BEING STREET SMART
HAS THE RALLY ENDED? August 20, 2008.
Early this year in this column I predicted it was going to be a difficult year for global markets. I suggested the best potential for making double-digit gains this year would be to go after several smaller gains of 5% to 10% from both rallies and corrections, taking profits each time.
With the S&P 500 still down 14% for the year, and still 19% below its peak of last October, and this second rally of the year looking tired already, that still seems like the best strategy.
At my last buy signal, July 16, I said we expected only a summer rally, then for the downside to resume to a lower low in the October/November time-frame.
The rally has already achieved the performance of a typical summer rally. By early last week the Nasdaq had reached my upside target of its 200-day moving average, and has now turned back down. Another of my concerns has been the lack of sponsorship lately, indicated by the very low trading volume.
As a result, I believe the downside risk is now at least equal to the upside potential. I’ve already had my subscribers taking some of their profits from the rally. I’d rather risk leaving some profits on the table than risk getting caught in a smash-down.
I say that because nothing has changed in my longer-term outlook, that we are in an on-going bear market, from which we can expect tradable rallies of as much as 20% in the S&P 500, and 30% in the Nasdaq. But they will be bear market rallies, followed by a resumption of the downside to lower lows.
The market launched into this rally after it became oversold beneath key moving averages in mid-July. We told you at the time it needed a catalyst to get it going. It received that from the plunge in the price of oil, and the rally in the U.S. dollar.
However, while the market has been focused on oil and the dollar, it ignored the continuing problems in the housing sector, the worsening conditions of financial firms, rising inflation, the spread of the problems globally, and what it will all mean for the economy for some time to come.
I expect the catalysts for the end of the rally will come from the market refocusing on its previous problems, and a reversal of oil prices and the dollar. As you can see from charts on my free blog, oil has become very oversold beneath its 30-day m.a., due for a rally, while the dollar has become very overbought, due for a pullback.
In fact we may have witnessed the beginning of those reversals over the last two days. If so, the end of the rally may already be taking place.
So, as I said in last week’s column, enjoy the rally but don’t fall asleep at the switch. The next easy profits will probably be from downside positioning in short sales and ‘inverse’ etf’s.
Sy Harding publishes the financial website http://www.streetsmartreport.com/ and a free daily Internet blog at http://www.syhardingblog.com/. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!