Testing Bottom

Includes: DIA, QQQ, SPY
by: Philip Davis

We topped out just under 14,200 on the Dow back in early October and a quick check on the old abacus tells me that 10% off that number would be 12,780, just a tad higher than yesterday’s close. Unfortunately, I tend to toss out what I consider spikes and I see a triple top in May, July and October at 13,750 and 90% of that comes out to 12,375, which is pretty near the median of the first quarter’s gyrations. I’m going to assume that stocks have gained SOME real value in 8 months and we’ll say that 12,500 should be a very serious floor while holding up at this level (12,780) will not chase me out of my trading range of 13,000 to 13,300.

Painful though it may be, that means we need to roll some more and buy some more down here, hoping for a good turn while keeping a good number of index puts and focus puts just in case it never comes. "I see their knavery: this is to make an ass of me; to fright me, if they could. But I will not stir from this place, do what they can: I will walk up and down here, and I will sing, that they shall hear I am not afraid." - it’s Shakespeare man, the guy knew his trading psychology, that’s for sure! Another great market philosopher is Yoda, who said "Fear is the path to the dark side. Fear leads to anger, anger leads to hate, hate leads to suffering." I think anyone who wasn’t well-hedged in the past 30 days know exactly what he’s talking about!

Yoda also said: "Named must your fear be before banish it you can." and that’s where we are in the market’s 5 stages of grief - Acceptance! We spent the whole summer in Denial, Cramer famously took us through the Anger stage with the Fed and we quickly began bargaining to salvage the financials which led to depression as things looked worse than we thought bringing us to Acceptance. We have named our fear (financial meltdown, $100 oil, Recession) and now we can finally start into the abyss and hit rock bottom on the road to recovery (assuming we don’t die in the process!).

That’s right - you can name your fear anything you want but, as the previous rulers of this planet discovered, if your fear turns out to be a cataclysmic event like a giant asteroid wiping out your ecosystem, then you’re pretty much going to die. Thank goodness we are a far more evolved species and would surely respond swiftly to such a threat to our planet… Oops, I almost forgot who’s in charge! Well not for long - in fact Al Gore was over in the White House yesterday and it looks like he was deciding where to put his Sports Illustrated swimsuit calendar when he moves back in as Bush grimaced for the cameras.

Asian markets were mostly down on their sub-prime fears but the Nikkei added a little length at 15,222 but the Shanghai Composite continues to decompose with yet another 2% drop on both the A and B sides now testing critical levels of 5,000 (5,102) on the A shares (down 20% from 6,429 on 10/16) and 300 (316) on the B shares (down 19% from 392 on 10/16). If Shanghai is not done going down, then we probably aren’t either.

Europe fell off about 1.5% this morning as the EU goes to trade war with China over currency imbalances. This is good for us as we were alone in that battle for a while but, now that the dollar is worthless, it’s more Europe’s problem than ours.

Back home, home prices are COLLAPSING with a record decline of 4.5% in Q3 and another $1.2 Trillion (5%) in losses is now forecast for next year with "at least" 1.4M homeowners losing their homes. Don’t forget these "homeowners" don’t tend to be hermits so multiply that number by 3 for the "at least" number of new homeless that will be coming to a street near you in ‘08!

Today they are making a big deal about the Abu Dhabi investment in CitiGroup (NYSE:C)which I thought would be a big deal yesterday when I reported it in the morning but, once again, we are way too far ahead of the MSM. Let’s see what the markets do with this as we continue to look for that ellusive bottom.

It’s good to be back - let’s have some fun!