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Thursday, October 23, 2008

GROSSLY OVERSOLD WALL STREET by Zhuge Liang


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To say that the market is grossly oversold is not exactly breaking news because it has been oversold for at least a few weeks; however, the oversold condition has been steadily getting worse over that time, and we have perhaps reached the limit of how oversold the indicators will get without the market taking some time to clear the condition. Keep in mind that the condition can be cleared if the market merely drifts sideways while indicators drift higher toward neutral territory, but, considering the kind of volatility we have been experiencing, a few technical rebouds is not being over optimistic.

Since Wall Street is extremely oversold, then we have plenty of evidence that a rally is due. ZL do not for one minute believe the bear market is over, but it does not seem reasonable that the vertical descent will continue unabated. Reasonable? Perhaps that is not the best word to use in these circumstances. Let's just say that the technicals are screaming for a good sized bounce. Having said that, ZL will leave you with a reminder that we are playing by bear market rules. Oversold conditions are extremely dangerous and do not always present opportunities on the long side.

The DJIA tanked again last night .... down -514.45 pts. BECAREFUL!

IS THIS THE BUFFETT-BOTTOM?
Warren Buffett said he was buying stocks these past couple of weeks. Should you? Well, it depends. If you buy stocks on a regular basis as part of a disciplined strategy, then keep buying. The idea of buying stocks over the long haul is not only to buy when the market is soaring, but more importantly, to also buy when the market is falling. The key element is your time horizon. If you don't need the money for the next 5-10 years, then you stay invested and keep buying.

Here's the problem. Fewer and fewer of Americans buy and hold. We've seen many of our strongest companies buckle and went belly up. Most financial companies have been brought to their knees during this financial crisis and the crisis is threatening to take many other sectors with it. American International Group (AIG) was thought to be a darling among Wall Street analysts. We don't need to detail the woes of AIG, just suffice it to say that no company is immune to failure. So if you're of the buy-and-hold mentality, remain diversified.

ZL is not of the buy-and-hold mentality and never will be - in a few instances maybe but definitely not a die hard porfolio junkie. Technical analysis is where it's at. When the first signs of technical weakness appear, beware. Let sectors regain relative strength before committing back into the group. This very simple strategy avoids major carnage and it's the major carnage that wrecks portfolios, not the minor losses from timing a trade incorrectly

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