By Nigam Arora
Companies buy other companies all the time, but a 63% premium on an acquisition doesn’t happen every day.
IBM /zigman2/quotes/203856914/composite IBM +1.72% unveiled its largest software acquisition ever by offering $190 a share for Red Hat . I need to start with a full disclosure: The Arora Report gave a signal to buy Red Hat at $43.14 with a call that it was likely to be bought out, most probably by IBM. A 63% premium on a deal is striking. Of course, a 340% gain on our position is putting me in a buying sentiment.
The anecdotal evidence is that the positive sentiment is contagious on this large premium. This is especially important since high-beta stocks like Red Hat have been hit hard. The buying is spreading. However, sellers have not gone on vacation. I have been getting lots of requests to try to figure out where is the bottom in the stock market. Let’s start with a chart.
Please click here for an annotated chart of S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.30% . Somewhat similar conclusions can be drawn from the charts of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.30% , Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ -0.43% and small-cap ETF /zigman2/quotes/209961116/composite IWM +1.04% . Please note the following:
• The chart is a weekly chart to help the longer-term investor.
• The chart shows the downtrend line.
• The chart shows the support zone.
• Volume has not been high enough to have washed out weak hands. This is a negative.
• RSI (relative strength index) is very oversold.
• The chart shows RSI is more oversold than in the last correction. When the market is oversold, it often bounces.
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Where is the bottom in the stock market? That is an incomplete question; the bottom for a day, a week, a month or forever? It is important for investors to always look at a bottom along with a time frame.
If the weak hands were washed out, the probability of this being the bottom for at least a few months would have been very high. Now, any bounce is suspect, but several positive factors are coming into play that call for a fair probability of a very short-term bottom. Investors are well-advised to remember Arora’s Second Law of Investing: “No one knows with certainty what will happen next.”