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The
markets bottomed last Friday at 1168 roughly on the SP 500, then violently
reversed with a 47 point rally to 1215. I had forecasted a likely short term
bottom at 1176/1188 ranges with a possible 60 point rally coming. With that
said, I didn’t think it would all happen in nearly 1 trading day.
On
Friday night, as most now know… Standard and Poor’s downgraded
the US Debt rating to aa+ from AAA. I would suspect
that the bigger players already knew this a few days prior and were short the
market with that information. My pure speculation here is that within the
first hour that some of these same participants will have covered their
shorts and probably be looking to buy some calls or get long certain stocks
if there is short term panic and we reach oversold short term extremes.
Clearly
though the patterns suggest we are in a bear cycle as evidenced by the 1233
break last week, but there will be tons of trading opportunities with violent
rallies along the way as well, trying to time those will be the hard part.
One
of the downsides to owning shares in companies in the public markets is that
panic and hysteria can very quickly mis-price a
security that represents shares in a company to well below where it would be
valued as a private ongoing business. This however also represents
opportunity for those with the right time horizon and the stomach to
accumulate when there is a mis-pricing of those
securities.
I
can already find many samples of small cap firms where they are not trading
dramatically above cash per share and certainly below total fair value per
share given their assets. I will be looking at some point to scale into a few
of these companies given that they are trading below a fair private value in
the public markets.
With
that said, where does the broader market go on Monday? Nobody knows, and
certainly the sentiment gauges as of last Wednesday had turned historically
very bearish prior to the Thursday and Friday drops.
Note
below we have an increase as of last Wednesday of Bears by 18% to
historically extremely high levels. Bulls were down to 27%, which is
historically about 12 points below the average. Source: American Association of
Individual Investor’s August 3rd survey:
 
Many
traders who were formerly clinging bullish were caught in a stop loss and
margin call induced liquidation late in the week. I would guess that hangers
on will be equally caught on Monday this week in margin calls and possible
stop loss sweeps.
The
smart thing to do is not panic and make sure you understand the valuation of
the business you own shares in if you have stocks, and decide how crazy the
market participants may get in their voting near term.
When
the SP 500 fell below my 1233 line in the sand, it pretty much confirmed a
new Bear Market for me, even with the 1168 pivot on Friday. The last very
outside shot for Bulls intermediately was for 1168 to hold and run, but we
may or may not do that on Monday or this coming week. The Elliott Wave
patterns are confirmed bearish with the 1233 break, and so other than some
miraculous turnaround off the 1168 pivot that holds…we must remain
cautious. I was looking for a trading range from 1176-1260/80 for a while as
MOST LIKELY…. but all we can do is find out to
what extent cool heads prevail or not this coming week and I’ll update
from there. Right now the weekly charts are super oversold like November of
2008. With that said, I make a case for a possible bottom around 1096 now on
the SP 500 as possible worst case.
In
this history of the markets, we had a major bottom on the SP 500 in 1974
which was followed by a 25 year bull cycle to 1999. On March 9th 2009, we
bottomed at 666 and re-traced a Fibonacci 61.8% of that entire 25 year bull
cycle over 8-9 years in ABC Fashion, which would makes sense.
Just
prior to that I forecasted a major bottom on February 25th with an article,
“Is the Market about to Bottom and Nobody Knows It?” You can
Google it to find it.
Now
with hindsight, we see 1370 hit on the Bin Laden killing and that was a 78.6%
retracement of the 07 highs to 09 lows. However, dialing back to the 1974
low, we rallied into 1977 in 3 wave fashion to the 1977 highs, went sideways
awhile… we then had a major drop from 107 to about 87 on the Index over
about 12 months… corrected a good 20%. Does history repeat in 2009-11?
We rallied in 3 waves, we have gone sideways… and then we drop 20% or
so? If so, that takes the SP 500 to about 1096… Another 104 points. At
1096 that would represent a 38% Fibonacci retracement of the Bull cycle from
666 to 1370.
Food
for thought… if you’d like to get more frequent forecast updates
on the SP500, Gold, and Silver please look at www.MarketTrendForecast.com and
take advantage of our 33% discount option.
David Banister
The Market Trend Forecast
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please check at www.markettrendforecast.com
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