Posted on 03/16/2009 11:44:31 PM PDT by Fred
Bottom in? Maybe. Maybe not.
In the January 19, 2009 investment letter I wrote:
“Sometime in the first half of 2009, the S&P will challenge and likely break below the November low at 740. I don’t know if this decline will end at 739 or 699, and the DJIA will ideally fall below the 2002 low of 7197. That’s the bad news. The good news is that once that decline is over, the market will enjoy the largest rally since the bear market began in October 2007. It will be ignited by economic statistics showing the rate of decline in the economy is getting less bad. The optimists will jump to the conclusion that less bad equals recovery.”
Now that the market has fulfilled these expectations and begun to rally, it’s time to ask the question, “Is the Bottom In?”
The spark for the rally off the March 6 lows came from a better than expected retail sales report which showed only a .1% decline in February, excluding auto sales. The mustard seed crowd immediately extrapolated this as an indication inventories will be whittled down soon, leading to a revival in goods production. This was reinforced by Fed Chairman Bernanke’s comment that the economy could recover before the end of 2009. As I discussed in my February letter:
“The breakdown of the banking system, collapse of the securitization markets, necessary retrenchment by consumers, synchronized nature of this global slowdown, and the new fiscal reality confronting state legislatures each represent a significant structural adjustment that will take time to fix.”
Although some progress is likely, I do not think a self sustaining economic recovery will take hold before year end.
As expected, the S&P and DJIA have dropped below the November lows, with technicians rightfully noting that the number of stocks making new lows on March 6 was down appreciably from November. This suggests to technicians that since more stocks are holding up better than in November, the market’s internal strength is improving. However, like all things, this improvement needs to be put into perspective.
In analyzing the July 2002 low with the October 2002 low, and the March 2003 low, the weekly number of stocks making new lows contracted from 1131 in July, to 962 in October, to less than 400 in March 2003. In November 2008, there were 1727 new weekly lows, while the week ending March 6 saw only 1185 new lows. Although an improvement, the 1185 new lows is more than in July 2002, and is reflective of a market that is still fairly weak. The patient may have been moved out of the ICU unit, but is still far from healthy. There are other worrisome signs. At every low since August 2007, the 10-day call/put ratio has been .96 or lower, meaning 96 calls for every 100 puts.
Between February 20 and March 6, as the S&P was falling from 770 to 666, there was only one day put volume exceeded call volume. At the March 6 low, the 10-day average was 1.095, not even close to any of the prior lows. And it’s now up to 1.315, as of Friday March 13. Other than January 7, 2009’s average of 1.373, this is the highest the call/put ratio’s been in a long time. Consider this, the March 13 level is higher than the October 9, 2007 reading of 1.295 (S&P 1565), and the July16, 2007 10-day average of 1.307 (S&P 1550). This suggests professional investors are more concerned with missing a rally than a further decline.
I use a proprietary indicator that incorporates NYSE Ticks, and a second indicator based on NYSE advance/decline data. These two indicators have done a nice job of nailing every short term high for months. The following dates are when the Tick indicator got into what I call the ‘Red Zone’: October 14, October 21, November 3-4, November 28, January 2-6, 2009, January 28, February 9, and March 12-13. The instances when the Tick indicator spent more than one day in the Red Zone have been more significant. The only times the advance/decline indicator did not match up with the ticks was on October 14 and October 21, when it missed by a small amount. Both of these indicators have already been in their respectful ‘Red Zones’ for two days, which suggests the market is in the process of making at least a short term high now. Finally, the decline from the January 6 high does not look complete, requiring at least one more new low according to pattern analysis. A close above 788, which is 1% higher than the highs of February 25 and 26, would cast doubt on a new low in the short term.
In the last couple of weeks, it has been suggested that China may lead us out of this severe global recession. Although China will fare relatively better than the U.S., Europe and Japan, they will not be immune. More than 75% of world GDP is in a deep economic slump, and China and India combined represent less than 10% of world GDP. Exports comprise almost 40% of China’s GDP. Last week, China noted that their exports were down 25.7% from a year ago. Clearly, the weakness in the developed nations is pulling China down, and, sorry to say, there are no indications of a rebound emerging anywhere in the world in the immediate future.
Over the last year, the majority of economists and investment professionals have consistently underestimated the scope of this financial crisis and the magnitude of its impact on the economy. A year ago, the demise of Bear Stearns was heralded as a sign the financial crisis was over, and that the stock market had bottomed, since every other crisis had ended with the failure of a financial institution. Market technicians noted the many positive momentum divergences between the March 2008 low and the January 2008 low. As the market rallied in April, many market commentators said that the market rally was telling them the economy would improve before 2008 was over, since the market discounts the future. When the Dow Jones Transportation average went to new all time highs in May 2008, Richard Russell wrote a piece for Barron’s proclaiming that a new bull market had begun.
The market has run over a lot of very smart people who had good reasons to believe the market had bottomed in March 2008 (S&P 1257), July 2008 (S&P 1200), October 2008 (S&P 840), and November 2008 (741). The magnitude of this crisis is bigger than any of us has ever seen. Global asset values have plunged by $50 trillion according to the World Bank in recent months. As has global trade, with export driven countries like China and Japan registering huge declines in their export volumes. The Federal Reserve, Treasury Department, and Congress have launched multitrillion dollar support programs, as have other countries and central banks. However, the global economy is still getting weaker. That will change at some point. But given the extraordinary unexpected events of the past year, I’m willing to admit to a lack of faith regarding the March 6 low at 666. Most investors, after the last year, would say the market has been a bit devilish lately. And that’s putting it mildly.
I disagre. I believe that Obama does NOT want an economic recovery, for that would ensure the survival of our free market economy.
Therefore it is not busness as usual. Obama intends to convert ouor economy t a controlled socialist system, with pricinn boards, and a cap on executive pay and mamagement bonuses all across the board. He is just getting started with banks.
Iblieve the econmy will not recover untu=il after bama is either forced to leave office, or loses the 2012 election.
Obama 's approval rating is around 45% and descending like a stone and soon he will become an icon of a political socialist system that America will grow to detest.
do not look for an economic recovery util after 2012.
Obama will become one of he most reviled presidents of US history.
"Beetlejuice, beetlejuice, ..."
When the market tanked in the last two hours today, the cause seemed obvious to me, but unnoted in the financial news commentary. It seemed to me <ack ack harrumph> that the big bust coincided with the renewed onslaught against the AIG bonuses. When the flames shoot up and the big head intones, "Those days are GONE!" ... well, the market is bound to get skittish.
A terror attack would ensure it's destruction. Didn't Obama just send something like a billion dollars to Hamas?
I'm not beyond believing...
A terorist attact or an international incident are part of the plan , as slipped by plugs biden, weaken the economy, weaken the Military, and decimate the morale of the American public. We are being preped as we Talk
I disagre. I believe that Obama does NOT want an economic recovery, for that would ensure the survival of our free market economy.
Therefore it is not busness as usual. Obama intends to convert ouor economy t a controlled socialist system, with pricinn boards, and a cap on executive pay and mamagement bonuses all across the board. He is just getting started with banks.
Obama is a communist and actually believes this will engender an economic recovery. The willfull ignorance of economics by Obama and those around him cannot be over estimated.
So can YOUR mandate to me, or take it home and suck on it.
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