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Today’s Summary: What A Long Strange Trip

Today's Trading Action

We had a very wild ride today. The market was up > 3% early in anticipation of the Federal Reserve meeting, it was down 2% as Fed Chairman Bernanke talked, but when he got to the part about the Fed doing everything in its power to fix things, we immediately went vertical on the chart and ended up > 4% on the S&P 500 Index.

The machines are definitely in charge – humans can’t move the market that quickly and turn on a dime.

As I scan our holdings performance today, I see some amazing things: Northern Oil and Gas was up +39.77%, Avalon Rare Metals was up +17.69%, ESB Financial was up +21.16%, Alstom was up +10.25%, Chicago Bridge & Iron was up +14.42%. Of the 300+ companies in our universe, we had eight that were down and all of those were fractionally lower. This is just an amazing thing.

What we are looking for is follow through. Will we reverse these gains tomorrow or are we on our way to recovering what we’ve lost this month? My best guess is that some of the biggest gainers give back some of the outsized gains. However, once the reactions and over-reactions settle down, where are we going?

One of my favorite indicators to give me an idea of the direction of the market is the Equity Put/Call Ratio:

equity-put-call-ratio

You may want to click on the chart to see a larger version of it as the blog tends to distort wider images.

If you look at the chart, you will see where I’ve circle the time where it said we were oversold and shown you the direction of the market when those reading hit. Invariably, even if not instantaneously, over the past seven years (that is the extent of the available data) when we get above the oversold threshold, the market moves higher from there.

Below is the chart of the S&P 500 year-to-date. I’ve included my favorite indicators, and even though I don’t have time to annotate it for you, they are all saying that we are severely oversold. Additionally, the volume bars sure look like we had a capitulation day yesterday where all of the sellers just puked up every bit of selling energy they had in them.

sp-500-ytd

I still feel pretty good about my statement on the blog yesterday that we will rally into year-end. I will go ahead and also say that from my viewing of the chart for the market year-to-date, when combined with the statement from Chairman Bernanke and the oversold nature of the market — and absent any major policy blunders out of Washington (that is truly a big caveat given the turmoil in DC) — that we possibly could have seen the lows in the market for the year. There are a lot of moving parts and since the computers are in charge of the bulk of the trading in the market these days, we can have things that just don’t make sense come about.

But I am going to operate under the assumption that the indicators I follow and trust are pointing me the right way, and we will continue to add to positions in client accounts at the right prices. It won’t be a straight up move, but I think the charts are telling me that we are in a recovery phase and we can make some money here.

Mark