Dead Cat Bounce Or Trend Reversal?

Euphoria returned to Wall Street as yesterday’s sharp rebound rally lifted the major indexes out of the doldrums after relentless selling for most of November. The question now is whether this marks the beginning of a trend reversal or is simply a dead cat bounce with more downside activity to come.

While obviously no one has that answer, I believe it pays to be a bit more conservative for the time being. If you like charts and technical analysis, this article in MarketWatch makes a case that the healthy pullback from the highs has accelerated into a more technically threatening downturn. Translation: The near to intermediate-term outlook has turned lower.

Singing a similar tune was chief economist Dr. Irwin Kellner in his article “Goodbye, expansion; hello, recession,” which focuses on the plight of the consumer. He makes the case that the value of people’s two biggest assets, their homes and their investments, are falling.

Many have little or no savings to fall back on, having spent more than they have earned for the past two years. Adding insult to injury, the credit squeeze has made borrowing no longer an unchallenged privilege for the masses; if you can’t prove you don’t need the money, lenders will be very hesitant.

More interest rate cuts by the Fed would confirm that the economy is indeed sliding, which will affect stock market direction. Right now, it’s too early to tell if this market will climb a wall of worry or if this rebound was a one day event. I am playing it conservatively, until momentum numbers show that the uptrend is alive and well.

Our domestic Trend Tracking Index (TTI) has climbed to +4.89% above its long term trend line while the international TTI has rebounded from negative territory, two days ago, back to +1.33%. I will hold off with making new commitments to the international arena until I can see a more consistent upward trend.