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Panic Selling Will Lead to a Sharp Bounce

By Paul Lamont

February 28, 2009



Last month, we noted the change the Beach Boys experienced from the early 60s to the early 70s: from good times on the beach to warnings about polluted water. In our report, we compared this to the significant shift in investor sentiment from 2007 to 2009. Stock market bears have had their day in the sun; but now is not the time to be in shorts.


Bearish sentiment is everywhere. Investors have finally realized what we have been discussing for the last two years. And now that we are near a temporary bottom, some investors are taking action. After opening their brokerage statements to inspect the damage (they don’t do this until near the market bottom), their immediate reaction is to cash out and stick their funds into CDs.


Unfortunately, investors are reacting to the past. They should have been in cash during the downtrend. CDs are not necessarily the best investments going forward. Buying CDs also ignores the lessons of the Great Depression: that fractional reserve banks eventually collapse under their own leverage. Instead, investors should be positioning themselves for a countertrend rally: by either not selling their stocks or if they are in cash, by considering market exposure (depending on your risk tolerance).


In January of 2007, we quoted Dr. Marc Faber; "In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate." As expected: “When investors finally give up at the bottom and sell, we will recommend buying.” We do not expect that this is the ultimate low, merely a level that will support a multi-month bounce. This reflationary bounce will be much stronger (and possibly last longer) than any other rally we have seen since October 2007. Its purpose is to put to rest the widespread fear currently in the market.


Looking For a Retest

We have continually used the inflation-adjusted Dow Jones Industrial Average Chart (seen below) to note the bear market’s progress. The midpoint line has created a reaction by the market in the past, for instance to mark the top of the market before the crash in 1987. We expect the DJIA to retest this trend line, much like in 1975.




The Real Government Role Part 2

As we explained last February, “the Fed and the FDIC actually tax the banking system during a crisis.” Sure enough, the FDIC is raising fees on all banks to support its bailout fund. More examples of the government destroying the financial sector are too numerous to mention.


Treasury Bond Update

That was quick. From its December 18th low of 2.54%, the 30 Year U.S. Treasury Bond yield has risen to 3.68% in two months. For such a big boat, that was a quick and abrupt turn. As we stated on January 5th, 2009, "government bonds were sold in the deflationary spiral of 1930-32. The excuses were two fold: liquidity concerns and inflation fears." In our view, the ‘Haughty Bond’ has fallen. Expect the trend in long term interest rates to be up until we reach the final stock market low (sometime between 2010-2014).


Short Term Bearish on Gold and Silver

We were able to determine a turning point in the Bond market using sentiment. Now everywhere we look, gold is present. Financial television shows and political radio are advertising it. Sentiment surveys are equally as optimistic, thus highly bearish. We expect a drop under the November low. However, we cannot be long term bearish on gold because it is only 7 years out of a lengthy twenty year bear market. Also, gold is money historically. If the credit of the U.S. is eventually impaired, gold may become a desirable haven. But in the current environment it is extremely expensive.


What’s Next

We expect an intense selling Panic in March, much like September’s action. The sell-off should end with the failure of a significant institution. This temporary bottom will support a sharp bounce into the fall.


***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.


Copyright ©2009 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.