Thursday, 4 February 2010

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Market Pulse: I was very interested in seeing how the first 3 days of the month would pan out for the markets. I have been a staunch bear since early January 2008, although being long the majority of 2009. I turned heavily bearish again around October and was quite stunned at the market’s ability to levitate even in the face of suspect (at least!) economic numbers, a poor housing market, and the consumer’s unwillingness to borrow (and the banks unwillingness to lend). So, my forecast for 2009, was that we would have a big rally. That rally would get everyone’s hopes up and optimism would return. The economic reality would hit in late 2009 (sometime in the fall) that the economy was not recovering as planned, and the markets would tumble again breaking the March lows of 2009. That break of the lows would provide a final washout of all the bullish investors, and we would potentially see a climactic low or an event driven low in the market. That low would probably be the nominal low in the markets for the next 20-30 years at least. That scenario did not quite play out. The market continued to advance through Oct. 2009-Jan 2010 and it was unrelenting (not even pullback more than 6%). Now, the market is showing its first real signs of cracking, and I am wondering if the this decline I was waiting for all those months. It remains to be seen, but I can say that January 2010 was a down month. Typically, how these bears markets go, you get 3 or 4 down months, followed by 1 or 2 up months, then 3 or 4 down months again, then 1 or 3 up months, and then a final 3 or 4 down months. Then it’s over. The lows are in and you can make quite a substantial amount of money if you get in at the lows. This bear market (I still think we are in) has been nothing other than abnormal. From the market peak in October 2007, the bear market was advancing in a typical fashion (as described above). But from the March lows, instead of rallying 1-3 months, the markets have gone up 9 out of 11 months, which just doesn’t happen in bear markets. So it made me think something else was going on here, and I just don’t know what that is because I have never seen anything like it. The type of advance we have seen from the March lows would usually signal the start of a new bull market. If that is the case, why is it that I feel 0% confidence that there won’t be some kind of ANOTHER market catastrophe or collapse. Blame it on social mood or whatever you want, but I wouldn’t want to be caught long at the beginning of 2010 and feel like 2010 is going to be exactly like 2009. Today, the market is getting crushed. This is the type of market action you get when you don’t have any kind of meaningful correction for 10 months. The market’s unabated rise was unhealthy and now we are seeing the consequences of that. I don’t know if it’s going continue for several months and recover, or if this is the top of the bear market rally I envisioned. If it is the top of the rally, then without a doubt the month of February should end lower. Period. Stocks should sell off the rest of the month and not surpass the February 2nd highs. Then we can sit back and see how March turns out.

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