Don't Be Fooled by Bad News - Market Is Heading Up

With no apologies to Superman, this rally is giving us that up, up and away feeling but with a kryptonite chaser. In other words, I am FAR from complacent despite my view that Dow 10, 000 is coming. And if we get there then I'll be cashing in the longs and putting on the shorts.

Contrarian contrarians - those who look at all the other contrarians and take the opposite view - which ends up being the view of the masses, think there are too many people looking for that rally so it won't happen. The masses look at the news and say the economy is going to hell in a handbasket.

1. Show me a majority of people/analysts/newsletter writers that are looking for a rally. Only then will I agree to fade them. Right now, the latest AAII survey has about 47% bears. Some majority of bulls, right?
2. The news is already baked into the market. Why else would a record number of job losses - a surprisingly high number, at that - result in a market rally? Trade the news and you are trading what the market did nine months ago.

So, the market can rally. This is not a bottom call - although I do think we've had it - but rather a call to make some cash before the opportunity dries up. But don't be a pig. Sell too early rather than too late.

Comments

[Firat Ünlü:]

This is not about bad news, this is about bad fundamentals.

2008 Dec 09 03:55 PM

[Mark10r:]

Eventually, yes. But the 533,000 jobs lost in November is just a start. The market will go up, and beyond 10,000 when we can see that the economy will begin expanding within the next six to nine months. Right now, the only thing that is obvious is that more jobs will be lost, consumers will spend less, and businesses will cut both operating and capital spending. The new administration is on the right track in trying to stimulate the economy by creating jobs, but the projects mentioned thus far may take nine months before hiring in earnest begins. There will be an additional lag before the benefit of the added jobs begins to trickle through the economy stirring new growth in consumption and better capacity utilization.

The best way to gauge the potential of the economy over the next year will be to listen to forecasts and earnings revisions coming out from corporate America over the next few weeks. When the new forecasts are absorbed into the thinking on Wall Street, the downward earnings revisions will bring earnings more in line with reality. Currently, the street forecasts earnings of around $75 for the S&P 500 (down from mid-$90's a couple months ago). Reality is probably something less than $65 for 2009.

Investors pay for future earnings and expect growth not contraction when then pay high multiples. In other words, not only will the earnings part of the P/E equation need to be lowered but the multiple investors are willing to pay for less-than-expected returns will need to come down as well. At the trough of most normal recessions, P/E ratios are usually around 12 times earnings. The drop in the S&P being the third worst bear market in history already seems to point out that this may be worse than "normal." Also, the average post-war recession duration has been about 15-16 months. Since this recession started 12 months ago and has at least (in my humble opinion) another nine months to go we will record more than 20 months before seeing daylight. This has to be considered a severe, not normal, recession. Severe recessions usually find the market sporting a P/E within the 8-10 range. If you do the math, we're looking at another leg down before we can call the "real" bottom of this recession and the DJI average should get down to the 6,200 level before we see 10,000. It could go lower if the market over-reacts (as it usually does) in panic selling but I wouldn't get greedy. My buying starts around 6,500 just to be safe and I expect it happen sometime in late January or early February of 2009. Merry Christmas!

2008 Dec 09 03:59 PM

[sheople:]

I'm thinking that Yamu said it, it's fundamentals. Move the factories out, inflate prices, lower interest rates, a little slicing & dicing, and bundling, and pretty soon the working class is broke and the Wall Streed/Cental Bankers are in control. Just throw some money at the busted few factories (auto) that we have and things will be just hunky dory. Oh yeah, I almost forgot the feds have already put the working class in hock up to their ears, giving the wall street crowd billions of borrowed & printed money.
Yep, the bottom must be here!

2008 Dec 09 04:03 PM

[DaveW:]

I'm not hearing the author say THE bottom is in, but A bottom is in and I w/o a doubt agree. I'm trading it and looking for Dow 10K, Spx to 1100, but will sell shy of those levels and go very aggressivly short for the next, and lower, bottom.

2008 Dec 09 04:33 PM

[sheople:]

DaveW,

From the following, I believe Michael said " I believe we've got it". I understand that to mean that he's saying he believes that we've got the bottom: ......... "So, the market can rally. This is not a bottom call - although I do think we've had it - but rather a call to make some cash before the opportunity dries up."


On Dec 09 04:33 PM DaveW wrote:

> I'm not hearing the author say THE bottom is in, but A bottom is
> in and I w/o a doubt agree. I'm trading it and looking for Dow 10K,
> Spx to 1100, but will sell shy of those levels and go very aggressivly
> short for the next, and lower, bottom.

2008 Dec 09 07:35 PM

[nmelendez:]

I guess i see the same thing but i am looking at the dollar index. The dollar is starting its leg down. That means equities are going up. I' m riding the dollar down to 68, even though i believe it will go to 62, thats a C leg down.

2008 Dec 09 08:07 PM

[jepittman:]

This is most likely a bear market rally but longer term investors should be slowly building positions is quality securities that will clearly survive this recession. The largest gains in a new bull market occur during the first year. The government's policy responses so far have IMHO been largely correct. There will be inflation problems down the road but those problems are a considerable time away. A determined Federal Reserve and an Executive and Legislative Branch no longer in denial about the seriousness of this economic challenge will result in a reflation of the US economy sooner rather than later. The recent volatility should be an indication to what is possible when the wildly underinvested and near universally pessimistic global investment community sees the inevitable economic recovery on the distant horizon. Buy weakness, buy quality, and buy patience. Even every dog has his day. True quality will have their months and years.

2008 Dec 09 08:51 PM

[nmelendez:]

This is a bear market rally to 11500 to 12000. After that, you will be able to find the bottom in one of the oceans deepest trenches. This is the 1930 bear 1.68X bear market rally.

2008 Dec 09 09:11 PM

[nmelendez:]

The problem is still liquidity. In 1929 the Fed held up liquidity. Today its the banks. Money is not flowing and the fools at the nations largest banks are hoarding the cash you and i are paying in taxes. If the Govt does not get these fools to start flowing liquidity it's 1929-1932 all over again. Go to Yahoo and look at the Dow chart from 1927 to 1931. Look familiar?

2008 Dec 09 09:16 PM

[{5U}:]

Can you pundits please stop?

Until the credit market can function without government aid growth will be fueled by pork barrel govie spending.

The DIP market may not even function properly.

Do you even know what DIP is or follow the credit market???

2008 Dec 09 09:43 PM

[jepittman:]

Dopey internet posters? You got me pal. Frozen credit markets were October's news. Libor is down, mortgage rates are down, and money is beginning to flow into high grade corporates (see the chart of LQD). Commercial paper volumns have expanded and muni bond rates are beginning to come down. Money supply is going parabolic and a huge Obama built fiscal stimulus package is on the horizon. The economy is slowly being reflated. If you want to bet against a determined Fed and a scared Congress with a mandate to borrrow and spend have at it.

BTW pundits will always be pundits. They will never stop.


On Dec 09 09:43 PM Equity Has No Clue wrote:

> Can you pundits please stop?
>
> Until the credit market can function without government aid growth
> will be fueled by pork barrel govie spending.
>
> The DIP market may not even function properly.
>
> Do you even know what DIP is or follow the credit market???

2008 Dec 09 10:05 PM

[Big-P:]

Sold to you Michael! My crystal ball says the market will tank into 12-16 near-term and, once that happens, I'll take another look at the long side.

2008 Dec 09 11:10 PM

[kianator:]

If we get a daily close above the 50 MAs on the S&P/NAZ with ABOVE AVG VOL then I will be convinced of a lasting rally until the end of year and early 09.

All rallies, including present one from Nov 21st, have all been usually below avg vol.

2008 Dec 10 11:32 AM

[Did U Think...:]

Dow 10k would be a step too far for Elliott wave 4 to go IMO. 9600-9700 perhaps but even that is dubious although I wish it would. I think there are too many people just like you waiting for 10k so they can short this POS market senseless. Perhaps some will not be able to contain themselves that long.

2008 Dec 10 11:04 PM