S&P Quarterly Review
It seems that we are faced with two overarching possibilities:
1) The economy is going to bounce back like 1974 and we will see some inflation with a choppy market limited by fairly high valuations, but we have seen the lows in the market. (Maybe not some or even most individual stocks, but the averages, yes.)
2) The economy is really going to fall off of a cliff and the market is headed for a downturn unlike any seen since the 1930's, or possible longer.
The chart above displays the S&P 500 for the last 50 years. It shows the key breaks in the market advance over those years and the resulting support/resistance levels. What we have seen since the market peak in 2000 is arguably the worst market since the Great Depression. First of all, I am of the opinion that public psychology and poor fundamentals caused the Great Depression, not the stock market crash of 1929 through 1932. Secondly, over the 9 year period ending at the end of Q1 2009, the market had lost more than half of its value. Even after this "massive" rally, investors have lost 1/3 of their portfolio. "Buy and hold" has become, "Buy and mold". The only comparable periods are 1973-1974 and the 1930's. So what now?
The 4th quarter will be key to answering that question. If the market cannot retake its 5 year moving average, we will be in for some serious downdrafts. If reflation takes hold, then the market will likely regain its footing and exceed it long term MA. If it does not do so by January, the odds will have shifted decisively, say 2:1, in favor of deflation. In that case, first stop would be SP500 480. Below that 320 is possible. Beyond that, if society collapses, SPX could equal 120. This would correct the entire 30 plus year advance from the 70's. I am not putting my money on seeing SPX with a 1 handle, but I put the possibility out there, as it is not inconsequential (say 10%). (Let's round out the probabilities with 20% for 320, 50% 480 and the remainder higher from here.
Here is what it looked like in 1974. If you think that consumer demand is going to rebound, the housing market will recover and unemployment will start to fall in the next year or so, that is the way to play. It is possible. But if the economy is likely to remain weak, then a test of the March lows is likely. And if they are broken, then 480 would be the first stop. Next time I want to extrapolate what a decline of that proportion may look like. A waterfall decline that would cut the averages in half. But for now ponder two facts: market momentum is negative in the long run, even with two big bullish quarters and the averages are trading BELOW there long term averages. And yet stocks are still not considered cheap. Notice the 1975 and 2003 recoveries both left the averages ABOVE their long term averages. If that does not happen this time, maybe something really is different.
1) The economy is going to bounce back like 1974 and we will see some inflation with a choppy market limited by fairly high valuations, but we have seen the lows in the market. (Maybe not some or even most individual stocks, but the averages, yes.)
2) The economy is really going to fall off of a cliff and the market is headed for a downturn unlike any seen since the 1930's, or possible longer.
The chart above displays the S&P 500 for the last 50 years. It shows the key breaks in the market advance over those years and the resulting support/resistance levels. What we have seen since the market peak in 2000 is arguably the worst market since the Great Depression. First of all, I am of the opinion that public psychology and poor fundamentals caused the Great Depression, not the stock market crash of 1929 through 1932. Secondly, over the 9 year period ending at the end of Q1 2009, the market had lost more than half of its value. Even after this "massive" rally, investors have lost 1/3 of their portfolio. "Buy and hold" has become, "Buy and mold". The only comparable periods are 1973-1974 and the 1930's. So what now?
The 4th quarter will be key to answering that question. If the market cannot retake its 5 year moving average, we will be in for some serious downdrafts. If reflation takes hold, then the market will likely regain its footing and exceed it long term MA. If it does not do so by January, the odds will have shifted decisively, say 2:1, in favor of deflation. In that case, first stop would be SP500 480. Below that 320 is possible. Beyond that, if society collapses, SPX could equal 120. This would correct the entire 30 plus year advance from the 70's. I am not putting my money on seeing SPX with a 1 handle, but I put the possibility out there, as it is not inconsequential (say 10%). (Let's round out the probabilities with 20% for 320, 50% 480 and the remainder higher from here.
Here is what it looked like in 1974. If you think that consumer demand is going to rebound, the housing market will recover and unemployment will start to fall in the next year or so, that is the way to play. It is possible. But if the economy is likely to remain weak, then a test of the March lows is likely. And if they are broken, then 480 would be the first stop. Next time I want to extrapolate what a decline of that proportion may look like. A waterfall decline that would cut the averages in half. But for now ponder two facts: market momentum is negative in the long run, even with two big bullish quarters and the averages are trading BELOW there long term averages. And yet stocks are still not considered cheap. Notice the 1975 and 2003 recoveries both left the averages ABOVE their long term averages. If that does not happen this time, maybe something really is different.
posted by Matt Butler at 9:48 PM
0 Comments:
Post a Comment
<< Home