Last day of the Christmas sale of American stocks

Ok, we put our methods to another public test and took a risk that we will make a fool of ourselves. No double speak.

Today if the market closes above its previous November 2008 low we will conclude the panic selling is over and the market will soon rebound ending the current hedge fund panic and the buying opportunity of a lifetime. On the other hand if the market breaks the November 2008 low then the new method will have failed this test due to over sensitivity to the whipsaw of the volatile market.

People like to point out that stock markets are one of the FEDs leading indicators and historically bottom 6 months before the Gross Domestic Product bottoms and up to 12 months before unemployment peaks. That is absolutely true and that is why the stock market is a reliable leading indicator of the American economy. That is why if we are at the market bottom now we can anticipate unemployment to continue to worsen for another12 months while the economy deteriorates for another 6 months.

So the market should rise in anticipation that a deflation/depression risk is diminishing.

Again the financial mechanism for the coming rally will be mergers and acquisitions by corporations and astute wealthy investors who just cannot pass up these basement bargains. The source of funds in most cases will be the hoards of cash held by corporations and banks that have been waiting for this bottom. That is why so much bailout money was hoarded before and will now flow too. It is all on the sidelines now waiting to rescue good investments and drive up the whole market analogous to an enormous stock buy-back.

The primary technical mechanism is the bear trap that will be sprung as hedge funds return to their bull market 70%+ long, 30%- short position from their current high levels of shorting.

The primary sustaining mechanism is all the experienced investors like you and me who got out of the market last year and have not been fully invested more than toe deep since then. The experienced investors have begun doing what Warren Buffett and Jim Rogers say they have been doing… selectively buying in since November and will buy much more on any price declines. Today may be that last opportunity before the market surges higher.

The psychological mechanism will be the public realization that in order to get elected many politicians trashed the economy, and the competency of corporation executives and the FED as well as federal administration personnel. Their obituaries for the American free market system and the American Constitution will be proven to be premature. Obama and the American economy are really OK and there was no need for the panic when Obama won. But it did make it clear who was driving down the market since the moment it became clear he would be a presidential candidate. The market then went into free fall the moment his election was announced. Obama however is selecting mostly pragmatic rather than leftists for his government.

When it becomes apparent that this current economic malaise is only a more severe version of 1989-1991 recession and not a depression… then Americans will realized that the market has over reacted and mistakenly discounted a future depression and should only have discounted a recession. That realization will put a relatively silver lining on everything and Americans will start investing again to beat the band.