well one bull is officially perplexed
I've always maintained, and continue to maintain, that I have no idea where the stock market will go in the short term. But in 2009, if your time horizon is long, stocks were cheap and likely to make you money.
Like most everybody else, this recent rally has caught me off guard. I am in awe of how far and how fast the market has gone, and in the last few weeks how it hasn't really taken a big step back. I hold the opinion that the market would reach 1000 quicker if we took a big step back to the 875 level or whatever. Establish long, buy and hold positions at low prices rather than ride-the-momentum positions at progressively higher prices. To stabilize the market for a new bull run we need secure positions that intend to stay for a few months or a few years, not trading positions meant to be exited in a few days or weeks. I can see a scenario where a severe down day occurs in the near future, and I keep making money on my long positions and I keep getting burned on my hedges.
I can see the case for someone arguing that stocks are still really cheap. The S&P is still down 40% from its recent highs, its still at a 6 year low. The Dow is still down almost 40% from its recent-year highs, and is still down for the year. One could argue that the beginning of the year pessimism and worry were higher than they are today and use that as a reason to believe it could run a bit more. And IMO all of those arguments are very reasonable.
But just like stocks can't go down every day forever, and the wild negative trend of mid feb through early march isn't sustainable, nor is the not quite wildly negative, but still very negative trend of early january through mid feb, ... but stocks cannot go up every day forever either. Somethings got to happen between here and good times and S&P 1200. Maybe we'll flatten for a time, maybe we'll have another big leg down, maybe we'll just see some choppy trade.
Now, those hesitant comments made, I don't think we will ever see S&P 600s again, at least not in this crisis and hopefully not in any future one. So many things had to happen for that to occur.
1. Mutual funds at all time high cash positions. Are they going to get scared out again? They are underperforming now for every $$$ of cash they hold so that gives them motivation to get back in. And are they going to jerk out the gains they've made recently?
2. Hedge funds were at an all time high short position, per Doug Kass on thestreet.com Are the hedge funds going to jump out of longs en masse again and short like crazy? Shares to borrow are getting harder to find and harder to find, evidence that a truly catastrophic outcome is likely is lessening all the time, and I just don't think a massive wave of shorting like that is probable
3. Uptick rule, scrutiny on naked shorting, etc., will have at least some positive effect. These were not in effect when the S&P reached the 600s
4. The belief that the banking system was going to fall completely apart to a shocking extent was a big part of how the S&P got to 670. I just don't think that level of pessimism is going to be seen again. THAT ALONE ensures that we don't visit the 600s again.
5. Some companys, one by one, get clear of the probable or possible BK box. Ashland Chemical was priced for at least a decent probability of BK, so was DOW Chemical, so was TCK, so was XL. One by one these companies get into positions where its just really not likely that they will go BK. Every company that gets to a position where its not likely to be driven to its previous lows is one less point the S&P can drop (well assuming they are S&P members of course).
6. Fund collapses and redemptions played a role in some of the big crashes, ... is money going to crash out of funds at a rate as high as it did in November and February again?
Too many things would have to line up to get us back to the 600's on the S&P for that to really have a substantial probability. All bubbles eventually pop, including negativity bubbles. In 2001 there were still people buying falling tech names on the assumption that they had to go back up, there are still people shorting stocks at S&P 800 this year on the same logic.
So, I am confident that the bottom is in and we won't re-test the pervious lows of this bear market. But something has got to happen between here and S&P 1200.
And that something will represent a really good money making opportunity for us all if we can figure out what it was.