Watching and Waiting

IBD viewed yesterday's action as a follow through day, and it did meet the technical definition as the S&P 500 was up nearly 2% on higher volume than the previous day.

Nonetheless, the stocks on my watchlist had a decidedly muted reaction - not the kind of explosive action I'd expect to accompany a follow through day.  In fact, the industry groups that moved the market yesterday have been among the weakest performers.

What does all this mean?  I will keep an open mind.  It is obvious to everyone that the financial system and US economy are in big trouble.  Whatever form the government bailout takes, it will most likely increase inflation and although it will help, we are still in for a protracted economic slowdown.  In spite of this, the market may rally and I'm ready.  I will take a conservative approach and view this as a bear market rally - I think we have some ways to go before the next bull market.

I will buy stocks only on convincing breakouts.  Many of the stocks I owned in the previous failed rally have held up very well during this correction and remain on my watchlist.  If the market wants to run a little I will join the ride, but I'm not going to take any undue risks.

-Geoff

Watchlist Time

What an exciting week in the market!

I'm greatly enjoyed the break from the daily concern over the market, but never let it completely out of my sight because I know the market often turns when the majority least expects it. We may have experienced the bottom of this bear market with the failure of Lehman Brothers over the weekend.

The market tends to repeat itself over time, and huge washout or 'capitulation' days with dramatic drops in the market accompanied by a significant news event and a spike in fear (measured by the VIX) can often signal a bottom. It's certainly been dramatic and volatile.

It's pretty contrarian to start looking for opportunities and building a watchlist just when the stock market and the economy appear as bad as they can get. I don't know why this paradox works, but it does. Perhaps it's just that things finally get so bad, they've no where to go but up.

I certainly won't rush in to bottom fishing or value investing here - but I'm tuning back in to the market and will keep watch for a follow through day. I'm building my watchlist again and though some of the stocks I liked have broken out early, like (BKE) and (THOR), there will be plenty more opportunities.

There are plenty of factors to set up for a rally at this time - the capitulation in the financial sector (AIG had to get bailed out today by the Fed on the heels of the Fannie and Freddie takeovers), getting close the October/November in an election year, housing market looks ready to put in a bottom, and this bear market has lasted a year and corrected well enough that we could rally from it.

Despite all of this, I'm not in the business of predicting the future. I'll be prepared but the market will let me know exactly when it's time to get back in. I'll be ready when it does.

-Geoff