How High Will This "Bounce" Go?

I've only got 43 years of experience professionally watching the financial markets, but even in that short period, you would think that something would repeat itself exactly and provide us with the chance to reference the incident and get exact clues as to what the next action might be.  Yet, it is never the same.  However, we do find a few rhymes, and we keep chasing those to see if there is some hint as to future action.  We never bet on those rhymes, but they do often give some hints for us to watch.

We've been comparing this "crash" with the one we had last year that started with that Flash Crash in May, and then subsequently chilled down in earnest.  Our Psychology Composite actually moved to P1 (its most bullish level) in that fear attack, while this time (so far), it has only managed a P2 (out of 6 - next to most bullish level).  That would seem to say the "dumb" fear is not quite as intense, or the "smart" optimism is not quite as optimistic.  It is true in some areas, but not in others.  For instance, the insiders are buying at a more aggressive pace in these last 6 weeks than any time in the last 10 years, and the OEX Option Volatility Index (VXO) actually moved even higher on this attack.

Yet, all in all, we would say the two emotional junctures are very close to mimicking each other.  Monetarily, the liquidity today, as measured by our Monetary Composite, is even more bullish.  And then our Valuation Composite is showing the S&P 500 to be Extremely Undervalued, but not as much as in last year's decline.

All of this talk about Psychology, Monetary and Valuation is ultra important, since it gives us the best advice we can get about the eventual long-term trend.  However, it's often the case that these kinds of very bullish signals have to sit here and stew for a few months before the rest of the investing world starts catching on and the markets respond.  In other words, traditionally, such signals are long-term advice telling us the market direction in the next 6 to 30 months, while the "herd" is interested, instead, in what is going to happen in the next millisecond.

Don Hays

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