Testing the low

The market is about to make its second bounce that typically signals that a market decline has bottomed. There is still an opportunity to buy now near the bottom.

The sell off in the last two months has been the result of people panicking, redeeming their cash value, and forcing the funds to liquidate holdings. The drop yesterday was on higher volume typical of capitulation of the risk adverse frightened individuals. The result of many index fund baskets of investments tends to drag the strong equities down with the weak companies so there has been no safe place to hide.

But this has created a situation where mergers can begin to flourish and managers can take many companies private buying out the low capitalized companies. With the cost of borrowing so low and the streets of lower Manhattan awash in cash, fund flows should soon become positive again and a rebound is due now.

Fear of a depression was an excellent political strategy up until November 3 but now the new government needs to stop scaring mom and pop investors. The wealth transfer that this opportunistic fear induced is from little people to the corporate managers who borrow other people's money (OPM) to buy the assets of the elderly and the fearful. This is reminiscent of Germany during the rise of Hitler. The Bank managers in Germany during the 1920s bought up the bank assets with OPM and then paid off the debt easily during the ensuing inflation.

Hitler became very popular because he promised to go after the top 1% of the rich who he claimed had stolen the people's money. No one expected that he would seek to exterminate them and confiscate their wealth. But blinded with hate no one objected too much when he did it. That will never be repeated but class hatred can destroy everything that made America great.

Today is critical. If we break through the DJI low established Oct 27 (8085-8176) then a new decline will be more likely. The DJI market intra day low this year was 7774 on Oct 10. Yesterday the low was 8637.