Often, you will hear market technicians talk about an "oversold reflex bounce". This is a fancy term for the market is not finished on the downside.
In yesterday's market action, the S&P 500 briefly touched below the 1180 support line before rally before the close. Since the 1180 mark is also an important psychological area, it seems logical that a move below this level will create enough anxiety for some panic selling. We will be looking for a sharp break below the 1180 area before the market reverses itself. This should be enough of a springboard for the market to begin the year-end rally.
Where will the opportunities be? Probably not in oil. Oil stocks may bounce, but a break below the $63/bbl area looks to have activated a correction that will bring oil prices down to the $55/bbl mark. The sell off in oil will be the main catalyst for a potential year-end rally.
Seasonality to Kick In:
The seasonal weakness we are experiencing abate towards the middle of next week. We should begin to see gradual improvement in the markets into yearend. To take advantage of an upcoming rally, I favor the Rydex high velocity funds, specifically the Rydex Titan 500 (RYTNX) for the S&P 500, and the Rydex Velocity 100 (RYVYX) for the NASDAQ. Both funds are very aggressive as they attempt to capture 200% of the move in the index rather than 100%.
I also feel that select retail stocks have a chance to bounce nicely. I have already mentioned Best Buy (BBY) and Wal-Mart (WMT) several times, but American Eagle (AEOS) and Gap (GPS) also look attractive.
Both companies sell trendy and affordable clothing. Recently, AEOS Chairman Jay Schottenstein took advantage of the stocks weakness and bought 1 million shares at prices ranging from $20.56 to $21.65 totaling more than $20 million. GPS on the other hand was reiterated a buy at A.G. Edwards. Why not, the stock looks cheap.
