SPX: The World Is Not Yet Coming to an End

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (October 27th):

...[T]he markets gapped lower early Friday morning, leaving the SPX trading more than 25% below its 50-day moving average [DMA] for the third time this month. As the good folks at the invaluable Bespoke Investment Group noted,

"Since 1928, there have only been five other periods where it (SPX) has been more than 25% below its 50-DMA. In the nearby charts we show the SPX during each of these periods. For each period we also calculated the maximum rally the SPX had in the 50-trading day period following the first occurrence. As noted in the charts, the minimum rally in these periods was 14% (1937), while the maximum gain was 66% (1932)."

...As for the investment account, in the current environment companies that have low debt, high free cash flow, stable revenue growth, strong cash reserves on the balance sheet, and dividend yields, should fare the best. As Richard Russell observed:

"In a bear market, stocks that pay no dividends are at the complete mercy of the downtrend. As a dividend-paying stock declines, the yield on that stock increases, and if the dividend holds, the stock becomes more valuable. This is a critical point to understand if you are going to invest. Strong, dividend-paying stocks are better values as the stock declines. The corollary is that there is no more desirable stock than a stock that boasts a long record of increasing its dividend year after year. Studies show that dividends contributed as much as 50% of the total return on the S&P since WW II. The almost magical power of compounding can only be seen by holding stocks and reinvesting the dividends over the years."

The call for this week: Despite all of last week’s carnage, the SPX still couldn’t take out the “capitulation low” reading of 839.80 that occurred on October 10, 2008, although this morning it looks like it will be broken. If not, last week’s low was at 852.85 and could be construed as a test of the October 10 low. As Walter Deemer wrote last week: “Even in 1929, the worst stock market crash of all time, the market managed to make a final low nine trading days after the 11.7% [capitulation low] record-volume decline and low of Tuesday, October 29” (see chart).

Last Thursday was the ninth trading day after the recent October 10th record-volume decline and “capitulation low” reading. And then there is this Mannie Friedman quote, “When the market wants to bet that the world is coming to an end, the safe bet is to take the other side and bet the world won’t come to an end. After all, what have you got to lose?”

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Disclosure: None

Comments

[mgcolin:]

No the world is not going to end, but (interrupted by a bounce here or there which is what this article is really about) the market will decline significantly as earnings contract in 2009-2011.

Between '29 and '32 the S&P declined from 32 to 5 - a decline of 85%. That is what we are looking at today - any talk of earnings or dividends are irrelevant with the economic headwinds we face. Companies will be lucky to service their debt, consumer spending in Europe and the US will drop by about 30% or more as debts are repaid, Unemployment will go over 10%, US residential real-estate will drop another 40% (still only getting us close only to the levels of the mid-90s)

Face it people, SPX is going to 400 over the next 2 or 3 years. Before you think..."No way -- that prices in a depression", remember 400 is only a 70% decline from the peak, far milder than the decline from '29 - '32.

The era of prosperity is over.

2008 Oct 28 06:07 AM