Folks, my own personal track record in making subjective market calls isn’t great. There, you have been warned. That being said, let’s take a brief step back, take a deep breath and talk about the stock market as it is today. We can go back to curling up in a ball in the corner later.
I have no idea when the stock market will bottom out during this nasty decline. However, what we are seeing at the moment is what a bottom looks like. The news is awful, no question about it. And although the media lives to overhype the latest blip on anything, there is no denying that there are some “meaty” issues unfolding. Major companies going “poof” or being bought bailed out is heavy duty stuff. Terrorist attacks against U.S. interests – even in foreign lands – is deadly serious business. Hurricanes that wipe out portions of major states have a severe economic impact. And did I mention that there is a presidential election coming up – one arguably without a viable candidate (“do I vote for the old establishment guy or the young socialist? Hmmmm. Decisions, decisions…”). And then there is the devastation being wrought seemingly daily in the financial markets, due primarily to the fact that some people lent money to other people who couldn’t pay it back.
This is how it happens folks. Ugly bottoms, that is.
Consider a few tidbits:
MACD/RSI/Elliott Wave
While the Dow plunged to a new low, note in Chart 1 the striking positive divergence in MACD and RSI. Also, while I’m not much of an “Elliott Head,” it is interesting to note that the current Wave count is looking for a Wave 5 bottom.
Chart 1
The VIX Index
The VIX Index has clearly “spiked,” indicating a sharp increase in fear. History has shown that (as perverse as it may be) “fear is good” for the stock market ultimately.
Chart 2 – VIX Index “spikes”
Click here for larger view
XLE and XLF
It is interesting to note that despite the fact that the major indexes plunged to new yearly lows on Wednesday, two primary sectors - the energies and the financials - managed to hold above theirs. In Chart 3 you see the action of XLE and XLF exchange-traded funds.
Chart 3 – Energy and Financials”hold” (at least for the moment)
Crude Oil
The recent spate of hurricanes through the Gulf has kept gasoline prices artificially high. Nevertheless, at some point the market will notice the fact that crude oil has fallen almost 40% in about three months. Heck, I though that was what we were all hoping for.
Chart 4 – Crude Oil plummets
Interest Rates
Lastly, interest rates have plummeted recently. When all the news is being reported in its worst light, declining interest rates get attributed to a “weakening economy” and “Fed manipulation,” etc. Still, at some point many investors will realize that lower interest rates are typically a very good thing for the stock market. Take a look at long-term interest rates in Chart 5.
Chart 5 – Long-term interest rates plummet
Summary
Stock market bottoms are nasty, ugly, frightening affairs. This time around will be no exception. Also, trying to “pick the bottom” can be a dangerous game to play since you never really know for until after the last harrowing decline has played out “how far down is down”? Nevertheless, if by some chance we can avoid a total financial meltdown, you should at the very least be actively looking for a buying opportunity in the near future.
The Yahoo headline read “Worst Crisis since the '30s.” The headline of the business section of the Chicago Tribune read “People are scared to death.” I know people who would consider these headlines alone to be a legitimate buy signal. Investors are presently fearing the worst and with the recent spate of issues it is understandable. But keep your eyes open.
I can’t tell you when this decline will end. But I can tell you that when this thing turns around it is going to take the majority by surprise.
Just like it always does.
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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
