Saturday, August 22, 2009
Yep, I'm ready to go ahead and call this one. In my view the US stock markets are no longer in a long term downtrend and began a new uptrend in mid July as the major US stock indexes made a significant higher high. This ends the bear market which in my opinion began in the first week of January 2008. Its a sad day for the remaining bears who go down hard in defeat as the fraudulent system (think Paulson (Bush), Dimon (JPM), Mozillo (CFC), Geithner (White House), Lewis (BAC), Bernanke (Feds), Liddy (AIG), Greenspan (Feds) prevails in victory. The cronnies who created this mess, for the most part, all got of a get out of jail free card plus a bonus.
Now I'm not gonna argue with those of you who remind me of rising unemployment, collapsing commercial real estate prices, the lower level of aggregate consumer demand or tell me that Obama's socialism will kill the economy. No I won't argue with any of that, but I won't give it much weight either. The markets are the pulse of the economy and they have the power to make or break global psychology. Was this rally based on bull shit? Yeah, most likely. Does it matter? No, not really, because if people get optimistic that things have turned around, if companies can start raising capital for expansion, if investors start making profits, then the fiction can become reality. And thats where I think we are today. Enough people drank the koolaid, who cares if we are all drunk as long as we have fun for a while right?
So thats it, I think this is likely to be a short bull market by historical standards. Perhaps lasting a few years. I could see the S&P 500 reaching close to the former highs in this bull, maybe higher. If I had to guess, I'd say this will be an inflation fueled frenzy of a stock bubble. Expect commodity prices to outperform stocks, and expect the leading stocks to be commodity producers. My guess is that at the end of this bubble you will see solar stocks at insanely astronomical valuations bringing back memories of the dot com bubble ("too the moon alice"). We are no where near the end of this bull, but expect the top to ultimately come from credit tightening by the feds after things get out of control.
Readers know, this opinion is entriely based on charts so here they are. In the daily chart below you can see that the S&P 500 made a very clear and significant higher high in mid July. The market followed through for about a week before goign sideways, it was at that time that my skeptical bearish tendencies kicked in and I really thought that the reality of the economy (all the bearish news the past few weeks) would roll us over and as that breakout failed volume would pick up. This did not happen. After a consolidation, mostly in time rather than price, the market made a new year high Friday on increasing volume. For me thats the confirmation I was looking for to define the previous long term downtrend as over.
So yeah, its pretty clear there to me. Now, I still have a knot in my stomach telling me this is all a big bull trap, and the economy will pull the market back down, etc, etc. I won't say that it is impossible for the bear market to resume, but it would be pretty damn hard. My line in the sand is 950 on the S&P, below there we are back in the 2008-2009 bear market. If we broke below 1000 again I'd start to get nervous being long, and either hedge myself or stop out. If the recent breakout does fail I'd imagine the market would go 1987 style and crash 10-20% in a few days. That being said, the odds are with the bulls from here forward.
In the weekly charts, I see massive inverted head and shoulders bottoms everywhere. On the S&P 500 (see top) that pattern targets about 1250 or 20% higher, a ~100% gain from the bottom this year. Below I have the market leading small caps (IWM) where the head and shoulders there nicely targets $75 which was the 2008 high.
This doesn't mean I am going to whole heartedly embrace stocks Monday, although I did heavily shift into UNG Friday. In the short term the market feels over extended and I would guess that we'll see a post options expiration correction early next week. Essentially, all the wealthy August call holders and put sellers will be taking profits on their newly aquired stock. Stocks will probably dip, but I think its time to buy that dip. If they don't dip next week, well, that would kinda suck. Again, I would stress that if the S&P 500 looses 950, this was a failed breakout and the vicious 2008-2009 bear market rises like a pheonix.
Disclosure: I own XLF puts and UNG calls.