Calamity Averted....

FUNDAMENTAL ANALYSIS
What was shaping up to be a historic 500 points opening to the downside with a possibility of ending the day 1000 points lower, ended up much "better" than expected when the Fed jumped right in with an Emergency Rate Cut of 75 basis points! (1 basis point = 0.01% by the way)This is the BIGGEST emergency rate cut given since 1984! Some analysts think that all Uncle Ben did was to show the state of panic that the regulators are in and some others think that he is catching up with the curve at last. No matter what anyone says, reality speaks for itself with the market pulled back from the edge of calamity. Well, that goes to show that rate cuts do work afterall and that investors are much more savvy compared to the crash of 1987. Investors do recognize that such weak openings are perfect time to be buying as such huge ditches usually heralds a rally. Such expectations in an efficient market has the power to prevent the huge ditch from happening in the first place. Therefore, I think the market action today proves 2 things; 1. Rate cuts always works... its just the magnitude of the cut that matters. 2. The markets are getting more and more efficient as the textbooks suggests. Indeed, I do see a few other factors that are contributing to the possibility that the bottom is near. Firstly, bond yields have really been severely depressed over the past few months. In fact, the short term bond yields are so low now that soon investors would start to notice that the returns on these bonds hardly offset inflation and that equities are looking extremely cheap, hence a move back to equities. Such a flight to bonds is also indicative that inflation is really not as much of an issue as the Fed has expected. Secondly, oil prices are also severely beaten down, hence reducing the possibility of further energy driven inflation, reducing production costs and allows the Fed more room for rate cuts. All in all, the case looks good both fundamentally and technically for a bottom soon.

TECHNICAL ANALYSIS
Yes, the Dow ended in a dragon tail formation day again. A dragon tail formation is an inverted hammer with an extremely long tail occuring at the bottom of a significant draw down. Dragon tail formations are extremely strong reversal signals and needs an up day tomorrow as a follow up in order to confirm. The Dow rallied back on 17 August 2007 on a Dragon Tail formation as well. In fact, this dragon tail formation occured in line with our expectation of a dead cat bounce. With the market this oversold and multiples plummetted across the board, investors would certainly be accumulating at this point for a few days at least. In fact, this could shape out to be the first up week of 2008.


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