We need to re-visit my yesterday’s post to make a sense of what happened today. Among many other things, I made the following points:
· I think we are still in a Bull market, although it is coming to an end.
· Tomorrow the QE2 GDP will come out and it may miss expectations. Coupled with uncertainty, this may trigger the SPX to dip below 1300 level.
And this is what exactly happened today.
I am not so much worried about the debt drama as the falling GDP, in-spite of the huge Government stimulus that has gone in the economy so far. The growth engine is coming to a stall and smart money knows it. They also know that the situation in Europe is still worse. That is why US T.Bonds are in such high demand even when AAA rating may be in question. SPX came down hard, touched the 200DMA and bounced and that says a lot.
The market action today is signaling that a bottom is in or will be in soon. See the hammers in the Index.
All selling in the past have bottomed when such candle patterns have emerged.
SPX went down up-to 1282 level and bounced back. Couple of times, even came in green.
And VIX went through the sky again. That is three days in a row VIX has closed beyond BB. The fear factor is now in high 20s and I have written repeatedly in the past that for the selling to complete, fear factor has to be in high 20s. We got that today.
VIX also has a spinning top today. ” After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.”( Stockcharts).
Once again, I think a bottom was in today.
But here is the paradox. On one hand a bottom is in and on the other hand the economy is stalling. Will we not sell now? Isn’t it time for another bear market to start?
I have been repeatedly saying that the world is not going to end on 2nd August. Although the US economy is almost at stall speed, it has not yet reversed. So we will muddle through, if there are no other external shocks. Even if the unemployment is at 10%, it is still better than Europe or Japan. The US Banks, in a bad shape as they are, still are in a better shape than their European counterparts. And there are plenty of cash on the sideline. The market will not go down unless it has soaked all the cash up.
So I expect the stock market to rocket upward as soon as the drama in Congress is resolved. We will be greedy when others are fearful and fearful when others are greedy. It is easy to understand the fear, but difficult to understand and control the greed. In a few weeks, when the market is going up again, we will forget this crisis and MSM will present all the good and beautiful stories. We will think that the good time is not going to end.
That is when we will turn bears, not today.