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December 21, 2008

Doc Holiday

I've been wondering all weekend what I would write when I finally got the chance to sit down and construct a post. Prognisticating in this market is no easy task. The action we are weathering is unlike any market before us. Many traders are attempting to use the 1929-33 bear as a model, given the rhyming economic environment, but I've highlighted substantial differences between the current economic debacle and the situation that dragged us into the Depresssion.

Two big differences that stand out are monetary policy and debt levels. Nine months prior to the '29 crash, the Fed had begun draining the money supply, and they continued this policy into early 1930. Despite this behavior, the stock market managed a 50% rally out of late '29 into the spring of 1930. In 2007 the Fed turned on the liquidity spigots before the market had fallen even 10%, and they've continued to shovel fresh new dollars into the system like never before. One would think that these actions would have fueled a rally to dwarf the 50% move out of the 1929 low into early 1930. Perhaps we'll still get such a rally, and in fact we should all hope for it because the implications of rally failure are disastrous: social chaos, wars, supply shortages, and vast losses of freedoms. Those were the words I used a few weeks ago when outlining the A-B-C scenarios.

Debt levels are also tremendously higher as percentages of GDP and national wealth than in the 1920s, and the debt destruction process is the primary phenomenon impeding our rally. We are simply waiting to find out if the amount of debt weighing on the system will cause the whole system to implode. Implode or not, I find it frivolous to think that our economy will emerge from a downturn in the next year as some of the vacuous talking heads would have us believe. 2009 is going to be very tough.

Now that I've painted a backdrop gloomier than a van Gogh, I'll splash some brighter colors on the canvass. I fully expect... and am so positioned... for a holiday-week rally. This low-volume period would seem to provide the perfect environment for the SPX to make its first lunge at the 65DMA.

index chart

If we are to see a full development of our mid-term rally, the 65DMA should eventually be conquered, though not necessarily on the first attempt. Our stop for this play remains at SPX 850, but I have to admit that if we don't see immediate strength I will get nervous. A market poised for a rally should have little trouble moving higher on a holiday week.

Speaking of holidays, I am keeping to true form by holding off on my Christmas shopping until the last minute... an activity I will have to squeeze in among other festivities. Unless something substantial occurs this week, I do not intend to post again until next weekend. I will be milling about in the comments section, though. Happy Holidays to everyone...


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