Let's Get Ready to Rebound

As the Dow Jones Industrial Average soared yesterday to a nearly 900-point gain, the largest financial ETF rode the top of the wave.

The Financial Select Sector SPDR (XLF) gained a one-day trading record of 15.7%, the biggest jump for the fund since its inception nearly 10 years ago, reports Greg Morcroft for MarketWatch. The previous record for the fund was this July 16, when it rose 13.1%.

Whether yesterday's move was the beginning of a trend or just a dead cat bounce, the market rebound will happen and we need to be ready for it. A number of funds are up 15% and 20% since the market low, while some others are less than 10% below their 50-day moving averages.

There are trillions of dollars sitting on the sidelines right now as investors ride out the storm, but when the bottom hits and a rebound begins, investors need to be mentally prepared and ready to go.

Most funds are far below the 200-day moving average, meaning it would be a long wait before a signal to buy is reached. We haven’t been so far below the long-term trend lines in decades. As a result, we have a short-term plan for getting back into the markets if the rebound is real:

• When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
• When the fund goes up 5%, put another 25% in.

By the time this happens, the 200-day moving average should be well within sight, and things should begin operating in line with our normal buy parameters once again.

We need to be clear: no one is saying that the bottom has been reached. We only need to be ready in the event that it happens (and someday, it will happen). It might happen so swiftly but quietly that it will catch everyone off guard.

The markets were moving ahead of an anticipated rate cut by the Federal Reserve. Analysts expect that the key rate will be cut from 1.5% to 1%, bringing the federal funds rate to its lowest point since 2004.

Banks have started receiving money from the government’s bailout plan. Here’s a list of who has received what so far.

Experts are saying that as far as the market goes today, nothing fundamental has come out to bring it sharply up or down. But no one expects that the market is higher for good, but rather that volatility still might be the order of the coming months. Out of the 20 trading days so far this month, only two haven’t closed up or down in the triple digits.

XLF is down 47.4% year-to-date.

Comments

[NeilEzell:]

Tom, what's new about record gains this year. They've became meaninless. As you pointed out July 16 was the previous record, 13.1 % up. And then what did the following months show? Amazing swings up and down seem the norm now. I agree though "be mentally prepared" for when we reach a REAL bottom. Please contact me when we reach that point LOL. No offence Tom, your just doing your job. Much better than many than most are writing.

2008 Oct 29 11:59 AM

[vince v:]

operating in line with our normal buy parameters once again.

FYI - page missing on this link

2008 Oct 29 01:22 PM

[Paul V. Azz...:]

Tom, I get your thinking, but what are your rules for exit if the rebound is a dead cat?

2008 Oct 29 01:49 PM

[Kunst:]

Bear market rally on the way! Just don't stay for the ride down to the next new low.

2008 Oct 31 12:52 AM