Wow! The biggest two day gain in years. Is it time to celebrate? Better wait and see.
It is possible that we have successfully tested the August low. It will be as much as three months before that can be stated with certainty. It is also possible that we are going to complete what is called a “head and shoulders” top (or a “triple top”), with market peaks early in the year, July and October. Again it could take three months or more for that scenario to play out. How do we know which (if either) pattern is emerging? The “double bottom low” would be confirmed by a rise decisively above the October high (approximately 14,200). A close of the Dow above 14,500 would confirm a continuing bull market. A close of the Dow below the intraday August 16 low (approximately 12,455) would indicate a triple top and the possible start of bear market.
If neither of the above scenarios occurs we would be in a trading range market, with the Dow fluctuating between 12,500 and 14,300.
I use a complex formula of exponential moving averages to decide when buying or selling of securities is indicated. This morning some banks and international ETFs gave the first “buy” signals in several weeks. I bought BCS (Barclays Bank), BAC (Bank of America), AIB (Allied Irish Banks) and IRE (Govourner’s Bank of Ireland). These are four of the six most undervalued large banks in the world. I also have WB (Wachovia Bank) and WFC (Wells Fargo) on the deeply undervalued list, but they have not yet given “buy” signals.
I do not feel that these banks are sure to be safe from future downturns, but their investment portfolios and earnings appear to be on better footing than some others, such as CFC (Countrywide Financial), C (Citicorp) and WM (Washington Mutual). Because they are merely the best of an otherwise suspect crew, I will maintain tight stop loss orders at the prices where my system would indicate a “sell” signal. Worst case, I will encur 2-4% loss for any bank that does pull back. Best case, there is an enduring rally and we benefit by 10-20% in a few weeks. All four banks are trading near 50% (or below 50%) of my calculated fair value, so the upside potential is significant.
International ETFs with “buy” signals this morning included FXI (Shanghai Index), EWH (Hong Kong Index), EWY (Korea Index), EWS (Singapore Index), RUS (Russian Index) and EWZ (Brazil Index). I bought EWY, EWS and EWZ early in the day. Again, as with the banks, very tight stop loss orders have been placed because these ETFs remain very close to the “sell” signal price.
Happy investing, but stay on top of things. The wild ride is probably not over.