What Is Not Seen

Oct. 13 (Bloomberg) — The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

It’s hard to imagine anything else that better convey the true nature of central banking and the present cheap fiat money paradigm, than what we are currently witnessing. Given the recent turn out of events, with one government bailout after the other, today’s joint action could hardly come as a surprise to anyone. To assume any other response would be as naïve, as giving tons of money to a pathological gambler, believing he’ll not spend a dime!  

Looking at the recent month’s panic, and the stock market cliff jump that followed, I think stock here may be in for a strong positive correction. While I am definetly more negative on a long term basis, certain signals have become more apperent than they ever have been in the last 10 year period of stock market corrections. In this type of market, where the sentiment is at record low levels, the effect of demand is usually stronger than supply, since most people that want to sell their stock already have. As the stock market plunges, more stocks are offered fore sale, pushing prices further down. As almost every stock in the broader stock market index are experiencing sharp declines, the pull of supply gradually diminish. It continues until we reach a point where demand once more gets a grip of price.

If we look at where we stand at the moment, and the Bullish percent indicator – that show the percentage of stocks on the NYSE that indicate some sort of buy signal – we see that the current 10 % is extremely low (by historical standards). Historically, a percentage below 30 has indicated an oversold market, with a strong likleyhood for a rebounce.

From the current depressed levels a slight increase in demand will act strongly for a positive correction. From a technical point of view the trigger for such an event usually happens when we see a reversal from a colum of O’s to a new column of X’s.