Monday, October 13, 2008

Columbus discovered, " the market was over sold."

It is surprising what a few trillion dollars can do for the stock markets. We had a big rally today that took us back to the level the market was last Wednesday afternoon. While 1,000 points, just over an 11% increase, was impressive, the credit problems have not been solved. We could go another 5% higher perhaps a little more from this level, but then I think we have to retest the previous low to see if it was a true bottom in the market.

I said last week that I would use the rally to raise some additional cash. I will and you should be looking at positions that do not pay a reasonable dividend as possible sell candidates. Look at stocks that have not shown any movement in today’s market as additional candidates to sell. Keep in mind, as I said last week, the sectors that were the most beaten down would lead the recovery. In todays market rebound the biggest gainers were energy and financial services.

These laggards will probably continue to lead until the rally runs out of gas. The leaders in the rally may be the stocks that sell off to test the previous low. The one thing that has to be taken into the mix is what happened last Friday with the opening sell off and then the spectacular recovery. Last Friday we hit a low in the Dow Jones of 7,782. Today we closed at 9,387 or a 20% move off the bottom in two trading days. As I said, the Market could go another 5% higher from this level.

As I said in Friday’s Blog, watch the one month and three month LIBOR interest rates to give you an indication of the direction of the market. While the US credit markets were closed today, the LIBOR rates issued this morning were off just slightly from Friday’s level. If we were to see LIBOR rates decline by more than 25 basis points tomorrow morning then I would expect the rally to continue. If they do not fall by one quarter of one percent in the morning, I would expect the stock markets to sell off.
We are not out of the wood yet and I think it will take more time than people are willing to wait to bring back confidence in the markets. I expect the volatility of the markets to be event driven; meaning that if a large company announces it is in trouble, the announcement could spook the markets. It is important not be swayed by the hype that now is the best time in your lifetime to buy stocks. Take the rallies as they come to raise cash. Make a stock shopping list with price levels at which you want to buy. When the stock hits the level you have set, commit one third of the amount you want to invest and then wait two weeks and invest the next third and after a final two week invest the remaining third. At each buy point look at what is happening and make a new decision if you see the price lower than your first purchase.

If it is true that this is the chance of a lifetime to make money buying stocks, just remember, “Buyer beware.”

Dan Perkins

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