Tuesday, November 25, 2008

The Market Has Already Discounted It

They say that the stock market is a discounting mechanism and that means it falls well ahead of the bad news. I usually trot out my chart of Enron and point out that it dropped from 90 to 60 and then half of that before the first scandals were made public. The market knew something was wrong. No, not scandal but something. People were selling a bit more aggressively than they were buying and that was enough to send prices lower.

Here is a head line from recent news:

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit

That's not million with an M or billion with a B. That's trillion with a T. T as in toast. T as in tremendous. T as in how much gosh dang (this is a family blog) money can the government come up with before they need a bailout?

No wonder the inflationistas are singing. But that's not stock prices. Here is a counter argument made by Alan Newman of the Crosscurrents newsletter:

The crash we have already experienced discounted much of what you now believe is occurring.

Hmmmm. That's an argument that we will NOT be seeing Dow 6000. I have a different feeling about the stock market these days and while it probably won't last it does seem that we can, as I wrote in the newsletter this morning, make a little cash to spend on the holidays.

Just be ready for another bear slide just when everyone breathes that massive sigh of relief.

6 comments:

patrick neid said...

Here's the current results from the Bespoke poll.

What will the low of the Dow be between now and the end of 2009?

Selection Votes
7,500 10% 88
7,000 24% 202
6,000 31% 265
5,000 16% 137
4,000 8% 65
3,000 3% 23
2,000 1% 8
1,000 7% 56

844 votes total

Throwing out the outliers it suggest to a contrarian that the Dow has either bottomed or 5000 is the more likely target.

Due to my own 1974 bias I voted 7500. Given the times very scary indeed!

anonymous said...

Based on the poll in the above comment, I vote for the Dow to be something above 8000 - simply based on trend seen in the poll numbers. Look at how the percentage increases from Dow 7500 to 6000 (10% to 31%). This suggests that there is major bearishness in the market, and while we have seen technical indicators hardly causing a dent in the direction, simply looking at this poll suggests, we should be heading in the opposite direction. Also, I heard on PBS/NBR from some old (read experienced) market watcher that most bear markets bottomed in November. Not sure if this is true, but, I am willing to believe that a short term rally is occuring from the lows seen in November.

Amalan

Quick Takes Pro said...

The above comments are part of a sentiment extreme that has me thinking positively for a tradable bounce. Steve Sears, the Barron's options guy, pointed out that his contacts at institutions are still very bearish (video at barrons.com). I did not include this in my column today but it is hard to find a bull anywhere but in Omaha (as in the Oracle of...). Even my charting colleagues are talking trash.

paulocuana said...

Speaking of sentiment extremes the 13 WMA of Investors Intelligence bulls over bulls plus bears has given its first Buy signal today since, I think, December 1994. The indicator has correlated well with intermediate-term rallies. The trick for me is to find a good entry point.

Ram said...

Michael,

What do you make of the Shanghai index? Does the 18-year trendline bear any significance to you?

http://headlinecharts.blog.com/4276241/

Quick Takes Pro said...

Ram,

The shanghai index chart you cite shows a trendline that does not describe the action over that period of time. Therefore, I do not consider it a valid line to use.

Try drawing the line from the 1994 low instead.