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Friday, November 7, 2008

7,000 or 11,000 first for DJIA?

7,000 or 11,000 first for DJIA? By Zhuge Liang




Wall Street built on recent gains Tuesday as reduced volatility and easing in the credit markets helped give stocks their strongest Election Day rally in 24 years.

Historically, Wall Street has enjoyed a bounce in the fourth quarter after a presidential election as investors breathe a sigh of relief that the long election cycle, with its accompanying uncertainty, has ended. Some analysts said investors seemed to be trying to get a jump on the expected rally by buying on Election Day.

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap, so investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

Other analysts said they believed the election had only a peripheral effect on the market, as there had been no major surprises. More important to the rally, they said, was a continuing round of coordinated interest rate cuts worldwide, a further thaw in the credit markets and the increasing resiliency of the markets to the daily drumbeat of bad economic news. The extreme volatility of recent weeks has calmed, though trading volume remained light.

Still looking for one more down leg?
We still expect the DJIA to retreat to the 7,000-7,500 level before a major bottom kicks in remains intact. Its hourly chart indicates either a likely flat or a larger triangle formation. Probability favours a flat formation.

Rebound towards 9,750-9,800 first?
In a flat formation, DJIA could bounce towards the 9,750-9,800 level around the US elections before the rebound ends. Our alternative wave count would only pan out if the DJIA rallied past 9,800. In this scenario, DJIA bottomed at 7,884pts on 10 Oct and a major wave “B” or wave “iv” has just started, targeting the 11,000 level.

But daily technical indicators are bullish. Our preferred wave count, however, is in conflict with the DJIA’s bullish daily technical indicators. RSI has broken out of its resistance trend line and the MACD just confirmed buy signals.

Bear not hibernating yet.
If the past two major corrections of the MxASJ are any indication, the bear market is far from over. The Jul 97-Sep 98 bear took 14 months and the index crashed 67% while the Feb 00-Sep 01 bear spanned 19 months, during which the index sank 58%. The current bear which started in Nov 07 is only 12 months old and the index has already tumbled by as much as 67%.

MACD widens.
In the last two major corrections, the monthly MACD confirmed its bullish “golden cross”, an indication of the start of a long-term bull run. After Oct’s sharp collapse, the MACD indicator widened further, indicating that the bear market is far from over.

Long term Fibonacci retracement support.
DJIA’s long term Fibonacci retracement support is 7,387-8,995pts (Figure 13), which is the 38.2-50% retracement of its 1974- 2008’s 34-years bull run. The monthly RSI of 27 is one of the lowest since 1974.

Mr President, Welcome Aboard

Congratulations on a long well fought race. Now, “fasten your seat belts, it’s going to be a bumpy ride.”

The debt, the deficit, two wars without end, the banking crisis, the mortgage crisis, the worldwide economic slow down, Social Security, a deadlocked partisan congress, health care, a tax system that everyone thinks is unfair, collapsing US auto manufacturers, jobs being exported at light speed, the defense of our northern and southern borders, a recession, still no energy policy, and what appears to be a complete collapse of our image abroad.

Why would anyone want this job? It’s beyond me. The real question is now that he has done what seemed like the impossible, how will it affect the markets?

This is a long and short-term issue. In the short term, the markets should rally. If for no other reason than the media and press will ease up on the hugely negative pounding they have been delivering for the past two years.

A rally is also likely because, as everyone knows, the market hates uncertainty. Even though this race has been all but a certainty for a long time, it has added to the mood of “what’s next.”

All of Obama’s promises about increasing taxes on the so-called “wealthy individuals” could be the proverbial last straw. If the President elect makes good on his promise to redistribute wealth by increasing taxes in this economic environment, we could have a longer and deeper recession than anyone has predicted.

The best thing the markets have going for them is that Obama is a very, very smart guy. And as smart guys usually do, they surround themselves with smart people. Hopefully, these smart people will help the new president see that most of the ideas used in the campaign to get votes need to take a back seat to the realities we face as a nation.
If this “smart guy” scenario plays out, we could do very well with this administration. When it comes to the markets, recent Democrats actually have a better track record than Republicans. If Mr. Obama is enough of a politician to beat the odds and win this election, I have to believe he is also enough of a realist to look at the situation he has inherited and deal with it appropriately.

History has proven that the markets do well no matter who is President. Most conservatives expected the world to end when Clinton was elected. Liberals threatened to leave the country if Bush was elected. Everyone under the age of 30 had heart palpitations when Nixon won in ‘68. The markets always find a way to make it to the next election.

BACK TO THE GRIND







With the election now over, focus will turn back to what ails the economy. And front and center will be the continuing housing crisis. Foreclosure rates keep going up and the $700 billion bailout has yet to spur lending.

So what is a bank with a collapsing loan portfolio to do?

Take matters into their own hands. Bank of America previously announced it would work with delinquent borrowers to try and stave off foreclosures, and now JP Morgan Chase is doing the same.

JP Morgan Chase has announced it will delay foreclosure proceedings while it works with struggling homeowners. Over the next 90 days, the bank will look at loans and determine if the loan is eligible for a reduced interest rate or loan balance.. The company has already helped over 250,000 families with over $40 billion in troubled loans, and over the next two years plan to help another 400,000 homeowners with over $70 billion in loans. Loans held by Washington Mutual and EMC Mortgage Corp, which were recently acquired by JP Morgan Chase, will also be eligible for revision.

What remains to be seen is the effect this will have on foreclosure rates. Reducing a borrower’s interest rate slightly doesn’t necessarily translate to a large reduction in a mortgage payment. A drop of $75 or $100 a month in the mortgage payment would be welcome for the homeowners, but the savings could quickly be eaten up by rising costs elsewhere.

Hopefully the plan relies more on reducing principal balances to more accurately reflect fair market values. This would help by stabilizing home values at fair-market levels, rather than letting foreclosures decimate neighborhoods.
For example, if a home bought a few years ago for $250,000 gets re-appraised for $180,000 and the borrower can now afford the payments and avoids foreclosure. This drops the value down to $180,000 for comparables, but avoids a potential drop to $125,000-140,000 if the home goes into foreclosure and gets sold at auction. Not a perfect solution, but anything is better than another foreclosure.

DIFFERENT ROADS SAME DESTINATION

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