Choppy day ends with big rally as investors bet on bottom

Small-cap stocks climbed to an impressive rally Thursday, quickly putting aside any downward momentum from Wednesday’s historic collapse. Investors were picking through the rubble for bargains, and also appeared to be testing the waters for a potential bottom. Traders had to endure choppy waters as the market traded more than 3% on both sides of the ledger, buffeted about by mixed economic data. The Russell 2000 (NYSE:IWM) closed up 34.46, or 6.86%, at 536.57, rejecting an intraday slide to the second-lowest point in more than five years to notch the third-largest one-day gain of the year. The Russell is now off 30% for 2008, while the Dow is down 32% and the S&P 500 is off 35%.

One encouraging element of the recovery move today was that small caps paced the move over the Dow and S&P 500 – even when the market struggled in the midday time frame. In addition, today marked the most solid chart action that we have seen since this whole collapse kicked into gear in late September. The Russell had a decent test of the recent lows without violating the bottom, then closed strong, which is a positive signal. In addition, the market has now left twin long “wicks” on the major low testing days, which is a form of a double bottom. It should be noted that these signs are on daily charts, and it will take a more dynamic formation on weekly charts to support any bottoming theory at this stage of things.

Even investors playing for a bottom that don’t watch chart dynamics have their own story to hang a hat on right now. Some of those elements include: (a) signs that frozen credit markets are starting to thaw vis-à-vis the pullback in Libor rates; (b) various valuation tools suggest the market is a bargain; (c) a majority of market pundits believe that the market has either made the lows, or is close to the low, which means downside risk might not be that bad compared to upside gain; (d) governments around the world have poured hundreds of billions into financial systems, which will stabilize the market. And even though economic statistics are truly . . .

For access to the full article, you must be a registered member - it's FREE.

Already a member? Please log in below