I Can't Find a Crash without a Retest

For those of you who have been fully, or even partially invested the entire way down, I am sincerely happy that you were able to make back some serious money the last few days.

That said, there was plenty of evidence in 2007 and early 2008 to tell you that it was time to get out of stocks and protect the hard-earned gains of the 2003-2007 Bull Market.

The biggest rallies have come in Bear Markets. Bear Market rallies make you feel good, scare you about being in cash, suck you in and then crush you. Buyer Beware!!

I actually started shorting some this afternoon. I expect a retest of Friday's lows.

I can't find a crash that didn't have a retest!

Look at the 2-day rally following the Crash in 1929. See how the market sold off and actually undercut the initial low?

The same thing happened in 1946. The Dow crashed and then put in a series of sharp rallies and retests. September - November 1946 looked like a really frustrating and unproductive time to own anything.

The Crash of 1987 looks a whole lot like the Crash of 1929. The crash was followed by a sharp, 2-day rally. Then the index tested the lows over the next week or so.

In 2001, the S&P 500 had two major selloffs (crashes). In the first (Green Box), the S&P rallied sharply for a few days and then retested the low of the crash.

In the second (Black Box), the S&P rallied for a few days and then sat around for 3 days (Black Arrow). While sitting around, price corrected 30% of the first move up, and support was easily defined for a clear stop point on any buys.

I am not interested in buying a spike down, and I am not interested in buying a spike up. I want to wait for a decent entry point, with definite risk.

There were also two crashes in 2002. The first had a 1-day pullback (Red Arrow), which retraced about half of the first-day's gains. A few days later, there was a nasty 3-day selloff which retraced a big chunk of the first rally.

After several weeks of rallying, the market rolled over and ultimately undercut the lows of July (Black Arrow). This testing and retesting is a part of the bottoming process.

My brother once told me that the markets go to the most obvious place in the most painful manner possible.

The most painful scenario right now is a sharp selloff to retrace some of the massive gains of the last few hours of trading.

That would be enough to scare some more people into selling their stock before a more meaningful rally. Remember, the average rally from these emotional extremes is 24% over 8 weeks.

This is an emotional time. The more information you have about historical precedent, the better you should be able to navigate the current market.

I think we are in a Bear Market rally of unknown price and duration. History tells me that there will be a retest of the recent lows, or at least a decent retracement of the first rally off the lows. It is at that time that I will be able to determine if I should be buying and how much risk I may be taking.

Clients know that I have been heavy in cash the last 12 months and that affords me the ability to pick my spots.