11/13/2008 Today the SPY (@ 91.17) formed what may be a climax low:
1. The market made a new relative low, but closed higher - this is known as a KEY REVERSAL DAY.
2. It did this on VERY STRONG VOLUME.
3. It was an upthrust day with an extended advance and wide range.
4. It found support right at the low of mid- and late-October (at around 83).
Fundamentally, the news is awful which does not rule out a significant rally or even bear market low. Remember that the market often advances several months before the fundamentals of the market start to change.
Yes, we are in uncharted territory and the market could certainly go lower, but we have muddled through past financial crises and will muddle through this one. I do not know if the market will be higher 6 weeks or even 6 months from now, but I would be surprised if those who did not buy around these levels will not be kicking themselves 5-10 years from now. Remember that if the market is down 40% from its peak, you are almost doubling the effective future returns of any dollar invested at these levels versus the same dollar invested at the market peak.
Stay tuned, but I am growing cautiously bullish.
Two factors almost no one is discounting is that 1.) the plunge in crude oil and gasoline has led to trillions of dollars of relief to the consumer going forward and 2.) President Elect Barack Obama's coolheaded approach and return of fiscal responsibility will probably inject some much-needed confidence into our system. Contrary to popular belief, markets perform much better under Democrats than under Republicans, particularly if those Democrats are centrists, as Obama is (despite McCain's misinformation to the contrary). If he stays true to his pledge to end the occupation of Iraq, this should add hundreds of billions to our economy going forward, probably lead to a stabilization in the region as the intensely unpopular American experiment in Iraq ends, and will further dampen oil prices going forward.
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