periods where the SPX has been more than 25% below its 50-day ma."

Raymond James looked at the ensuing 50 days in each case, and calculated the rallies in the market. The minimum rally they found was +14%, which occurred in 1937. The maximum rally was +66%, in 1932.

The hard part is that the market wasn't being liquidated by deleveraging hedge funds back then, at least not that I know of. That said, I agree that there is a big, fierce, snapback rally brewing out there. I hope that I am nimble enough to take advantage of it. Then the question will be, how quickly does any rally get sold?

Comments

[User 278265:]

What an idiotic article. Just another moron GUESSING what the market will do short term. Why don't you just flip a coin? You would have the same odds of being right.

2008 Oct 28 09:38 AM

[investor88:]

I think Jordan has written an insightful article. His hunch backed by analysis of the distance from 50d sma [in this case a high -25%] is logical - in any case the Dow and sp500 is now rebounding strongly.

Some people dismiss charts and short term analysis but for traders [not long term investors] they are useful aids.

2008 Oct 28 09:59 AM

[anarchist:]

Anyone that breaths enough hot air to fog a mirror can see that someplace in here we will have a 'snap-back' dead-cat bounce. Great for day-traders but lethal for those trying to catch the elusive "bottom".

2008 Oct 28 10:11 AM

[DaveW:]

'lethal'? Nibbling in at this point is far from lethal for long-term investors, in fact it's probably crucial for long-term investers to dollar-cost avg. in now, not at SPX 1100. No, it is only lethal for day traders who don't apply stop loss triggers, period. The author points out that there is risk of a rally, if you're short, collect some gains here and hedge for some upside potential. There will likely be selling on strength up to year end, a rally will offer an opportunity to re-short.

2008 Oct 28 02:25 PM