February Bottom January 31, 2008
Oakville, ON, Canada The optimists are in trouble. Every year, they like to say, “As January goes, so goes the rest of the year.” But this year we’re saving that line for the pessimists.
So, what happened this January? Why did the market plunge and the FED lower interest rates so aggressively? What went wrong?
Think Big
Try to imagine what it must be like to manage a stock portfolio worth billions and billions. It’s New Years Day 2008 and you know the banks are in trouble. You’ve been reading about junk mortgages for 6 months. And you know that your portfolios are still “over-weighted” in bank stocks. You’d like to go from “over-weighted” to “market-weighted.” You’re worried.
And now it’s one month later. You’ve done some selling, but you’re still over-weighted in bank stocks.
Market Technicians call this “over-hang.” It refers to BIG institutional stock positions that are ear-marked for sale if the market goes up.
The important question as we enter February 2008 is: How much Over-hang is there? And when will the over-hang be over?
On January 21, 22 we witnessed a selling climax. The big institutions finished their first wave of selling. Then the market bounced straight up for a few days: the big sellers had backed off and the market bounced up to a more normal level. How much over-hang is there? Was the January stock market low, the final low? And now, will the market go up? Or was that January low just a short term stop in a continuing bear market?
February will tell us the answer. Perhaps the first week of February will tell us the answer.
What’s Normal?
A common pattern for a stock market bottom is: [1] A selling climax. [2] A rebound. [3] A test of the lows. [4] The beginning of a new bull market.
Half way to Heaven
So far, we’ve seen the selling climax and the rebound. We’re half way to a reversal. The most bullish thing for the market in these early days of February would be a sudden stock market drop back down toward the Jan 21, 22 low points. If the market stops going down somewhere near those January low points, the October ‘07 to Jan ‘08 “mini-bear” will be over. The optimists will be in the driver’s seat again.
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