For the last few weeks, we have suggested that President-elect Obama could either adopt the FDR model, which would be disastrous for the economy and the markets, or he could step-up and provide leadership to fill the current leadership vacuum. Again as the GaveKal organization opined:

“Probably most important economic transformation which is about to occur is the transformation in personal leadership. Suppose you believe, as I do, that the financial meltdown triggered by the bankruptcy of Lehman Brothers was not a divinely ordained retribution for decades of greed and profligacy, but simply a bizarre accident, caused by the incompetence of the Bush Administration, particularly of Mr. Paulson.

In that case, the arrival of a credible new economic team in Washington, led by respected figures such as Messrs Volcker, Summers and Geithner, could transform psychology in global financial markets. With house prices stabilizing and an inspiring new leader replacing the doltish President Bush, American consumer and business confidence could enjoy a similar resurgence.”

And, that appears to be precisely what happened late Friday. Hopefully, that mindset will continue this week.

The call for this week: My firm still thinks October 10th represented the capitulation “lows,” as can be seen in the S&P 500 chart below that shows the RSI and MACD indicators at their most oversold levels since the 1982. As Barron’s notes:

“For a bullish spin, though a weak one, the market has not made a significantly lower low since Oct. 10th. The word ‘significantly’ is important because some major market indexes, including the Nasdaq, have indeed been setting new lows. But the trend, if we can call it that, has been more sideways than decidedly down. A better, but still weak, bullish angle comes from trading volume, or the amount of money committed to either the bull or bear side each day.

All of the higher volume days that have occurred since Oct. 10 have come on days when prices rose. Theoretically, when prices are going up and volume increases, it means that investors are chasing the market higher. That's a sure sign of demand. Subsequent declines occurred with lower volume, so we can conclude that the desire to sell was not quite as strong as it was before Oct. 10th.”

And don’t look now, but cold weather has crept into the country, which should be positive for the energy stocks my firm has been recommending.


Click to enlarge