Is a 600-Point Rally Enough?

January 23, 2008

A lot a fears concerning a total market meltdown was relieved today as the Dow rallied from being down 300 points to closing up 299 points. All of which took place in the last two hours of trading. The volume was very high on the day, as the buying programs kicked into high gear to bring the indexes back into the positive on the day. The markets began feeling very confident, that we would get another significant rate cut from the Fed next week in the form of a 75 basis point cut. There is a real possibility of this happening, and the market appears to be already pricing this into stocks.

Though the action was very good in the market for the bulls, a lot of people were undoubtedly burned by the major and unexpected turnaround in stocks. The last two days have seen a lot of panic selling by the bulls which, after today, has cost them dearly, and on the other side of the coin a lot of overzealous shorts got hammered when squeezed out of their positions after a hard late day rally. At this point, the market’s direction is uncertain and difficult to determine. Many will say that we have reached a bottom, but realistically speaking we are not at a point in this juncture where we can say that with a lot of confidence.

Therefore, don’t be too anxious to commit your capital too quickly. If we truly are at a bottom there will be plenty of time for us to jump back in and make some solid gains in the process. It is better to give up a few points initially to the bulls as they turn this market around (assuming the positive) than to try to blaze a trail on your own, only to get hammered and stopped out if the bears have indeed determined that the show is not over yet. Don’t expect the bears to give up quite yet, they are going to try with everything that they can to pounce on this euphoria surrounding the markets this evening, heading into tomorrow’s open.

Let’s review the charts…

Weighed down by the earnings report given by Apple, the index spent most of the day down over 3%, but managed to close the day up 1%. An incredible feat, considering the pressure the index was under. However, things will not calm down from here, as we should expect further volatility and more testing of this week’s lows to continue in the days and weeks ahead.

S&P also managed to stage an impressive comeback in the final states of today’s market session. Capital preservation must remain of utmost importance, even more than getting in on the early stages of a possible market recovery. Patience is key.