Let’s start with a little disclosure.

I have a confession to make, and it’s a bit embarrassing, because any time you change a long held opinion, friends, relatives, associates and acquaintances are sure to take issue. So be it. In the interest of everyone being in the know, here it is:

I am now a bull. For the first time since I began participating professionally in the markets nearly 15 years ago, I am now a full fledged stock market bull. I have been at various times a committed, rip-snorting bear, and at times a less aggressive, cute, Koala-like, friendly bear, but I have never been out-and-out bullish. Now I am.

I have been very keen on gold for that entire period, mind you, and for the long haul there’s nothing higher on my investment list than that beautiful yellow metal – coins, that is, not stocks or any other gold proxy – just those beautiful, smooth 9999 Canadian Maples – hell, even alloyed Krugerrands. I’ll take whatever you got. But holding the yellow metal is clearly a priority for the long term.

In the interim I made money on select investments – predominantly in the corporate bond market and with a few convertible trades. But I never trusted investing in garden variety stocks until now.

The reasons I am bullish run from the mundane to the theological and even include fundamental and technical analyses of our current market reality. We’ll examine some of those indicators here in a moment, but let’s make a little reality check first.

What to do when it’s all falling apart

As much as you may hate what the U.S. government may have done… and as much as you hate what it will mean for the average taxpayer… and as much as you can’t believe that there won’t be more, bigger disasters on the way in both the banking and other sectors… and as much as you’re tired of all of Wall Street’s bullish hype and nonsense…

You have a responsibility to make money, and to make it big, and to make it now. And if you don’t – for whatever reason – then you’re just a crybaby and a whiner and a fool.

And if the markets don’t move the way you imagined, and if you refuse to get on board, and if you want to whine about how evil and corrupt and plagued the system is, then go ahead. But know that you’re worthless as an investor, and you’re no good to your family, and may as well do us all a favor and remove yourself from the gene pool.

Now let’s get on with it.

The Aroma of a Panic Bottom – a Trader’s Sense of Smell

Last week was maybe the hairiest week in the market since 1987. To read the newspaper headlines you would think we were actually sucking up icy, North Atlantic seawater after hitting an iceberg. Panic was in the air. The media reveled in it. The media, in actuality, created it. And now it’s passed. But there were other signs that indicated a real panic had set in.

The first was volatility readings. There are a number of volatility measures that traders examine on a daily basis – and it’s worth it for everyone who actively trades to be aware of them. On their own they’re not sufficient as trading guides, but taken together, and melded with a number of other sentiment indicators, they give helpful direction for both short and intermediate trends.

They’re all available for view on the regular charting sites and can also be accessed at the CBOE website (a great source for option traders). They are:

• VIX – Cboe Volatility Index
• VXN – Cboe Nasdaq 100 Volatility Index
• QQV – QQQ Volatility Index
• VXO – CBOE Market Volatility Index

There are others, too, but these are the most widely noted.

Below, we’ve charted a decade’s worth of the Dow Industrials monthly and the corresponding VXO readings for the same period. The VXO (computed slightly differently from the more widely watched VIX) is the only measure with records that go back that far.

As you can see, volatility spikes correspond nearly perfectly with market bottoms. But trying to figure out when the spike is complete is anybody’s guess. At this point, we’re forecasting that last Thursday’s 45.81 VXO high was the turning point.

Next, the VXO reading came on a key reversal day for the Dow, which started down 150 points (a new intra-day low) and then rallied for 550 points to close at 11,388. Technically speaking, key reversals reliably mark turning points in the intermediate trend.

Other indicators that pointed to a bottom for the move include the panic seen in the money-markets. Take a look at this:

Last Wednesday, the entire world jumped into short term paper (briefly) and sent yields plummeting to ZERO! NOTHING! NADA! (It wasn’t actually nothing, but close enough if .04% on three month paper qualifies.) That’s panic. The last time such levels were seen was WWII.

Finally, a two day spike in gold of over $100 that forced the COMEX to up its margin requirements and reversed a prior bearish chart pattern for the metal sealed the deal. Gold traders were responding to the mega-inflationary move by the Treasury and world central banks to inject the financial system with the equivalent of anabolic steroids.

And with that we arrive at a new bull market for stocks, my friends. Yes inflation-driven. Yes, pathetic and socialistic and all the other venomous epithets you want to throw at it. But a bull market all the same.

Remember to make money.

Cheers,

Matt McAbby
Analyst, Oxbury Research