The Santa Claus Rally which was stalled for the past seven days with a stand-off between the Bulls and Bears may have got the punch from the FOMC it needed to kick it into High Gear. Helicopter Ben came through with a surprise of more than a 75 basis point cut in the rates which drove the Market up by at least 200 DOW points from the time of the announcement at 2.15 pm to the close at 4.00 pm.
After four days of trading in a tight range between 885 to 915 with the Bulls threatening to
break through to higher ground, the Bears got control for almost three days before the late breakout this afternoon. The Bulls are knocking at the door once again, and need a push through 915 with vigor to press on towards the target I had previously set at 950.
The question then arises as to what might be a strong rally for what is considered a Market in deep recession and tinkering on the brink of a depression as we see all the gloom and doom which raises its ugly head on almost a daily basis.
There is precious little previous numbers to turn to which may have set a precedence unless we trot back to that dreaded period back in 1929 to 1932 for anything resembling big drops and succeeding Bounce Plays and/or Bear Market Rallies. So here is what I have been able to dig up on that score.
It suggests that now that we are now 23% up from the recent Base Low of 741, we can at least expect a continuation to the 28% to 30% level as seen from the numbers in Column C. That would give us a Range of 948 to 963. We can discount the 52% and 101% legs for now, and the very best we could expect if history is to repeat itself is 1030, but let’s take one big step for Santa Claus before we even think of such giddy heights for mankind. There are probably still too many hidden skeletons in the closet which have not been uncovered, but at least the strong stance that the FOMC took today is to focus on the Deflation issue and kick the can down the road to worry about Inflation later:
1. Understand that the Dollar Index has fallen and this particular item needs to reverse. Watch it like a hawk to see the effect of this recent move by the FOMC.
2. Likewise, the jolly old VIX has trotted around 50 to 80 for far too long and we need to see if this shot in the arm can allay some of the fears and pull the reading down quickly to the low 40’s at least. The VIX pundits make a case that since the extreme readings it could rise to about 57 by February 2009 and we could have to wait until 2010 to see it meander down gradually to the mid to low 40’s!
3. The number of New Lows has come down on and off to below the 50 level of late, but the New Highs on the NYSE have languished at under 10. This is of necessity a laggard indicator but if the Rally is to show any signs of real strength, all boats need to rise quickly.
4. Of course the other internals such as the Accumulation/Distribution, # of ERG stocks above 240 and the # of Daily and Weekly Bongos “Yes” must skyrocket now. I showed you all of this in the December Newsletter which was published yesterday.
5. Last but not least for this to be a sustained rally, we need to see Leadership by way of stocks with strong Earnings, tight chart patterns move above the 50 and 200 day moving averages. Whether you use “sma” or “ema” is immaterial at this point in the bigger scheme of things, but some Technical Analysts prefer the exponential to the simple moving averages and I bow to them all to make their own call.
Best Regards, Ian.�