AFTER 2250 DOW POINTS, RELIEF!
That all said, normally, we would rather talk about the big picture. But because of last weeks action, we will spend a little bit more time on the short-term action.
The big picture does not change. We are in a world wide bear market for stocks. As we have told you on numerous occasions, this did not just start a few weeks ago. Just like most bull market tops, this was another multi-month, arduous process where little by little, piece by piece, areas of the market topped out. This finally led to the major indices playing catch-up. It has been a classic textbook topping out process. At this juncture, and we are not kidding, we count only about 10%, at most 12% of stocks still holding up or in decent shape. The problem is those areas are all the defensive, recession-resistant areas that we always warn you about. These are always the areas that do best when markets are in trouble and when markets are forecasting economic trouble going forward. Our fabulous list includes deep discount retailers(dollar stores), water utilities, food, alcoholic beverages, AT&T and Verizon, tobacco, utilities, household products and a smattering of real estate stocks. Are you thrilled yet?
Before we get into the near-term which we called so well for you in the middle the week, please recognize that this week, Apple, Amazon, and Facebook are reporting earnings. Google will be reporting next Monday. They will have a very large sway on the markets near-term as they are a large influence as well as a large weighting in the NASDAQ and the NASDAQ 100. We do believe that in bear markets, they get them all so be careful about any initial positive reactions.
Now for the short-term. We sent out three reports on Wednesday, all on purpose. After 2250 Dow points to the downside in just 14 days, we told you to look for washout type action. It is this type of action that typically will end the downside legs of bear markets. There were several things we saw showing up at the same time telling us a decent low was ready to be put in. For starters, just the fact markets were down so far, so fast was the first criteria but you never know at what point a low will be put in. You still need the masses turn overly bearish, sellers get washed out and buyers get the upper hand. On Tuesday and Wednesday, put buying spiked to levels we have not seen in many a moon. These are people getting overly bearish after a big drop. On top of that, over 2200 stocks hit new yearly lows, an extreme number that very often indicates a low is getting close. We can also tell you we received numerous emails and calls asking us about shorting stocks…that’s after a 2250 point move to the downside. If that doesn’t tell you about sentiment, we do not know what does. We can get into all the other gauges we follow but to make it brief, some of them you would have to go back to 2010 and 2011 before they got so bearish. Remember, these are contrary indicators so when the masses get bearish, it’s time to think about bullish. Next you had Wednesdays action. By itself, It meant a lot but when adding in all the bearish sentiment, it means a hell of a lot. The last piece of the puzzle was put together when even when the Dow was still down 250, the Russell was up and The NASDAQ/NDX were almost up signifying a classic washout. At the close of Thursday we were still confident but were not thrilled with Thursdays close. Friday’s action though, confirms for us that a good low is in for now. Nothing is 100% so if Wednesday’s lows get taken out any time soon, that will just tell you the market is even weaker than we even think.
So for all the above reasons and more, we feel strongly that although we remain in a bear market, a good short term low has been put in. As far as how this plays out, our best guess is to think August 24 and Septmebr 29 of 2015. August 24 was the first low, September 29 was the retest and then October 2nd was the day we told you we thought a real good low was confirmed and that we would rally for a few weeks. If you recall, we indeed did rally but on November 8, we told you that we were getting worried again as the market was starting to act like it did before the August drop. The rally and the holding up of the rally lasted about 10 weeks total until the market got hit in the snout again.
Remember the bear market rules. Bear market rallies serve several purposes. They work off the massive oversold, stretched and extended conditions. They wipe the smile off the faces of the bears. They put back the smiles on the faces of the Bulls. They get everybody feeling better. They have everybody saying “whew!” And then as the rally peters out, a new leg of the bear market gets going. This ain’t over yet ladies and gentlemen. If we continue to rally/bounce, all you will be hearing is that the bearish phase is over. We disagree.