The charts in the shorter term daily timeframe are favoring the downside and the Santa Claus Rally may be in jeopardy. Investor psychology is waining and the media is creating a gloomy image on the market with so called experts criticising the Fed's surprising move. Although it seems like there's a massive flood to the exit, I believe we are in the final phasing of the correction. When sentiment is very bearish, we tend to reverse up and vice versa when sentiment is bullish. Bulls are getting whipped now, but I think they will be rewarded a few months from now. Fundamentally, inflation risk has yet to be confirmed and still the market is factoring in the prices that mirror a recession. Fear overpowering greed seems to be the perception and that's all it is. There are a lot of attractive stocks with high growth that are trading at a big discount. Recession in the US should not affect the global demand in terms of the broader picture. The emerging markets are bigger than ever and there seems to be no signs of haulting in those markets. I believe global equities will continue to perform well and this period of profit taking provides a great opportunity to get long in foreign stocks. As history points out time and time again, the greatest economic countries experience a downfall and give rise to a new successor. It is inevitable that the US will no longer become the economic powerhouse with the likes of China and India.
I'm going to stick my neck out and say that we will not fall of the charts next year and most definately not in the emerging markets. The subprime woes seem to be stablizing and as proof, the Homebuilders ETF (XHB) is showing good relative strength as it is up for the month of Demember whereas the strong performing ETFs have pulled back. Although it is the worst performing fund on my list since August 31, buyers are stepping to the plate and shorts are covering. Bad stocks seem to be bottoming and good stocks look to be topping. These mixed pictures, to me, signal profit taking and usually the volatility declines. When that happens, prices usually go to the upside. I think downside risk is smaller in comparison to the upside, however given the poor sentiment, we could trade sideways with no clear direction in the immediate future. Down the road, I think there will be an upwards bias and most definately a flight to quality such as the emerging markets and commodities. I have been trying to play the game of the contrarian investor and it has paid off well thus far. While people are parking money in the more liquid large caps, I'm slowly accumulating positions in small caps for my long term portfolio. My swingtrades and daytrades have been exceeding my expectations, but my long term holds have been dogging me. The only thing that matters is price so time will tell if I've made the right call or not.
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