A quick look/outlook at the stock market and the end of the recession
December 28, 2008
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Since I posted my last chart, where I said the downtrend was probably broken, the S&P 500 (SPX) continues to basically trade sideways, which means that the severe downtrend is indeed broken... for now. Will selling resume, or buying pick up in the new year, when trading volume is back?
There were 12 90% downside days (=90% of trading volume is down=panic), and there were 3 90% upside days during the bottoming period or as I called it "the zone", clearly indicating the start of buying. The 90% downside/upside rule is one of the most reliable indicator to spot bottoms, because it indicates when the panic reaches an extreme (when 90% downdays appear) and buying starts again (90% upside days).
Bad news is now ignored, another bullish thing. Remember when the Madoff scam broke out, the market even closed in the plus on that day. And this despite expected losses of $50 bn for duped investors (more than $5 bn in Switzerland alone that went to monetary heaven).
It was a particularly wild and nasty period in October/November with the volatility index VIX trading above 60 for two months, a level the VIX did not reach in the past 20 years. Clearly I never expected that... This was due to forced selling throughout all asset classes from hedge funds who must meet redemptions, whatever still had a value was sold. And since Hedgies were particularly engaged in hard assets, those sectors were among the biggest losers. The VIX is now trending back to lower regions, currently at 43. So clearly, volatility has come down. Once the smoke clears I expect hard assets to outperform the SPX as they were so knocked down.
I also mentioned several times in earlier blogs how extremely oversold the SPX was during the crash and bottoming out period. This should promise at least a strong rally maybe up to the 200 day moving average. This would take the SPX back up to 1100-1150 from currently 870, a nice 30% gain from here. But it could also very well mean the bottom of the bear market...! We will only know over time. Remember, nobody is going to ring a bell at the bottom, especially not the bears. Hey, who said investing was easy?
Remember, when gold went over $1000 in March 2008, the goldbugs could not wait to see it go higher and set higher and higher targets, despite gold being very overbought (=RSI above 70 on a weekly chart).
Or when oil almost touched $150, the oil slugs already saw $200 this year. T. Boone Pickens even found the environmentalist in him and wanted to cover up to 40% of electricity use in the USA from wind turbines.
Well, at least, gold held up pretty well, if you compare to oil or the stock market...
Now the bears can't wait to see the stock market go to new lows and the economy to fall into the new Comapression (=super brutal great depression). Did you know, even Nouriel Roubini doesn't expect a Great Depression...?!
The TED spread, the spread between 3 month Treasuries and LIBOR (the rate at which banks lend to each other for longer than overnight), continues to contract to almost pre crash levels. At the worst point in October, when lending almost froze down, it was higher than 4. This indicates that banks are starting to trust each other again (at least some) and are lending to each other. I expect this to normalize in the new year and thus the spread to go down to under 0.5. This should also help business costumers and home owners, as rates come down and credit will increase again (despite all of this mess, credit has never contracted, it has only slowed down.
Recessions since WW2 last an average of 11 months with the longest being 18 months (1973/74 and 1981/82). Before WW2 recessions were deeper and lasted longer, up to several years. It seems this has to do with the Fed and the government working together to combat recessions, and not just letting things happen.
Today again we have the Fed and the Treasury working together. Fed Funds rates are near zero, the Fed is buying up all the bad stuff from the market. And Paulson is recapitalizing the banks by buying stakes in them. All of this is to calm the markets and restore confidence. Of course, this is highly inflationary and it will be fun to see, how Bernanke is going to deal with that. But that's for another time.
So let's say the recession will last again 18 months. The stock market usually smells the end of a recession 3-6 months ahead. It has started in December 2007 and so would last til June 2009. Should this be the case, we should see a new retest of the October/November lows just ahead. However if November was THE bottom the recession should be over by March 2009.
Now, maybe all the new short seller millionaires in their Ferraris were just on Ski holiday in Aspen for a while, and will return back in the new year? Is that why selling dried up? There are hedge funds who blocked redemptions, so as to not be forced to sell at bargain prices. Will they soon flood the markets with assets of all kinds? That would mean once volume picks up we go down again? I don't know, we'll see. But redemptions have been blocked for months to a year, so, this selling seems to be postponed. Will we go up? I think so, but that's just me.
Next time, should you follow the best of this year next year too?
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