The snap back rally

A number of indicators I am seeing are telling me that we are oversold and due for a bounce. I do not expect this bounce to amount to much, maybe end at around 820 or 830 on the S&P500. Note however that we are in such a severe crisis that it is going to require some kind of external event not already factored into the market to cause this rally. I think some options area temporary repreive from mark to market accounting

• reducing the captial ratios that banks have to have on their books
• some kind of pseudo-nationalization plan that doesn't completely wipe out bank shareholders

Now let me show you some charts and I will post some notes about them for explanation.

The topmost portion of this graph (the SPXA50r) shows the number of S&P500 stocks about their 50 day moving averages. As you can see, in almost all downturns except the most recent one, the market bounced back when this number got to around 15/20. The prior dowwnturn in Sept-Nov 2008 was u

nique in that it was a real freaksow with Lehman collapsing, AIG needing govt. help etc. I think we will see a similar event later this year when the main banks need to actually be nationalized, but not now.

This next image is the S&P 500 relative to its own 50 day moving average. Take a minute to understand what means. It's basically the number of std deviations of the index from its 50DMA. Here again, you see how exceptional the last downturn towards end 2008 was. So, if the present downturn can be considered more run of the mill, we should see a snapback given that we are 1 std. deviation away from the mean.

And finally we have the VIX or the volatility index I have alluded to before.What this is showing me is that we are still expecting very high levels of volatility, but not as high as Nov '08. This shows that this most recent downturn is probably of the routine variety.

The caveat emptor for all this is that if we see a sudden deterioration in the markets, say some country reneging on their debt or another bank going to the woodshed dramatically (my latest concern is with European banks that have made loans in Eastern European countries).

And finally, a quick not on where I see that markets going from here. I really think this is a more severe recession that we had ever imagined and that is going to show up in the markets. But remember, nothing goes down in a straight line and we will bounce around a little before hitting the final bottom which to me lies between 450 to 600 on the S&P 500!!! It may happen late this year or in the middle to end of next year.