Is It Time to Buy Yet?

The long-term chart above shows that the S&P 500 is now at multi-year support levels established during the 2002-2003 bear market lows. Sadly, anyone who bought and held stocks since 1997 is at best even, and, most likely significantly under water.

Since most people dollar-cost average into the stock market more or less evenly over time, as they have been trained to do by the financial services industry, most of the money put into the market came in when stocks were much higher than they are now.

If you were dollar-cost averaging in during 1998, 1999, 2000, 2001, 2004, 2005, 2006, 2007 and most of 2008 you're probably wondering what the heck is going on. The rapidity and severity of the second market plunge of this decade has left buy and hold investors down upwards of 40%.

I'm generalizing across market averages, and not speaking to particular sectors or particular stocks, which have done much better or much worse than the averages. But, since most actively managed mutual funds do not outperform the S&P 500, or their benchmarks, mutual fund owners must be in pain.

So now that we're back to 1997 and 2002 levels in the S&P 500, what is our next move? The obvious trade is to stay long, and hope that these levels represent the bottom of a decade long trading range, with room for considerable upside. A more pessimistic view of the same chart shows strong support at S&P 400, more than 50% lower than current levels.

Whether we head back up toward S&P 1500 or S&P 400 ultimately depends on how long and deep the recession runs. If the world-wide response to the credit market tsunami and recession is adequate, economies will stabilize and begin to rebound. If things don't stabilize and unemployment continues to grow, and people continue to lose their homes, both here and abroad, we will continue with a deflationary recession that will likely pull stocks lower from here.

Given how quickly stocks have factored in some really bad news, I think it likely that the next big move in the stock markets will be a multi-month rebound, taking the S&P 500 to about its 50- or 200-day moving averages, about 1150 and 1280 respectively.

At that point I'd sell the rally, and wait to see if the market wants to go any higher. Frankly I doubt it.

Positions: Long cash (US Dollars), and shares in the Reserve's Government Money Market Fund, closed to redemptions since 9/17/08. I also own a home that's steadily losing value.

Comments

[Smarty_Pants:]

"Is It Time to Buy Yet?"

In a word. No.

2008 Oct 24 10:37 AM

[daytrader:]

any rally,no matter how small,will be sold for a long time.why?because mutual funds,dividend rein.programs,are a thing of the past.yes,i do agree with you that the rally will be sold.but in a trader's envirionment,it will be a struggle for the s&p to get to 1150&1280.like climbing mt. everest backwards,barefoot!peo... just do not trust wall st&wash d.c.

AND THE PEOPLE ARE RIGHT!!!

2008 Oct 24 10:50 AM

[moonbat1775:]

I just love a stable economic system. The factories are still standing, no massive plagues, no asteroid impacts, no world wars, I still have my hair and STILL an economic disaster. Any wonder why people vote for more socialism?

Capitalists of the world, unite and overthrow the dishonest and therefore unstable banking system that will be your doom if you don't.

2008 Oct 24 10:51 AM

[anarchist:]

yes moonbat, I agree-no more socialist Republicans in office please.

2008 Oct 24 11:18 AM

[Dr. O:]

Ironically, I wrote this piece early yesterday evening, before the Asian markets crashed, and our index futures went "limit down."

However, either on it's own or with a little help from "Hank and Friends" the S&P 500 held the 840 level, the low for this move. However, many stocks and sectors are hitting new lows for this leg down.

Too many cross currents to factor in, including redemptions, but, for now, Hank doesn't want the US Stock Market to put in a series of lower lows. IMHO.

And check out the currency markets! Some serious unwinding! It's almost time to head to Europe, or at least the U.K. The Dollar and Yen are screaming higher.

Sadly, as if there wasn't enough to worry about, the emerging market currencies, debt, and stock markets are crumbling, dependent as they are on the sale of commodities and the influx of foreign capital.

In the good old days just a currency crisis or a single hedge fund crisis could give the stock market a good thrashing. Now it's everything all at once!

Honestly, things are a lot worse now than they were during the bear market lows of 2002-2003, and, fundamentally, the S&P 500 "should" be in the 600 range, IMHO. I figured and still suspect we'll have a trading rally into the end of the year.

2008 Oct 24 12:34 PM

[jkmac:]

LETS ALL PRAY TO OBAMA

2008 Oct 25 11:29 AM

[Diegojames:]

OK Survivors; so after the election are they going to back up the BANKS,INSURANCE COMPANIES, BROKERAGES AND HOME BUILDERS
OR are they going to give away money to everyone OR WILL INFRASTRUCTURE PROJECTS AND REMOVAL FROM FOREIGN OIL DOLLAR DRAINING TAKE A PRIORITY???
ANY BEATS? I AM FOR AMERICA but CONGRESS IS FOR SUBSIDY GIVE AWAYS AND SOCIAL PROGRAMS, RESULT, A LONG RECESSION.
WHAT ABOUT CNG (NATURAL GAS) FOR CARS AND WIND MILLS LIKE IN THE PICKEN'S PLAN????LINKING UP ALL THE NATURAL GAS PIPELINES FOR UTILITY PLANTS?OR EXPORT?
I AM LONG XOM , CVX ,OXY AND EOG, TOOK A BIG HIT ON PROLOGIS.
REALLY SEEMED LIKE COMMERCIAL REAL ESTATE WAS WORTH SOMETHING. MAYBE THEY NEED A SOCIAL PROGRAM FOR A DECENT LUNCH AND A 100 BILLION FOR STABILITY.
DIEGO

2008 Oct 25 07:41 PM

[Dr. O:]

Agree. There are many good uses for our tax dollars. Agree with using CNG in cars. I was in Italy over 20 years ago and used something-like CNG then. I do believe we have to "bailout" the banks that made the bad loans and bad bets. We simply cannot allow the financial infrastructure to fail.

I would support some big government works programs like during the depression. What if we decided to employ people to drill for oil and gas in a National Oil Company, like many other countries. What if we expanded the rebuilding of our infrastructure--everyt... from oil and gas pipelines, the electrical grid, to nuclear power plants, to better roads and a much expanded Amtrak. These ideas have worked in other countries.

It seems stupid to have millions of people out of work collecting unemployment checks when there is so much work to be done to improve the back bone and infrastructure of our country.

2008 Oct 26 08:17 AM