The above is a weekly chart of the SPY (an ETF which tracks the SPX). We believe that the scenario as shown above will play out.
Our rationale is as follows:
1. oversold on the daily timeframe
2. neutral territory in the weekly timeframe
3. oversold in the monthly timeframe
We already had the big crash (capitulation) in October and November and now the market is just going sideways. This sideways meandering is sort of a reflation trade, because all the asset markets became extremely oversold in Nov.
o In the first up leg from Dec-Jan, some of the sectors reflated. e.g. shipping, commodities, energy.
o In the next leg up lateJan-mid Feb, we expect some of the tech names to reinflate e.g RIMM, GOOG and probably some of the commodities which missed out earlier like oil.
We expect this action to frustrate both the bulls and bears for a month or two. From a psychological perspective, this is essential action. Since the dot com era, screaming stocks caught the imagination of people worldwide. Stocks moving 5-10% in a single day is normal. Similarly, the crash of last year, made the bears extremely rich.
From a technical standpoint, we believe the 20, 50 day moving averages and the 20, 50 week moving averages should create enough confusion and wild whipsaws to frustrate both the bulls and bear for a while. From a sentiment standpoint, bears will keep claiming "commercial real estate is the next shoe to drop" as they have since December and the bulls will keep claiming "all that is factored into the market".
From our perspective, the market lost a lot in value in a short amount of time. We are now making up time. Hence, the rangebound nature of it. This frustrating experience is essential to wean individuals off the stock market. When the bear market is finally over, we bet the number of people with distaste for the market will be overwhelming (yes that may include us too).
Ofcourse, the best strategy is to be in cash, but if you want some fun, we suggest some oil and some oil trusts like PWE. We believe oil has bottomed and we expect oil to trade higher to about 70$ by mid 2009. We like the oil trusts because one gets paid rich dividends for waiting.
That being said, we believe there will be another crash on the cards. Our best guess as of now is in the March-April timeframe.
