Stock Trading: Bottoming Process Continues

THE FINAL NUMBERS – Monday Bounce

NEWS: The major indices were bid higher Monday as the beaten down foreign markets gave the US a boost overnight. With an hour left in trading the Dow (^DJI) was up 235 points or 2.7%. The S&P 500 (^GSPC) was near the high of the day, up 27 points or 2.7%. The NASDAQ (^IXIC), which has been lagging all day, gained 30 points or 1.8%. Oil was up over 3% and gold was up $5/ounce.

THE BOTTOMLINE: After retesting the multi-year low on Thursday, the indices were able to continue the short-term rebound - if you want to call a 200-point gain on the Dow a rebound. The way things have been recently, a 200-point move on the Dow could be achieved in minutes, not an entire day. That being said you have to start somewhere and I was happy to see a decrease in volatility to begin the week. Also impressive about the action was the broad-based buying. Everything from utilities to health care to energy was having solid days as buyers finally woke up for a trading session.

The keys to the market this week will be the influx of third quarter earnings reports along with the technicals on the major indices. The big three must continue to hold above the low hit two weeks ago for the markets to have any chance of continuing the bottoming process. Keep in mind the key word is “process”. A bear market does not end one day and a bull market begins the next.

Most uneducated investors believe that is the how the market works and that it is easy to determine when that occurs, but unfortunately that is not reality. I have taken some flack recently for highlighting indicators that historically identified market markets, such as the spike in the VIX. What readers MUST realize is that I am not in the business of calling a market bottom and no one out there can honestly tell you they know where the bottom is. However, I can take all the information I have and attempt to predict when the market looks attractive on a long-term basis and when I believe we are in the bottoming process.

This past weekend on Fox News Channels top-rated “Bulls & Bears” program I was asked if the worst is behind us and I responded and overwhelming, yes! I truly do believe the over 40% sell-off in the S&P 500 from the high last year to last week has either put us at a bottom or very close to one. Therefore that would suggest the worst is behind us and that the bottoming “process” is continuing.

The China Conundrum

NEWS: Early this morning a series of economic numbers were released by the Chinese government regarding recent activity. The big one was Q3 GDP which came in at a 9% increase, below the 9.5% estimate and down from 10.1% in Q2. Industrial Production in September increased by 11.4%, though it was down from the 12.9% in August. Retails sales in September skyrocketed higher by 23.2%. The September CPI came in at 4.6%, down from the 4.9% reading in August.

THE BOTTOMLINE: The numbers China reported today would lead the average investors to believe the stock market in that country should be very robust – when in fact the exact opposite is true. Since hitting a high 12 months ago, the Shanghai Index is down nearly 60%! What is even more amazing about the sell-off is that it was not one week that sent the market lower, as was the case in the US. The Chinese stocks have been in a steady downtrend for a year and are now trading at levels not seen since 2006 and are at the same level it was at in 2000!

Back to the numbers. Yes, the 9% GDP growth is below estimates but tell me where else you will find that type of growth in this environment? I am willing to give up the double-digit GDP growth in China for a few quarters, but compared to its peers, the country is considered a growth machine. Add in the CPI, which fell, and there is a high probability the Chinese government will take actions to stimulate the economy/market without fears of increased inflation.

If you are a believer in the potential of China as a country and its related investments, now be a good time to start building a long-term position. The one issue I have is the high volatility of the Chinese ETFs and stocks, but then again the US market has been just as volatile. The best strategy may be to wait for a confirmation of a bottom in the US market before putting fresh money into China.

CHART OF THE DAY – GOLDEN OPPORTUNITY?

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