Global markets are way oversold. Do NOT panic.

Most stocks are 30% to 50% down in 1 to 3 weeks. But remember that the world has not changed much (yet). In fact, I would argue that there is a financial armageddon in financial sectors, BUT life will go on. Everyone will still need to consume most of the necessities in life.

I believe that there will be a global melt-up at some point, but I don’t know from which level it will rise, nor from how high it could rise to.

My tentative guess would be down on this Friday, big up next Monday, big finish towards next Friday, and then big down towards the end of October. Your guess would be as good as mine. But seriously, the world is NOT collapsing. Or at least not yet. In fact, if energy sectors and prices go down too low, we will REALLY have a problem going forward maybe starting the end of 2009 to 2010. High energy prices encourage exploration and production. And I’m sure we will need that supply down the road.

The magnitude of fall around global markets is equivalent to 1987. I believe it will rise eventually.
Just a disclaimer. I don’t know to which level it will rise. I think it’s probably okay to say that stocks will go up by 25% to 30% from the absolute bottom when it appears. But if we go down another 15% from today’s level, you may gain only 10% by buying today. ( 1-15% ) * (1+30%) = 110%. I believe it may go up by 40+% for certain sectors. But again it depends on where the low is. If you can catch the bottom, you will do great. If you catch the falling knife however, you will definitely get hurt. Volatility is the rule of the day.

And by the way, use index or ETF if you want to play in this market. Now is not the time for stock picking. There is always a slim chance that you will pick the wrong stock. And picking the wrong stock in a highly volatile market will kill you.

By the way markets are trading, it seems that some hedge funds are being liquidated. Markets seem to be trading at great depression level. It is incredible that energy stocks are trading at such low levels.

The canadian trusts (PGH, HTE, ERF, PWE) are trading at about 20% dividend yields. The MLPs stocks (EPD, PAA, MMP, FMO) are trading at about 10% dividend yields. The forward P/Es for many big energy stocks (XLE,OIH) and ETFs are at probably less than 6. This trades like a Great Depression is here.

Sooner or later, the markets should bounce back with a V bottom I believe. I can’t really believe that these stocks can ever be traded at such low valuation. But certainly, it can get cheaper by hours.

Markets on Thursday may react positively initially. I’ve actually bought back some of the positions that I sold at a slightly lower prices. But I’m simply trading these stocks.

Earning seasons however are just around the corner. As soon as this boost is over, I expect that markets may test the recent low, and it’d better hold at a higher level. If that is how things go, then we may have an intermediate rally. In the meantime, I think precious metals sector may take a back seat, and trade in a range.

Energy sectors however are looking VERY BAD currently as I’ve said previously. I’ve pretty much sold out all of my energy holdings, except the ones that are held under my money management account (which is actually significant). I don’t want to second guess what my money manager does. But I’m not going along with his bets temporarily.

In summary, the big picture should be
1. General stock markets will work their way up slowly.
2. PM sector probably trading in a big range to continue to finish Elliot wave 2 and tire all participants.
3. Energy sector is undergoing a fall of Elliot wave 2, and this is usually the worst down wave in a bull market. I don’t know how long it will last, but frankly, these stocks are dirt cheap. I may still pick up some value plays.

PM sector should lead energy sector. Therefore, it fell first, and it will rise first also. Eventually, money from the reflation policies from all the government bailouts will find their way into actual commodity prices. Before that happens, PM will be the most sensitive, and will react first. When the reflation becomes inflation again, energy sectors will be alive again.

Looking forward in 2009, I believe both energy and PM will come back in a big way next year. Be ready to switch over.

For now, long term commodity investors can continue to hold. The only thing that I hate to hold is stocks in general stock market.

Sorry that I haven’t been blogging on a more regular basis. I’m a little worn out between markets and my day job.