Stock Markets Nearing Important Bottom

The stock market is nearing what I think to be a very important bottom. I believe that last week's options expiration-related short squeezing rally will lead into a pullback that will test or even break the recent lows at S&P 1200. If we get down there, I will be a heavy buyer from 1200 on SP all the way down to 1182 for an intermediate term (9 months to 18 months) hold. Some major buy signals are lining up here.

1182 represents the 50% retracement of the 5 year bull market run from the March 2003 lows to October 2008 top on the S&P 500. This market could run as low as 1165 but this move would be fast and most likely occur on an intra-day basis.

An internal washout in the broad market looks to have occured for a couple of reasons:

• Panic as measured by the NYSE NEW LOWS set in a single day high an all time high early last week. Very bullish from a contrarian point of view.

• NYSE McClellan Summation Index, which measures the internal health of the stock market through analyzing the advancers versus decliners daily, is a very reliable tool in identifying major stock market bottoms. This index hit its second lowest level since 1929. The 1998 bottom (Asian flu) produced an even lower reading. Again, bullish from a contrarian point of view.
• AAII, which measures investor sentiment, is near an extreme level of pessimism. The last time we saw this proportion of bears in this market was 1994, right before the dow began its decade-long bull market. The number of bulls as polled by AAII is now at its lowest reading since 1995.
• Volume on the NYSE has been crescendoing to record levels; indicating a real fear or panic.

An external washout (price deterioration) is now due. This should bring the final wave of selling, coupled with evidence of inter-market divergences. i.e., banking, housing, and some other laggards should show some relative strength for my theory to hold true.

The "news" over the past year has been nothing but bearish, day after day, suggesting that this time it's different. The market is never different. It repeats its patterns over and over again. The credit crisis, deteriorating dollar, high gold prices, and high oil prices are troublesome, but the market is a discounting mechanism which has already priced these fears into it.

There is always a crisis and it won't be handled any differently this time by the criminals on Wall Street. When I mention criminals, I am referring to the engineers of this selling. The same guys who distributed, or sold, their shares between March 07 and October 07 are now keeping a downward pressure in the market in order for them to pick up their shares on a huge sale. When they are done, they will remove that downward pressure and allow the market to move up effortlessly.

Now, there is a chink in the armor. The market will soon be entering a period of bearish seasonal tendencies in the August to October timeframe. While I do believe a robust rally will come out of the levels I suggested above on the SPX, I am not going to rule out an attempt to retest the general 1165 to 1200 area, come August-Oct timeframe. This time period also coincides with the nesting of the 9 month cycle lows, the last one being in January of 2008. The theory of a 9 month cycle is very reliable in identifying significant bottoms in the market.

However, once this is complete, the market should be allowed to run in earnest. Volatilty should remain very high for the foreseeable future.

Comments

[cynic69:]

Kunal
You sound like a guy who is long this market. Don't you realize that neither the economy nor the market can survive with energy prices at this level? Wait you say, it's doing OK so far. Not true. The refiners are still refining oil they bought for $95. This combined with the fact that Bernanake and Paulson are trying to save the White House for the republicans by flooding the system with liquidity has delayed the coming market crash. I'm afraid that your past experience is worthless because the economy is in its peak oil death spiral. I think that after the auto industry is cut in half and the airline industry disappears all together most stock prices will be about 20% of their current value. My advice is to sell whatever stocks you own and buy a truck load of puts.

2008 Jul 21 02:22 PM

[DaveW:]

Hey double-click, real intelligent post. Shall I say, 'takes one to know one', to be equally intelligent?

2008 Jul 21 03:48 PM

[barnburner:]

galewhitaker, Kunal is a daytrader, he doesn't give a sh*t about your long term forcast he is just speculating about the short term.
aSpadaSpade, get grip, this guy could probably buy sell you a dozen time over

2008 Jul 21 06:09 PM

[Steven Hansen:]

i wish somebody would demonstrate how this is the same old sh*t happening. yes, yes, yes.....market down, investors gloomy, etc, etc. historic cycles, blah, blah.

but if you examine the universe of data present today, it seems a lot different. we are running too close to our energy threshold to continue economic expansion, the dollar is no longer the currency of refuge. the center of economic power is shifting from west to east. these are not temporary issues the market can simply rebound from (such as credit crisis and a simple recession).

2008 Jul 21 09:15 PM

[Kunal Vakil:]

galewhitaker, its NEVER different. The charts do not lie and they are not lying this time either. This market is very close to a very robust rally that will most likely run it higher for the next 9 to 18 months ahead.

Energy, financials, etc. Didn't we have the same sentiment in 2002 2003 timeframe: war, worldcom, enron, stock market crashing from 2000 highs, overbloated earnings, etc? We then witnessed a gigantic rally that lasted 5 years and didn't look back. This pattern repeats itself at almost every bottom.

I am here to make money, not to pontificate on economic conditions that have no bearing on price movements in the market. Remember, the market is a discounting mechanism. When I see panic, which I have seen, I see the sale coming to an end. That time is near.

Please re-read my post. I am NOT long this market. It is quite the contrary. If you review my history, I have been bearish all the way down from 12700 on the DOW Jones, calling for this financial debacle every step of the way.

I suggest in my post that the market is CLOSE to a significant bottom that I will buy with a 9 to 18 month time horizon. That is CLOSE but not here yet.

"I will be a heavy buyer from 1200 on SP all the way down to 1182 for an intermediate term (9 months to 18 months) hold"

This is precisely my plan

2008 Jul 21 11:19 PM

[Schippi:]

Excellent artical

2008 Jul 22 01:24 AM

[ggbbppl:]

like they say you can not beat city hall . this is the truth if yoyu miss this you lose. a 80 trillion dollar and a 15 trillion housing problem. governoment fix the problem oh was there a problem? i do not think so. look you want to make some money the government will use our tax money to bill them out ,but they will pay for their house which they can afford think think think stupid

2008 Jul 23 01:42 PM

[ggbbppl:]

people got drunk seeing the house they are living in they could not believe it. now they will pay fre and fnm at a reasonable rate . this is AMERICA . THANK YOU PRESIDENT BUSH. I THINK YOU STARTED TO LOOK LIKE YOU FATHER TRHE BLOOD LINE CAN NOT FAIL . thank you for not vetoing this bill ytou have help your people remember we are the beARD BASKEK OF THE WORLD . ASK YOUR MOTHER. LOOK MR PRESIDENT YOU ARE A HUMAN BEING YOU DID GOOD . YOU GOOD iraq NO FORIGNCOUNTRY HAS CAPTURE iraq THANK YOU FOR HELP YOUR PEOPLE AND COTINUING TO PRESS IRAN . NO NUKE ......................... for NORTH KOREA STANDING you got them by the ball thank you CON RICE

2008 Jul 23 01:57 PM

[mkttrdr:]

Good work-but K, this will be a short rally. Gale is close to right on. Banks won't even lend to other banks. In fact they say not to buy (our stock)for at least 18 months-they are not buying back their own shares yet! Why?

2008 Aug 13 11:53 AM