What happens next? That’s a multi-trillion dollar question which both bulls and bears will wrestle with for the next few weeks, and on into eternity.
In today’s Barron’s, Mike Santoli points out that "the recent seven-day, 8% jump from the intraday
low August 16 is only now at the point of proving whether it’s a mere
bounce or something more."
My own humble approach has been to note the quality of the rebound off of the lows, paying close attention to rally volume and breadth. That, so far, has spoke volumes about the nature of the snapback.
There are many other ways to assess the situation. Santoli notes the recent comments of Ned Davis Research (NDR is amongst the most highly respected technical analysts). Ne Davis has devised a number of measures for reading markets:
"Ned Davis of Ned Davis Research (NDR) is noteworthy among market handicappers for his adherence to the tape’s objective message and for a refreshing willingness to embrace nuance. He’s like a pilot who knows to trust his instruments most of the time yet is experienced enough to recognize when it’s necessary to fly by sight.
Davis for most of the year had been giving the nod to the market uptrend while discounting some upbeat signals due to the excess of debt in the system. How’s that for a well-written playbook?
Here’s what he wrote last week, on the subject of investor sentiment following the Dow’s bounce off the Aug. 16 low. "The market, aided by the Fed, did what it needed to do to prove the pessimistic majority wrong by rallying. Nevertheless, with mortgage rates and junk-bond yields still in zones which I feel are hostile, and with Big Mo’s Tape [his market-trend indicator] bearish, I have felt the NDR Crowd Sentiment Poll should drop below 40 to signal a low-risk buying opportunity."
His sentiment poll instead dipped to 48. That’s about on par with readings that accompanied the market lows in 2005 and March 2007, but not as pessimistic a showing as one that flashed at the 2006 bottom.
Davis concluded his Wednesday client note thus: "I admit there are some bullish signs around, but I just do not see a ‘fat pitch’ from the sentiment indicators currently."
Thanks for pointing us to the good stuff, Mike . . .
STREETWISE: Late Summer Reading
Barron’s, August 27, 2007