Contrarian Alert
Research for Online Investors

by John Dalt

8/23/11

Has the last month left you pulling your hair out?  U.S. GDP growth has slowed to where we must have decimal points on the readings to make sure they are positive.  Inflation popped in the last CPI.  Some companies are lowering their forecasts.  Everybody is talking about the world going into a recession.  Debbie Downer couldn’t make it sound any worse!

The VIX is elevated on traders buying puts to protect themselves from a high volume sell off.  Business news talking heads are feeding the rumors that Ben Bernanke is going to rush to the aid of investors on Friday with more quantitative easing or some other program that places a “Bernanke Put” under the market.

Don’t count on Bernanke to look out for you.  The Fed has destroyed the savings of most retired folks by squashing interest rates for the last three years.  Do you think he cares about equity investors?  The Fed serves one master, the banks.  Jefferson knew it, Lincoln knew it, Madison knew it and Charles Lindbergh Sr. knew it.

This is the contrarian’s dilemma.  Do we go with the popular “gloom and doom” predictions or should we ignore all the commentators as just more white noise?  It is instructive to look at a chart of the S&P for guidance.

We have three horizontal lines on the above chart, one at 1119 (the closing low on 8/8/11), another at 1104 (38.2% retracement of the market from 3/6/09 to 4/29/11) and 1020 (the 50% retracement of the market from 3/6/09 to 4/29/11).  Market commentators are “talking the market” down to the lows from last July (1020) or August (1040) for solid support.  We don’t doubt the market would find strong support at these levels.  Fear would have to be elevated above present levels for this sort of sell-off to occur.

We cannot know what headline shock would cause equities to fall this hard, but it is possible.  We also notice the market found strong support at the 1104.  It penetrated it for a couple of minutes before rebounding and closing the day 68 points higher!

The market is higher today.  If this rally continues, we need to watch the 1200 level, that is where the market turned lower last week.  If we can push through and close above 1210, we will be ready to call “all clear.”  If buyers cannot push through 1210 and hold it, then the bears will work to take the market back down and retest support.

The market has given us a tradable double bottom, now we need to use it to pull some profits out of old positions we may have been caught in.  Watch the next few days, if 1210 is left behind, we may have seen the low of the year.

And that is good news!

Quote:
The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at my rear is my greatest foe.—Abraham Lincoln

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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