Friday, February 13, 2009

Find the trend

Investors trying to trade the indexes are getting whipsawed to death. That's probably putting it mildly.

The bears think the market is ready to crash down to the 600 level.

The bulls say the market has already crashed, valuations are cheap and after a more than 50% decline this is already one of the worst bear markets in history. Hence we probably have a long term bottom.

Here's the problem as I see it. The market is still 25% below the 200 DMA. It's probably going to be tough to fall off a cliff again with the market still stretched so far below the mean. Not impossible mind you but tough.

Fundamentally earnings are going in the wrong direction. Until we see some indication that the recession is ending and earnings are heading back up it's going to be tough for the markets to rally much. Sure the Fed can just devalue the dollar and spark a rally that way. It worked in 2003. However we have a deflating credit bubble that is putting enormous deflationary pressure on the system. At this point its a stalemate.

The end result has been a market that is just trading sideways never giving us a sustainable trend. Investors trying to do anything other than day trade are getting fleeced.

There are two sectors however that are trending. Precious metals/miners and refiners. One has to ask themselves if it's really worth the stress of trying to second guess the daily swings in the market when they could just get on board one of the two areas that are moving higher and let the trend do the heavy lifting for them.

The longer the market stays in this vicious trading range the more investors are going to gravitate to these two trending sectors.