Anatomy of a Bottom
22 August 2007
After going through all the
technical and sentiment data available, I am more convinced than
ever that a major bottom was formed in the markets last week.
Below I present the reasons:-
a. Volatility Index (VIX) which
measures market fear surged to 37 intra-day on Thursday before
reversing and settling at 30. On Tuesday, it fell further to
28 - we may have seen the top in the VIX.
b. On Thursday, over 1,000
US stocks recorded fresh 52-week lows and only 10 stocks hit
new highs - this extreme reading is a symptom of a severely oversold
c. The Put/Call ratio, which
measures the number of put options (bets on the market declining)
versus call options (bets on the market rising) reached 1.3 which
is even higher than the level recorded at the bear-market double
bottom in October 2002 and March 2003. The current reading indicates
that the majority of market participants are positioned for a
further fall and not many are betting on a rise. Such a high
level of bearishness is a great "bullish" contrarian
d. The latest survey done by
Investors Intelligence shows that the level of bullish advisers
has shrunk to 43% from close to 60% which is consistent with
previous market bottoms
e. The Bank Index in the US
(a leading indicator) also bottomed last Thursday and has been
leading the advance off the lows
f. The Fed cut the "Discount
Rate" by 50% and this is a sign that it will probably cut
its Fed Funds Rate at its next meeting. Rate cuts are bullish
for assets and negative for the US Dollar.
g. Finally, Thursday marked
a "key" day reversal. In other words, after being down
significantly during the day on massive volume, US stocks managed
to close higher representing panic and capitulation.
So, you have to ask yourself
the following question:
If the capitulation has already
taken place as evidenced by Thursday's data and the majority
of market participants/advisers are now stark bearish, who is
left to sell???
Gold and silver shares were
also whacked during the recent rout, which is inconsistent with
the bullish monetary and economic backdrop for precious metals
- rising monetary inflation worldwide, imminent interest-rate
cuts in the US and expanding credit spreads.
In my view, the above data
combined with the prevailing negative sentiment is screaming
a "MAJOR BOTTOM". Investors are advised to accumulate
major positions in resources (miners, energy stocks, uranium
stocks, precious metals stocks) and the emerging markets during
this widespread doom and gloom. After some additional consolidation
and a re-test of last week's lows the advance should resume.
The above content is taken from the recent "Email Update"
sent to subscribers of Money Matters.
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.
Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
|Recent Gold/Silver/$$$ essays at 321gold:
Aug 23 Novo Scores +1 Gram Per Meter at Egina Bob Moriarty 321gold
Aug 23 Gold Stocks: Morning Stars In Play Morris Hubbartt 321gold
Aug 23 Gold Mid-Tiers' Q2'19 Fundamentals Adam Hamilton 321gold
Aug 22 Goliath Drills a 718-Meter Porphyry Bob Moriarty 321gold
Aug 22 The Rosen Market Timing Letter Ron Rosen 321gold
Aug 20 Blackrock Swings for the Fences at Silver Cloud Bob Moriarty 321gold