Barron's: Look For a Tradable Low


No bull or bear market travels in a straight line. After five down months in a row, it's smart to take a little more risk in stocks even if we have begun a new bear market. The last time the market posted five consecutive monthly declines, it marked the start of the 2008 bear. However, after months of topping action, a swift break of support in January '08 and more than one show of support near the prior-year low, a multi-month rally of nearly 15% took stocks back up for a test of the January breakdown. Look at all familiar to our current situation? Months of topping action, followed by a trapdoor selloff in August, and a fifth month down in a row in September...I'm not implying that the eventual downside will be the same—but to my eye the analog would match best if we got a spike down in October (closer to last year's low) and reversal. This would look awfully similar to January-March '08, and leave the door open for a powerful rally to finish the year.


An October low would also line up perfectly with the seasonal tendency for the market to be strong in the fourth quarter....


A strong enough push could nudge us over 1250 by the time Santa arrives, giving us a gain for 2011 and keeping the presidential cycle intact. Sounds crazy...but this is the process you need to be going through: a lot of "if this, then that" analysis. These are not forecasts. They are probabilistic thought experiments. We should be willing to own a certain percentage of equities here. A further drop below 1100 on the Standard & Poor's 500 this month has a very good chance of creating a tradable low.

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