Conventional wisdom dictates that the weeks from Thanksgiving to Christmas historically sees rises in indexes. This year looks to be no different - but from somewhat different circumstances. The S&P at current tape of 910 is down 41% for 2008. The intraday low was 741 - 52% off the top. We have rallied 22% from the intraday low - which technically constitutes a bull market. Ergo - your Santa Claus rally underway. Will it continue - more than likely to the end of the year.
The real test will be what happens next year. A case can be made for a rally to sustain up to 1150 area going into the inauguration. This is derived from a 50% retracement of the entire move down. If this happens, this would be an excellent time to revert to bonds because typically after a 50% retracement, the lows will be retested. Keep in mind that during the last bottom, the bottoming process took 8 months and retested the "low" 2 additional times. Guaranteed, this will happen again - so we will look for 752 closing low within the next 6 months.
Market and Economic outlook - the Fed / Treasury / Government will be "pushing on a string" for the next several years fighting deflationary forces and pimping "banks loaning money." As consumers continue to retrench and pay off bills - perhaps our outstanding debt to GDP ratio will lower from 350% of GDP (which was larger than the '20s). It seems the government desires a return to high borrowing and high spending. This became unsustainable and the credit explosion dissipated like a tornado ripping through a straw house. In absolute terms, no economy can spend their way to prosperity.
The government can't borrow the money, give it to taxpayers, and expect the ponzi scheme to continue. These are short sighted desired outcomes that just will not work in the long run. Apparently the answer for overborrowing and overspending - is to borrow and spend. Just silly.
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