Thursday, June 08, 2006

Going out on a limb

Make no mistake, the death of Al-Zarqawi, who has caused so much human misery, was a piece of unmitigated good news even though some may claim “his methods have become unsound” even to those within Al-Qaeda (see here). On days bygone, it would have been good enough for 300 Dow points. But not today. The news of his death was far outweighed by the overnight bludgeoning in Asia. The market sold off HARD into noon but staged an equally emphatic reversal to finish near the flat line. The volume was a blistering 3.5 billion on the NYSE and 3 billion on the Nasdaq. I’m sure tons of people are calling this reversal the start of a new leg up, but I remain unconvinced.

First of all, a clarification: there was a volume bar missing in yesterday’s chart of the S&P. StockCharts is slow to show it at the end of the day for some reason. If candle stick charts were used, it would have been easy to see the 3 and 1 pattern on the impulse/corrective waves. Today being an up day is actually consistent with that rhythm. The 64 million dollar question is then, will this wave structure continue? Keep in mind the next wave will be (3) of 3 -- usually the most energetic. I find myself once again going back to September 2000 for an answer. Below is the chart on the S&P from year 2000 that was first shown on May 23:

There were the two high volume up days in early October 2000 (granted today’s volume is much higher, relatively). The first up day was off a reversal that touched the previous intraday-low. If we are to see a repeat, the decline should resume by Monday at the latest. By any measure there was capitulatory selling today. On the other hand, this decline is so unlike the ones in the recent past that I think Mr. Market may have a nasty surprise in store for us.

Action like today’s is exactly the reason that I hesitate to commit one way or another. As mentioned in passing on May 24, I’m still concerned about hedge fund redemptions or even another LTCM around the corner. Just as Jeff Saut says, and I paraphrase, “We haven’t seen the bodies yet”. Yet by definition, such events are not predictable, one can only prepare for them.

This is not investment advice. Please do your own due diligence. Good luck and be safe.