November 9, 2007
Same news different bank. Wachovia Bank, Bank of America, and JP Morgan made it known that they were going to be today’s problem child. The market was so close to recovering from the losses earlier in the day. But in the last hour of trading, investors began to get a bit nervous and what you saw was another plunge downwards. The selling surge that is currently taking place is very extreme and appears to be unsustainable from a pure technical sense. Downturns in the economy tend to be more moderate in the sense that they do not happen all at once; rather they occur overtime and very subtle. Tops in the market do not announce themselves to the investor community, instead it comes as a thief in the night.
With the attitude of the bulls to always buy the dips, it would make sense that they will eventually stage a rally attempt; for the past year in dip has always been a reason to buy, and it is highly unlikely that they will give up without trying again. So expect an eventual attempt by the bulls to stage a rally attempt at doing just that. Whether it will succeed is anyone’s guess. When this rally occurs, we believe this will prove to be a good opportunity to fade the rally (terminology for going against the tide).
Also, selloffs like the one we are currently experiencing are steep and unsustainable. Furthermore, to try and chase the bears downward can really hurt your portfolio, when it suddenly rebounds. We will look for a rally to a higher price level before initiating a short position, and on the long side we will tighten stop-losses after the first dead-cat bounce (popular name for a rally in a bearish market – getting its name from when a dead cat falls, even though it is dead, it still bounces).
Most traders and investors are on the sidelines with this rally as it is difficult to get in a position of any kind. So don’t feel that you are missing out on an excellent shorting opportunity, because you are not the only one out there. Many others are in the same boat too. Therefore we need to remain patient for a solid entry price so we don’t get burned from over-aggressive trading.
By the way, next week we will begin posting charts with our analysis so that you can visualize more easily what we are discussing in our market analysis.