U and V

A colleague of mine asked me if he should got into QID at $51 by beginning of last week. I told him that I don't know why I thought the market was going to go up more before it starts going back down. Anyway I'm damn right about it as QID is currently sitting at $47.02.

Last week we kind of had a V-shaped rebound. Well I always say nothing will go up in straight line, as well as nothing will go down in straight line. Many stocks have been going down in straight line for days and months. Those declines created hugh differences between their 20-day EMA and 200-day EMA. So it's not surprising that they should go back up a bit to shorten that distances.

But since we are still in a pretty confirmed downtrend (meaning 20-day EMA is below 200-day EMA), even if we are going to turn back to uptrend, we at least have to retest the most recent strong bottom (which came in at the middle of the week before last week, the day and the day after the surprise Fed 75 bps cut).

Just read a little interview of Jim Rogers before I wrote today. He is predicting a worse and worse US economy and stock market. I pay high respect to this man and I'm pretty sure he has a view. I am not as smart as he does, but I was thinking, given that in the past we see double-digit interest rates and then we have economic problem. Government started cutting rates and then economy turns good. Now the Fed started cutting rates when interest rate was only 5.25% (if I remember that right). Last time US Red needed to cut rates down to 1.0%.

We all know Japan was in big trouble because they had no interest rate to cut as it reached closed to 0%. I guess nobody would like to see US goes that way.

Okay back to the topic I want to talk about.

From time to time we see U-shaped bottom and V-shaped bottom. As the name suggested. U bottom is kind of smooth and curvey, while V bottom is sharp and rebound quickly.

I did not check into all historical moves and bear markets, but I will not be surprised that if I will see a V-shaped curve as the first phase of bear market within a completed U-shaped bottom.

Usually in the first phase of a bear market people started to panic, as the economy is damaged surprisingly. It is surprising because people mentally are still deeply attached to a bull market. The news has to be very bad to wake them up. While the news is very bad that they suddenly change their mind from greed to fear, they rush to the exit quickly. Now margin calls kick in and many people have to sell to raise cash, forming the down-leg of the V-shaped. As most margin calls got wiped off and probably some portfolio rebalancing kicks in (note that I don't use the term value buyers here because there is no guarantee that all investors who buy at these levels are value players) as well as people are speculating a bottom, creates huge buying power and push the market back up very quickly, forming the up-leg of the V-shaped.

V-shaped rebound doesn't have to be symmetric. For example, the V-shaped rebounds in February and August 2007 may not be a perfect V-shaped, depends on how you see it. The January 2008 V-shaped is more obvious.

I'm just wondering, starting from November 2007, it maybe actually started forming a U-shaped downtrend. In the meantime I cannot conclude it. We'll see.

The current strategy is still wait to look for the chance to go ultra short ETFs. Better to wait till the current price of the tracking indices to hit 100-day or 200-day EMA before starting a position.