I think the general stock markets have made their intermediate low. It may be hard to believe for those bearish on stock markets (myself included), but I think temporarily the clouds are clear.
Why? I’m basing my opinion because of the following:
1. Globally, the investor fear level is very palpable. In fact, most international stock markets experienced a BREAKDOWN. I like to look at Asian stock markets (manufacturing based, as a leading indicator for global economy) FXI (China), EWT (Taiwan), EWY (Korea), EWJ (Japan) and commodity-related stock markets (commodity are consumed for manufacturing) EWA (Australia), EWC (Canada), EWZ (Brazil). Just clicked on them for the charts. I’ve included the charts for just EWA, EWT, and FXI here. NOTE that most charts have displayed a clear pattern of A-B-C 3 elliot waves down, or double top pattern, with similar time distance and magnitude for A and C waves down.
2. Gold/Silver ratio indicates fear and euphoria. In this particular cycle, at the high of the ratio, it represents a credit crunch fear. The recent high of this ratio was at about 75, similar level if not higher than achieved in 2002/2003 stock market bottom. In the recent past years, it normally ranges between high 50s to low 60s. After the dramatic rise of gold on Wednesday, this ratio has started falling from 75 to about 71/72. Since 75 is a very high value in the past, I assume that reaching 75 this time probably has qualified that the peak of fear has been reached.
3. Reaction of the market to AIG rescue was decidedly negative. Markets reacting to a very positive news in a very negative way, is representing lots of fear. The fear is confirmed by the volatility index $VIX, going into 40, exceeding previous peaks.
So I believe that markets have reached a tradable intermediate bottom. Again, I want to re-emphasize that I believe this bottom may NOT be the long term bottom yet which probably will come in about 3 years from now, and definitely NOT the long term bottom on an inflation-adjusted basis.
What stocks should one buy? Probably index or sector index stocks are the better ways to go. I don’t want to venture a guess here. I don’t want to concentrate my bets on neither just the financial sectors nor the energy/materials sectors. It’s going to be hard to tell where the hot money will flow back to, especially given a potentially significant consumer slowdown ahead of us. In opportune time, I will again sell the rally, unless a massive government inflationary effort morphs my projected long term bottom into a higher nominal value.
Best luck trading.
Frugal at 1stMillionAt33.com