December 9th, 2008

Market Approaching Critical Hurdle

Get ready, it’s going to start coming at you … if it hasn’t already. All the talk about the 6.7% drop on November 20 being the long awaited capitulation day. “We had the bottom and good times are ahead.” Without a doubt the tone of the market has improved markedly since then. I wish I could believe it and buy into it but I just can’t … not yet.

As one talking head said today, the market has 20.9% since that close to today’s and in years gone by that’s been categorized as a Bull Market. For those of us who have been and continue to be mostly in cash, watching from the sidelines what by past measures would have been an excellent year’s worth of gains has been extremely painful. (Of course, having been on the sidelines, we didn’t suffer from the 20.5% decline in values during the nearly 3 weeks leading up to the “capitulation” but who’s splitting hairs.)

Let’s put all of this into some perspective. I long ago described what the bottom would need to look like for it to be real. On October 13, after a big reversal day that happened to be higher than we closed today, I wrote in “What Crash Bottoms Look Like” that “hitting bottom isn’t a day or an event. It’s a process.”

Further back, on September 19 in “Has Monetary Action Forced a Market Bottom“, I wrote

“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 [at a minimum having the Index cross above its 90-day moving average]. 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.”

The reason I’m dwelling at length on this is because we’re approaching one of those milestones. The Index is within striking distance of the 60-day moving average (another 6% move will get us there). The oh-so critical 90-day moving average is a bit further away (at 1070, or 17.6% away). To give you some idea of the importance of these hurdles, suffice it to say that since November 6, 2007, more than a year ago, the Index was above the 60-day moving average only 49 trading days …. most of which were this past April-May.

What about the 90-day moving average? The Index was above that moving average only 39 times. Again, all during the April-May bear trap suckers’ rally.

Enjoy this volatility if you want but stay nimble and stay light. There will be a retracement and a retesting over the next 3-4 months. It’s only my guess but if you are too afraid or too late to grab some of these outsized quick gains – or to timid to lock in your profits when you have a chance – you’ll have another chance later. This is a process that could go one until early summer – if, of course, it doesn’t go lower first.

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