Today marked one of the biggest market reversals in history with the Dow trading in a range of 625 points from low to high. With the recent drubbing of the major indexes, and the Fed’s emergency casting of a lifeline in form of a sudden 75 basis points interest rate reduction, it was only a question of time before the markets would stage a rebound. The million dollar question is if today was simply a bear market rally or the start of something permanent to the upside.
From my view, one day does not make a trend and, right now, I look at it what it is, a bounce in the market. Early this morning, we took the opportunity to liquidate some holdings in healthcare (IHF) and short real estate (SRS) as our sell stops were triggered.
Our Trend Tracking Indexes (TTIs) remained in bear territory, below their long-term trend lines by -0.49% (domestic) and -9.69% (international).
Yesterday, Jim Jubak posted an interesting article called “Where the bear will bite hardest.” Here’s a portion:
The last bull market myth still standing is now dead — at least in the minds of the many investors who believed that China and India could continue to power the global economy despite a slowdown or recession in the United States.
The panicked sell-off in overseas markets on fears of that long-anticipated U.S. recession is proof of the theory’s demise.
The death of this belief in “global decoupling” is likely to have three effects:
1. It will shift the harshest bear market action from the U.S. to overseas markets, as overseas investors discover that their economies are slowing, too.
2. It raises the odds of a “bear market rally” in the not-too-distant future. Such a rally would leave the bear market intact and end in another painful market downturn.
3. And though the death of this myth is essential to finding the bottom in the current bear market, the final end of the bear still depends on a recovery in the U.S. financial and housing sectors, which now looks unlikely until early 2009.
The danger of slowing economic growth is a months-old story to U.S. investors — one reason that the major U.S. market indexes are currently flirting with the 20% loss that defines a bear market. But it’s something new for investors in overseas markets, many of whom thought that those economies would be immune to a U.S. recession.
My indexes confirm his view and, until proven otherwise, we will remain in cash with the bulk of our assets and try to take advantage of select opportunities as they present themselves.