jstegma (99.68)

Predictions old and new

March 10, 2009 – Comments (7)

We have been due for a major rally for a week or two now.  There was just way too much doom and gloom about stocking up on guns and gold and spam.  It was just a bit overblown.  So we were due.

The current rally seems to be coming from some idea that Citi is operating profitably.  I'm not sure what to think about that exactly, but I think the rally could be important in an of itself.  That's because later this week or sometime next week, the mark to market rules will probably be suspended or modified.  Bernanke talked about it this morning, and now with the broader world economy tanking beyond belief because of banks being insolvent, it seems likely that the rules will be changed.

There are a ton of shorts in the financials right now.  Everyone and their dog seems to be spouting gloom and doom about them, so word seems to have gotten out.  But think about it.  Everyone and their dog have a rather reliable track record.  Internet stocks.  House flipping.  Now shorting financials or buying SKF or FAZ.  When it gets to the point where you can't sit down at the bar without hearing about how to get rich easy from the guy on the barstool next to you, that's a good indicator that things are about to turn.  Jack Kennedy supposedly avoided the Great Depression by selling his stocks when the shoe shine man told him how much money he was making buying stocks. 

Let's face it, the smart guys bought internet stocks in 1995 and sold them by 1999.  They flipped houses in 2003 and were out of the business by 2005.  They also shorted financials and housing stocks in 2007 and got out when the Dow dropped to 7500 or 7000.  The same guys that are shorting financials now are the same guys who got shredded in the internet stock bust and the housing bust.  They probably still have some pets.com stock and a few condos in Vegas they'd love to get rid of.

So if Citi is profitable this quarter and they eliminate the mark to market rules, we can be pretty sure that all the other big banks will be profitable as well.  The shorters aren't counting on this to happen, so it's time to cover.  Even if it turns out that the banks are losing money later, there are no guarantees that the market will return to the 6500 level, so again, it's time to cover the shorts.

That said, if you are going to buy into this rally, do it now.  The rally will probably go up around 7500, but it could possibly go as high as 9000 before it fails.  I don't think this is THE rally, at least beyond 7500 or so.  We'll see 7500 again after the rally is over, so I'd say sell out it if it goes much past that.  Earnings and employment in the broader economy will keep the country in a recession for a while, so it's just not time for the next true bull market.  It may be quite some time until it comes, but we are in for a nice little bear market rally for the next few weeks.

I called bottom on Thursday, and the market closed at 6594, but yesterday it sunk down to close at 6547, so I missed the closing bottom by two days and 50 pts.  I'll give myself an A- for that prediction so far.  I missed the intraday low by about 190 pts, so I'd say a B for that one.

The prediction is that the market will make it to at least 7500 before it makes it back below 6600 and that the market will not make it past 9100 before it falls back below 7500.