Sunday, September 28, 2008

Still a Lot of Uncertainty Out There

As of now, it does look like a modified version of the bailout package will be passed and signed into law sometime this week. Now the big question is where does Wall Street go from here, now that this big news item is almost past us. I can see us rallying here, but a "sell the news" reaction would also not surprise me, as it sounds like the deal is not as Wall Street friendly as first proposed. Basically, here are some arguments that I see for both sides.

The Bullish Outlook:

1) We did have a follow-through day (albeit a weaker one) so a strong rally could develop as is always a possibility when a FTD occurs.

2) The bailout removes at least some of the uncertainty that is out there, and by most people has been looked at as a plus, if for no other reason that armageddon was postponed if not avoided.

3) Elections are coming up and politicians (PPT?) will do whatever they can to get the market up a bit going into those elections.

4) There is a lot of money on the sidelines that would likely be willing to jump in if the market appears to be poised for a meaningful rally.

5) We did have a panic-driven environment from which stocks have bounced, including a spike in the VIX and many contrary indicators that are seen at other bottoms.

6) I have seen a few more nice charts popping up in my scans, although still not a ton.

7) We are somewhat oversold or at least neutral on those type of measurements, which is usually not the case right after a follow-through day.


The Bearish Outlook:

1) Markets that bottom on intervention from the government are typically not the strongest bottoms - it would be nice for the market to bottom on its own for once.

2) The recent trend has been to "sell the news" (see Fannie and Freddie bailout) so that possibility certainly exists again.

3) I am worried that most bloggers I read are just assuming that we will rally after this bailout is finalized and passed. It almost seems too obvious for me to work.

4) This bailout in no way is a panacea that will solve all the problems out there. If this happens and still more bad news comes out (let's say Wachovia or a bank of that ilk fails) then how scared do people get? Wasn't the bailout supposed to stop the problems? Without short sellers out there to provide buying support, then things could get ugly.

5) We are also coming in on earnings season and it is certainly possible that estimates are still too high and that there are still going to be a lot of disappointments out there. Look at RIMM if you have any doubts about how the economy is doing.

Obviously, there are still a lot of tradewinds out there that are going to make things difficult for us all, at least in my opinion. If I had to guess, I think we could rally for a day or two, but then pullback. I think any rally in the short-term (next few days) could be capped at around 1250 on the S&P 500 and 2300 on the Nasdaq. I am not discounting a meaningful rally from here, but what I would discount is a smooth uptrend from here. We may head higher, but I think it is going to be a very choppy and volatile ride higher. Markets just don't change from being news-driven to fundamental-driven over night, and there is still a lot of news out there.

Because of this, I think my basic game plan is not going to change that much. I plan on taking things slowly, keeping my positions small to start off, and take profits when I have them (if I get any). Right now, I can't see myself having any positions of over a few days, although I hope that's not the case. I am willing to be cautiously bullish and will trade accordingly.

Here are the long candidates I am watching. There are others but these look best to me. I again emphasize that I am not jumping all in here - I may test the waters a bit with small positions to see if we do rally, but will only add if the positions work out.

STSI, CLNE
ABMD, VRTX
BLUD, HA
RMG, LRN
PRAA, FSYS

I am still watching gold closely, and if the market does sell this news, I will focus on putting some money to work here, since shorting is a lot more difficult now. After the recent explosion in gold, I told myself not to chase and just wait for a pullback. That pullback has happened though and has been very calm. Some other commodities however look weak (some oils, the ags) so if you do want to short and we do head lower, this is where I would focus. If we head lower, I will focus on the index ETF's like DXD, SDS, and QID.

RGLD, DGP
All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Tomorrow should be interesting, as should this entire week. I am all for a great new bull market starting right here, and for America to overcome these problems and start anew. I hope this bailout works out and that we can all learn lessons from this, both Main Street and Wall Street, and not make the same mistakes again. I hope we as a country can get back to living within our means and being a nation of producers rather than just consumers. I hope all of these things can occur, but I just don't know how realistic those hopes are. To be honest, I am scared that they are all just pipe dreams.

I think this snippit from IBD states my outlook the best:

"Discussing the market's follow-through in Friday's edition of The Big Picture, we noted that a follow-through day by itself doesn't guarantee anything. No bull run has started without a follow-through. But not every follow-through launches a bull run.

That's why it's important to follow the market closely in these next few days and weeks.

Ideally you'd like to see the major indexes tack on brisk gains in healthy volume. You'd like to see leading stocks show similar action, eventually breaking out of well-formed bases.

In the meantime, be prudent. Don't dive back in headfirst, snatching up stocks recklessly. Let the market come to you. If the rally does gain strength, there will be plenty of buy opportunities down the road."


They are the experts and I think that advice is quite wise in our current environment. Good luck to all this week and especially to our country. Let's all hope we get through this.

2 comments:

Anonymous said...

Rayn,

just in case you did not notice - BLUD will have Q1 2009 Release on Wed after market close ...

Mac said...

Thank you for pointing that out.