The Markets Will Reward the Patient

The market continues to meander nowhere.  It is stuck in a sloppy trading range and we are witnessing whipsaws almost every single day.  The light volume trading has kicked in and is making the market vulnerable to sharp swings in either direction.  I am still in the belief that the broad markets will work their way down to the lows of July before we see a more substantial rally.

For the short term, the Dow & S&P are setting up rising wedges from the lows put in from July. 

As you can see, a rising wedge formation on the Dow.  There is an outside chance that we tag the yellow line, however, I believe the lows will be challenged again in the coming weeks.

The S&P 500 is painting a similar picture.  I continue to hold to my 1180 to 1200 target for this move down.  1165 is even possible but we will evaluate once we get closer to that level.  We made a note on the chart that volume is currently very light.  Remember, many traders are on vacation, making this environment very difficult to trade for day traders.  Once the big money comes back from the Hamptons, they will drive this market.  I am thinking down so that they can buy and then up STRONGLY.

Our next chart is of the $BKX, which is the banking index.  I want to point something out here which is find interesting.  This index has made a 61% retracement off of the May highs.  This is a good sign.  This is our first sign of strength and should put us on guard for a weak pullback so that we can go long this sector for a more sustainable rally.  We need to stay patient and the market will reward us.  I will do an extensive writeup on the banking index to give you some ideas of what looks good. 

Lastly, I want to show you a chart of Goldman Sachs (GS).  It is interesting to note that this stock is trading near its lows from July.  There is a theory that when the market flushes out the leaders, a bottom is finally in.  Well, our leader may just get flushed out before this is all said and done.  Let's keep a close eye on this one.  I am thinking that we will see a large failure in Fannie Mae (FNM), Freddie Mac (FRE), Merrill Lynch (MER), or Lehman (LEH) before this is over.  I also suspect that the internal indicators of health in this sector will be relatively stronger than the previous move down, setting up a bullish divergence which will be bought vigorously by the big players. 

Stock position: None.

Comments

[SHARK&PAUL:]

Have read 12-15 words from it.Funny that everybody got so smart on financials when they are down 50-90%.
Even if market will crash,expect it starting today since 11550 Dow Jones and then wait for the last hour,I am not sure financials will crash the same as IBM,GE,or Wal Mart as the rest of the secors have a nice way down to catch with Fannie Mae and Freddie Mac,in few years time all the stocks will be so cheap like on fire sale and nobody will buy as there will be no money to buy.

2008 Aug 22 09:55 AM

[whidbey:]

You may have to be patient for a longer period than you suggest. The declines, when they come, will be substantial as investors finally see that the coming dislocation is based demand destruction in the consumer sector. It is here and will stay until housing is fixed. When will that be? Do you live in a closet with a TA book? Nice try, but no sale.

2008 Aug 22 03:37 PM

[Kunal Vakil:]

Your a fundamentalists...have you ever heard that stock prices reflect future expectations of earnings? The market is telling you now that it believes that the financial turmoil will be over sometime next year. Why would big money wait till then to buy? They are going to buy now when everyone is fearful and stocks are on sale. Mark my words here, the financials have or are very near to an important bottom.

2008 Aug 23 09:01 AM

[jay fredric...:]

The oil shock to our economy has just started to take hold. As more and more people spend more of their take home pay on gas, they'll have less to spend on all other things that create jobs and improve profits. Once gas gets to $3 a gallon the market begins to move up. IF IT DOESN'T, THE SLOW BLEEDING WILL CONTINUE. it could be 7,500 on the Dow before there would be any substantial rally with oil being up.

2008 Aug 23 09:55 AM

[FWallace:]

K.Vakil....

great article and analysis, I will patiently await more to come...

Thanks

2008 Aug 23 10:15 AM

[WBJ:]

Kunal,

Thanks for your analysis. On friday, the Dow has successfully closed above the trendline you showed in your chart. To me it seems like the market has some more uplegs. What's your take in the coming week?

2008 Aug 23 12:30 PM

[Steven Hansen:]

Kunal, i don't see where the market will be getting its legs from. the consumer does not seem capable of stimulating the market. now the talking heads are saying the foreign markets as still linked to the US market. the problem here is the perma-bulls trying to push the market up before the fundamentals are in place for a long term bull market to run. before talking the market up, let it heal for another six months and see how things are then.

2008 Aug 24 12:41 AM

[Kunal Vakil:]

The hand,

The market is a discounting mechanism; it will price these issue into price well before the issues become a reality. It appears that most are forecasting the subprime mess to be controlled at some point next year. The big players will not wait that long to make their purchases. Now is the time, in the face of fear. I still believe we challenge sub 1200 on the SPX as I suggested above and it should probably happen in the next 3 to 4 weeks. This bottom should mark an important in my opinion.

2008 Sep 11 03:51 PM