Market Brief

by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | October 9, 2008

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The bear has returned with a vengeance. It looks like the Paulson bailout package is ill conceived and too little too late. The lines in all the major averages, that were consolidating since June, have now been crashed through to the downside. Thus our decision to wait on the sideline last month has been vindicated. It was one of the worst stock market months ever and it is bound to get much uglier before a bottom is reached. Hopefully capitulation will come sooner rather than later.

In general terms never has there been so much bad news. On all fronts: commodities, financials, autos, retail, transports and tech, the news and outlook are terrible. With Dow theory in mind the Transport average had a very negative move on Thursday the 2nd. This indicates that the confirmation signal that we were looking for is now in place and the pulse downward has gained momentum.

 

When we look to the Industrials the breakdown really started at the 10500 level with no future support in sight until the 7500 level is reached. To approach this target would constitute a crash in any mans language but the point of the matter is that all significant daily moving averages have been broken, thus there is no technical marker around to psychologically break this free fall. For the market to advance into a bull it must solidly consolidate around a rational support structure (only then will institutional and wholesale money show their hand). I believe the Dow 7500 mark, where the 2003 bull rally started after a successful retest, is the ballpark area where that battle will be waged.

However the November elections will be such a pivotal event that any strong bottom retest or powerful movement to a higher high, with confirmation from the transports (on a weekly chart), should be traded using our usual stop loss strategy (see our 12 trading rules on the website).

In essence, crystal ball gazing apart, our recommendation to investors is to wait for the November elections to be over and then start moving into long quality positions when you see a bottom tested on high volume.  Investment areas to look at would be healthcare, consumer staples, construction and energy. If there is no solid rally after the November results all bets are off.  If the vacating administration starts being investigated and the real truth of the unregulated, one quadrillion, Basel 1, over-the-counter-shadow-banking-debt-casino is revealed, the next panic pulse might commence. Such a move could last well into 2009 with a recession finally being "officially" declared.

Market gyrations aside it must be realised by the administration that the banking sector will only finally become stable when a market platform has been devised to objectively value and trade credit default swaps; when bad assets have been conservatively written down; when debt insurance is commercially re-instigated through reputable triple "A" entities; when off-balance sheet items have been audited, fairly valued and brought back to trial balances and when capital and fractile banking structures are refinanced and reformulated at the historically stable 8-10 level. Authentic government should get all the germane information out and over with at once. It should not be death by a thousand truths. There must be one total truth, then the healing can commence. With this honesty can come a new beginning but only if the American financial elite rediscovers the meaning of morality and "civitas" (the greater good of the community), and reintroduce harsh functioning regulation.

Should the USA come out of this recession before the rest of the World it will have an opportunity to faithfully put behind it what will probably come to be regarded as the worst presidency in the history of the States. Strong faithful leadership is needed. If this leadership proves itself worthy the World will breathe a sigh of relief and support it in whatever manner possible. This prospect will probably mark the beginning of a powerful bull market cycle. It will be a time to rejoice. However, should the opposite be the case, and faithlessness and mendacity continue, the American banking conglomerate will never recover and the demise of the American system will continue. With that will come renewed asset destruction and going short will become the new going long. As always the index to watch whether this prospect is becoming reality is the Dow transports. I have come to realise that it is the most powerful leading indicator and functioned brilliantly in 2001, 2003, 2007 and on Thursday the 2nd. October, 2008.

Please study our trading rules and disclaimer prior to taking any investment decisions.

 

Copyright © 2008 Christopher M. Quigley
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Christopher M. Quigley, B.Sc., M.M.I.I., M.A. | Dublin, Ireland | Email | Website

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