September 19th, 2008

Has Monetary Action Forced a Market Bottom

I know you’re confused and don’t know what to do; I know I am. And at times like this, the safest thing to do is to do nothing. Not every action calls for a reaction.

If we’ve been conservative and hedged ourselves (or even shorted indexes through the Powershares index short, foreign currency and precious metals ETFs) then we’ll be taking a hit due to this morning’s surprise announcement and subsequent market runup. But since most of our capital is locked in money market funds (now even more secure because of the announcement of new government insurance) and short term T-bills (which, I must confess, I only started researching a couple of days ago), they we’re in an excellent position to get back in the market when it’s clearly indicated that momentum has turned from pessimism to some optimism.

How do we know when that is? We know that through looking at stock market history and looking at when, under similar market situations, it was safe to buy stocks again. Given the current alignment of the moving averages (300-, 180-, 90-, 60- top to bottom), the earliest that has happened in the past is when the Index reliably (with volume) crossed above the 90-day moving average:

During all Bear Markets and corrections since 1963, the odds are that you will wind up with less money in the end if you bought prior to hitting this threshold. It’s not to say that there might not have been instances when this wasn’t the case. It only means that, on average, those early trades haven’t generated sufficient gain to offset the instances when the market feigned an upside move only to reverse course and turn back down.

This market is treacherouse. It does look like strong government action has forced a bottom in at least the financial sector. What it will do for housing is still unclear. Even more importantly, will monetary policy alone turn the rest of the economy, a weak employment picture, faltering $US and soft consumer economy around so that the rest of the stock market can also form a bottom.

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