After the Rally, Now What?

The six-week-long rally is over. It was huge. The Dow Jones is up almost 1500 points.

But the party is over. The Dow Jones fell under its 13 day moving average, the same thing happened to the S&P 500 and the Nasdaq composite. I had some hope that the Naz could stay above its 13 day MA, but no such luck.

Now what? According to the 1932 scenario, we might have a 2-3 months long slump, followed by another bull market. Or the market can go down big time, cross down its 50 day MA and test the March lows. I think that the Dow is going to stay in the 7000-8000 range for a while, but Mr. Market might have a couple of surprises for us.

Important decision time. I'm going to act on a premise that the Fed is in control of the situation and the current crisis is just a Great Recession, which is not going to become a Great Depression 2.0. Which means that either the March low holds or a new low will not be much lower. With stocks going down, I'm going to load up on three groups: tech, financials and bonds. Particular stocks are to be defined soon. To reduce risk, I'm going to keep transaction sizes small and take profits if I feel they are good enough. No particular stock picks right now, need to see the action.

Comments

[jeandit75:]

Alex, I agree that the $ucker's rally should be over. I would however add one risk to your scenario. I think the banks are going to sell-off ahead of the 4 May Stress Test results cause let's face it, no one wants to bear insolvency risks. Then, knowing that the FED is in control and likes to hide stuff, it is likely that the Stress Test comes out as better than expected which could set the tone for continued rally into the late Spring. I would then worry much more about the 2010 economical prospects which means that you new market low scenario would be pushed to the fall of 2009.

Apr 21 05:47 AM

[fatcat:]

Base metals are soaring...maybe the China effect...but that indicates a short term continuation of a market that won't correct too much.

The gubmint has declared that the banks will be saved...no use fighting that....its now a stock pickers market.If you can figure who's going bust,you can make a living on the short side for the next year.or so...

Apr 21 06:01 AM

[schlumpf:]

yesterday this blog moved the market:

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.


copy f. mac123449

then denies ( very fast )

www.thestar.com/Busine...

The U.S. Treasury Department has not yet received the results of "stress tests" on the health of the top 19 U.S. banks

Is this possible ?????
They test all banks at the same time??
Or do they start with one bank and then the next??
For me its unbelievable that the Treasury has no results.

Apr 21 07:04 AM

[Roger Knights:]

"Base metals are soaring"

Not according to Bloomberg today:
www.bloomberg.com/apps...

Apr 21 08:32 AM

[The Geoffster:]

The Fed's in control? I'm waiting for the dust to clear and interest rates to soar.

Apr 21 08:33 AM

[Old Trader:]

I agree with the thought of having a chunk in bonds/fixed income, specifically in global sovereign debt. I'd be a bit leary on the corporate side.

Apr 21 10:36 AM

[CLH:]

This huge down is a one day wonder and is over. This rally has just begun. This was the first correction but not the last. The fact that volume is low shows that few believe which is bullish. Stocks havent been this cheap since 1946 and 1982 which were the start of 20 year bulls.

Although the bottom is in, stocks may go no where for 5 years but no one will lose money. Dont wait for the other shoe to drop--it aint going to happen. Shorts will continue to be losers. Learn to trade until all leverage is gone and the bull has started.

Apr 21 12:50 PM

[The Geoffster:]

I'm rooting for you Cetin, but just in case, I'm hedged for a catastrophe.

Apr 21 06:11 PM

[montyman:]

And when will this next downleg happen? 15 years from now? So far Cetin H. seems to have nailed it better than anyone else.


On Apr 21 06:53 PM WAKEUP wrote:

> Nope. This rally will soon be forgotten. These things can be, and
> in this case was, engineered. It's a sucker ploy, plain and simple;
> don't bite.

Apr 22 05:50 AM