Wednesday, March 14, 2007

Reversal Day

Still two hours to go but it looks like the makings of a reversal day in the market, which can be a strong buy signal, particularly from oversold levels. Reversal days represent capitulation and a washing out of the weak players. Don Hays mentions in his wonderful market letter today that put/call ratios and the Rydex bullish/bearish index are flashing psychological buy signals here. The speed at which each of these indicators has declined recently has been impressive (see chart on the right by Hays).
We continue to view the market now trading in a broad range. As it nears the low of the range, commentators will focus on sub-prime mortgages or some weak economic indicator. Near the top of the range, they will focus on private equity and corporate buybacks. Until Fed policy changes or something dramatic changes in the economy or the world, we view this trading range staying in place for several quarters.


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