Friday, May 7, 2010
Black Thursday - a buying opportunity
By now you all have probably heard of yesterday's stock market fireworks in the U.S. markets. At around 2:20 pm the S&P started a hair-raising plunge that took the average down 7% in 30 minutes. The cash S&P 500 hit a low of 1065. Then the market pulled a dramatic U-turn and rallied 7% in the next 30 minutes, recovering nearly all of its losses. Nonetheless, this average closed down on the day by more than 3% from Wednesday's close.
I think the situation now is very similar to the one that developed in early February. Take a look at the top chart. You can see that at yesterday's low the cash S&P 500 was trading a little below its rising 200 day moving average and a lot below its rising 50 day moving average. This is a classic buying opportunity for the aggressive contrarian as I explained in chapter 11 of my book.
Today's headline in the New York Times (image of today's front page is above) confirms this. This is the first time since the February low that the stock market has received a bearish headline mention in the Times.
Since the aggressive contrarian has maintained an above average commitment to the stock market from the 690 level in March of 2009 no additional action is called for. I think yesterday's Black Thursday will appear in retrospect as a huge buying opportunity. I expect the S&P to trade over the 1300 level during the next several months.