A bear market rally, or a genuine turn in the market?
With the Federal Reserve cutting the discount rate 50 basis points to 1%, it remains to be seen if this will loosen up the credit markets. There remains a great deal of mistrust among banks and borrowers at the present time, and until that changes, we would look for the economy to limp along.
The sharp move up, in both the DOW and the other indices on Tuesday was a sharp counter trend rally to what remains a prolonged bear market. One day does not make a trend, and we will not know for some time if the lows we have seen recently in the past month are going to be the final lows of this bear market.
My gut feeling is, that we will see more sideways action in these markets for some time to come. I would not look for any dramatic upside action in stocks. If we do see a further rally from current levels, it would be perfectly normal within the confines of a bear market. If you are inclined to trade these markets from the long side, I suggest doing so with a slightly smaller position than you would normally trade. We expect the volatility level to subside from its current torrid pace and fall back to a more normal level as we move sideways.
The judicious use of a game plan and money management stops is highly recommended for everyone. These markets can cut you into pieces in hours mainly because of the market's inability to fashion out a firm trend either on the upside or downside.
Just because the market is going sideways does not indicate that all is over on the downside. The longer we see these markets move sideways, the greater the opportunity that we may be building a base to carry the markets higher.
Adam Hewison
President, INO.com & Co-creator, MarketClub
