Yesterday’s follow through rally brought the question back to front burner as to whether the recent down trend has run its course, and happy days are here again.
From my vantage point, it’s too early to tell. Fundamentally, nothing has changed in the past couple of days, other than that Fed talk was interpreted as a confirmation of an easing of interest rates when the Fed meets next month. The same old Subprime/credit and real estate problems still exist, but today Wall Street in its infinite wisdom focused on a “maybe” event.
Technically, we did not miss out on anything since most sector and country ETFs have now just about regained everything that they lost since our sell stops were triggered earlier in the month. Of course, if you were the adventurous type of investor and had thrown your entire portfolio at the market during last Monday’s drubbing, you would have had a nice short-term gain.
If last Monday was in fact the bottom, we will need to have a little more confirmation that this rally indeed has legs and staying power. More follow through buying is needed to confirm that the up trend has been resumed.
Remember, when following trends, we will never buy exactly at the bottom, because that point is unknown at the time and can only be determined after the market comes out of a bottom formation.
In that sense, we will always be late to the party, but it will help avoid a potential whip-saw signal here and there. The objective is to buy somewhere within 10% of the bottom, and sell somewhere within 10% of the top. Since we can’t forecast either point, both conditions have to occur first before we can take any action on either side.