Dow Reverses Into Neutral Trend.

The Dow followed up on Friday's rally today with yet another rally of nearly 300 points as bond traders continue to rush into equities, causing bond yields to rise again across the board (see bond yield curve). This has reversed its intermediate trend from bear to neutral with neutral trading channel bounded by 9500 and 7500 points, which means that it is a good time for some neutral options strategies. Yes, 2000 points wide neutral channels are rare and can only be found in extremely volatile market conditions such as this one.

So, has the final capitulation that I have been talking about ended with the 2000 points ditch last month? Probably. Is the market ready to reverse? No. With all the job cut reports coming in recently, the forward looking unemployment rate doesn't look good. In fact, I personally think that peak unemployment rate should be 7% or higher. If peak unemployment rate has not yet been reached, the empirical probability of a stock market recovery remains pretty low as all previous crises have reversed on peak unemployment rate (there's pretty good fundamental reason behind that which I will not elaborate here).

So, have the stock market bottomed yet even though I don't think its time for a reversal? The possibility is high as the Dow has found tremendous support on its monthly 200MA, which marks long term support level. This also coincided with bonds generating yields of recently unseen lows, causing an exodus of bond traders back into stocks, providing the fundamental basis of support. If this support holds, this could well mark the bottom for this bear market and the Dow could go into an extended neutral trend until unemployment rate peaks before breaking out into a reversal.

Well, I still we should see the worst economic numbers come in during the first quarter of 2009, which will see recovery from the second half onwards. This means that the worst for the stock market could already be behind us.