6 Reasons the Market Should Bounce Here

On May 5, 2006, the S&P 500 closed at 1325. Friday, Jan 18, 2008, the S&P500 again closed at 1325, down from its Oct. 9, 2007 high of 1565 (about a 15% loss). This (1325) is the last major technical support point before approximately 1250 (low of 1222). Will the market bounce off of this support?

There are several indicators that make me believe it will. First, this is major support. It is a point which hasn't been reached in about 20 months – quite a bit of market growth to wipe out.

Second, the slow stochastic oscillator indicates that the market is greatly oversold.

Third, Bernanke has effectively been promising to lower the Fed Funds Rate (and the Discount Rate) by 0.5 basis points on Jan. 30. This should help people with variable rate mortgages. It should help the banks by making cheaper money available (and by decreasing the number of future foreclosures). It should help individuals not at risk of foreclosure by slowing the erosion of their home equity. High priced homes are simply more affordable at a lower interest rate. They are no longer so overpriced. The Fed's rate cut has not been priced into the market yet. It seems likely that this will happen to a great extent this coming week.

Fourth, Bush and Congress are promising a larger than expected stimulus package of $100 Billion to $150 Billion. This should put money into individuals' pockets, which many think should help the retail industry. All of this should have a positive effect on the rest of the economy as well.

Fifth, the volatility index has had a sharp run up lately. It is due to go downward soon.

Finally, there is very little economic news next week, and there are not as many banks reporting next week. Bank of America (BAC) is the only one that really stands out. B of A is conservative. Their news may be bad, but it should not be that bad! This should allow the markets to move up. The markets should be further encouraged if there are some good tech results. I note Credit Suisse put out a buy rating on U.S. equities in general last week. Then too there are now some bargains out there. For example, some of the formerly high flying shipping stocks, which now have very low FPE's, look especially attractive: DRYS (3.15), EXM ( 4.15), TBSI (4.91), etc.

Some of the stocks reporting this week that investors may look strongly at are:

Monday: WGOV, PHG, SAY

Tuesday: AAPL, BAC, UNH, TXN, JEC, JNJ, HOKU, PCP

Wednesday: MOT, GD, GILD, ATI, CTXS

Thursday: BRCM, WFR, JAVA, SPWR, POT, AMGN, F, T, LMT, MSFT, NOK

Friday: HOG, HON, WFT, CAT

The markets are closed on Monday due to the holiday. That leaves the rest of the week. I am hoping it is a great one! No one likes to see a deep recession. The equities markets tend to presage the economy by about 6 months. I am hoping we start climbing from here.

Comments

[sammyg123]

I can't believe your article actually made it to the front page of seekingalpha. You realize that stock markets around the world are selling off, and that Dow futures are down 514 as I write this, don't you? You are talking bounce here and the market is crashing. Yipes.

[Rhodomontade]

First, technical analysis is nonsense.

Second, see above. "Stochastic oscillator" -- ha, ha, ha! I am laughing out loud. You can use any fanciful jargon you want, make it sound as scientific and "technical" to impress the mathematically uninclined, but it is all just a random walk.

Third, any Fed action is already priced in.

Fourth, the politicians haven't agreed to do anything yet. They have been talking for six months about what to do about idiots who bought subprime, but still haven't done anything. What about our broken political system do you not understand to see that this money-wasting boondoggle of a stimulus package will do nothing but drive us deeper into debt and continue to destroy the value of our dollar? Or are you among that tribe of fools who believe the world owes us a living? That the savings of Asia, the accumulated wealth of their sweat and industry, will continuously be used to purchase up the debt of an entire generation of worthless politician spendthrifts why by the very nature of their positions and obligations are nothing but useless, incompetent whores?

Fifth, "the volatility index is due to go downard soon." How so? Did you see its plane ticket?

Sixth, what does news or a lack thereof have to do "storchastic oscillators and the VLI?" Either you follow your stock market voodoo and ignore all outside factors, or you don't. You can't make these stupid astrological predictions based on some pseudoscience and then blame a lack of results on some headlines or Fed action.

Truly an ill-informed article.

[hutchv]

you are an idiot.

[robster]

ay yay yay yay. Your reasons don't back up your facts. 6 reasons why it will bounce, many more why it won't. Markets priced in 50bps cut long time ago pal. If there was a sniff of 100bps i would say maybe. What about the bond insurers going belly up. Means a great deal of the banks subprime hedges are worthless, making the writedowns worse!! Don't write silly articles anymore...please.

[shaft]

While I don't find that your article itself makes a compelling case for a "bounce", I do find the extremely bearish sentiment (as expressed, for example, in people's comments to your article) quite bullish!

Also, I predict that if we are down big tomorrow (Dow > 300), uncle Ben will move...

[basehitz]

After reading all day about markets crashing around the world, I was curious how your piece, time-stamped after this news was everywhere, would find the basis for your title. You didn't even mention what is happening. Then you cite previous close on SPX when it is obvious it will gap lower by a humongous amount Tuesday barring a miracle (e.g., premarket announcement by helicopter Ben of immediate 1% cut).

BTW, depending on how ugly tomorrow is (i.e., if selling becomes irrational and jolts the VIX sustantially higher) I will likely buy for a trade.

I hope next time you give a little more thought before posting.

[Bottom Line]

Every genius wants to be the one who nails the timing of "the bounce"... it's getting old already... why hurry back in long this market... ask all those people who followed Kass' advice and started buying the financials....

[jsp9999]

This just demonstrates how hard it is to predict the market regardless who you are. This article probably was written before the future price sinks in so it's okay to make a projection. Although the author will be blamed as the most idiotic guy in the world. But think about it; Fed almost never gets it right itself let alone individuals. Anyhow, Mr. Market is much more confusing than it looks and it certainly does not look good for people on the long and wrong side.

[sohony]

a more relevant question than "This (1325) is the last major technical support point before approximately 1250 (low of 1222). Will the market bounce off of this support?"

is

"what is the next support level under 1225--1250?"

the most telling verbiage in this entire "article" is the repetition of "i am hoping..." in its final paragraph, which pretty much sums up the rather feeble argument(s).

judging by the tenor of articles on this and other sites over the weekend it would seem that a lot of people rushed in to "buy stocks on sale!" last week and the margin clerks are now getting ready to sell them out this week. there is money on the sidelines and short covering to come of course, and that will provoke a "vicious" rally for bears--question is where will that rally start?

the answer will require a more realistic estimate of 2008 profits than we currently have--perhaps that downward revision of profit estimates will revalidate the "fed model" after all!

what's really needed is not yet more $100 bills but for the air to be taken out of debt laden personal, corporate and federal balance sheets as the whole country has been living on borrowed money for so long that it's forgotten you have to pay it back one day. what a brilliant idea for companies to leverage themselves up to buy back stock! as brilliant as taking all of the bubblicious equity out of your house to buy made in china crap. or printing treasury debt iou's to fund "the deficit" because it is the right of our fair nation to have one in perpetuity.

but what happens to all that paper if gdp declines--same thing as when house values collapse--or company profits fall below the levels needed to service their debt--the holders of that debt get nervous and want to get their money back. perhaps that's why the 30 year T-Bond future closed at the pretty much the same price last friday as it did last tuesday--while the dow went down over 400 points over the same period--a very early hint of another interesting "de-coupling"... perhaps the idea of hanging around til 2038 to see how solvent the grand old US of A turns out to be won't be shaping up as the archetypal flight to safety in the next few weeks?

[Reinko]

The above article is beautiful because it proofs an important law around human so called 'logical thinking'.

The law is very simple:

Logical reasoning is the first derivate of emotion.

This is also the reason why it is so hard to create artificial intelligence; how do you get emotion inside a computer?

To Sohony: Your comment on the article was also beautiful and proofs the above law once more, thus your emotional basin is far closer to reality than the mind of the writer of the article.

[bobbyjoe]

Nonsense. I will never get that 2 mins of my life back. Thanks SA.

[Victor S]

This is why the market is down so. Everyone who has commented on this market has been negative. The market is truely what people think. In life you create your own reality. Simply put, If you believe the World is coming to an end It Will!!! So let us not say there is no water, when two third of the World is covered with it...

[A. Nomas]

I love it. Great and timely information. Thanks for posting this article. I sleep so much better knowing you guys are doing your job.

[A. Nomas]

I love it. Thank you for featuring this article. I sleep better at night knowing you guys are doing your job.

[blah-blah]

I want to thank the author for posting this. If you don't like the reasons he suggest, you only need look at the comments for a bullish reason for a bounce.

I know, you sold your stocks, went short and you are mad at anyone who disagrees with you. You are now part of the herd in a bull and I am the guy telling people to be cautions that it might crash. Just like when everyone thinks it will go higher, it stops and when everyone thinks it will go lower it stops.

Including today's action we are very close to at least an interm bottom. Capitulation and excessive negativity, wonderful.

When are you going to play the market and stop letting the market play you?

[kevintx]

1. S&P 1325 support: possible
2. Stochastics oversold: maybe, market down abt 18%
3. Fed 0.5% cut not priced in: doubtful. Fed futures even some 0.75%. Not sure ARMs are tied to this if they would reset. This is a big cut though ~10% Fed model valuation jump of market.
4. $150B stimulus: Last rebate $300 gave about 0.7% GDP boost to 2H 2001. Market kept sliding. Now it maybe $800, but still too uncertain right now.
5. VIX overshoot: nope. now 27, hit ~30 August and November
6. Less bad news: Dunno, still catching up on old bad news.

The market has been too high for awhile.

[427mustang]

Somebody should take your keyboard away from you. There is a better chance I will wake up tomorrow 30 years younger.

[David White]

FYI, I wrote this article on Saturday (Jan. 20). SA just did not publish it immediately. I think it still has some interesting information in it. I certainly didn't claim to be unequivocably correct. The world markets did not open until Sunday. I did not ignore the world markets. Obviously I was hoping it would bounce. With the futures down today by so much, I am now hoping it will find support at 1250 or at worst 1220. I don't think my technical analysis was grossly flawed. The market is just not doing as I hoped it would. I did mention that further support was lower. Clearly I thought there was still a strong possibility of the markets going lower. News trumps everything. I did not foresee the large crash in the world markets for the last 2 days. Clearly this had a large effect on what the U.S. markets will do tomorrow. I think the stocks I indicated are worth watching. The markets may key off their results this week. Also the shipping stocks do seem to be oversold. The Baltic Dry Index did go up for Capesize ships.
The market may still bounce off a lower point, or it may continue downward. This crash in the world markets may reset the bar. It may indicate that the current estimate for world economic growth of 4.8% in 2008 is too high (by the IMF). The world wide crash is a reason in itself for the markets to go lower. The world wide markets probably presage world wide economic performance about as well as the U.S. markets presage U.S. market performance. This may mean that the good news we were expecting from the multi-national companies may not be forthcoming. It now looks like we will get into recession territory on most if not all U.S. equities markets tomorrow (>20% loss from the previous high in October 2007).

[David White]

It may be a good time to watch the solar stocks too. One that I have previously mentioned is LDK. No doubt it will get hit like everything else tomorrow. However, it has sold virtually all of its production capacity for 2008 and 2009. It has even sold a significant part of 2010 production. It will be hard for LDK to get hurt too badly by a short lived recession. This crash may present a great buying opportunity in this stock (and likely other solars or a great oil stock like PBR).
It is also hard to believe that China will have a recession just before the Olympics. The HSI may have lost a lot, but it was at approximately 15,000 at the start of 2006. Now it is at approximately 22,000. It is still significantly ahead of 2006. It is even still ahead of the start of 2007 (about 20,000).

[David White]

In answer to someone's question, there is further support at approximately the 1180 level.

[Chuck]

I was gonna say, "You F'd up",
but now I'll use my daughter's comment,

"DUH ?!?!"