Market Watch: Beware the Ides of February

According to the Roman calendar, the ides of the month correspond to the 13th for February, or the day of the full moon in the month, which is the 10th in 2009.

As the S&P 500 seems to be mired in the current resistance zone of 900-920, I continue to believe that we are in for a short-term rally to be followed by a decline which will test the November lows. In this, I agree with John Hussman’s view of the markets:

My guess, and it's only a guess, is that the general tenor of the market may remain tepidly positive for a few more weeks, but that we will ultimately observe another frightening leg down in the first part of next year – possibly to re-test the November lows, possibly to new lows, depending on the evolution of economic conditions. The problem isn't that stocks are expensive – they're not. The problem is that the U.S. economy will probably not see the beginnings of a recovery until the second half of 2009, and while we've seen a good deal of fear, the stock market tends to go through a great deal of sideways action after panics like we've observed. It's likely that stocks will trade in a very wide 25-35% range for months.

Here are some bullish signs that are supportive of a short-term rally:

• Bespoke reports that stocks owned by institutions are up big. This indicates that there is institutional sponsorship for this rally, which tends to be more powerful.
• Mebane Faber is expecting a good January. Faber concluded in a recent study that small stocks should enjoy a very good January after the dismal period we have seen in the markets.

Still just a bear market rally

Make no mistake about it, this is still only a bear market rally. While I believe that the market is undergoing a basing period, these kinds of basing periods can involve range-bound markets with explosive rallies and sharp declines. Here are some bearish indications for traders, which should banish any thoughts of sustainability when viewing this period of strength.

• There are still too many people looking for the market bottom. A couple of weeks ago, while watching CNBC as the market rallied off the November lows, I was struck by the number of people trying to call THE BOTTOM here. Add to that the rash of articles that came out about that time with the same sentiment (see examples here and here) and you can conclude that the market is still falling on a slope of hope.
• Earnings Season will start soon. 4Q earnings are likely to be horrendous and guidance will likely be no stroll in the park. What are the chances that we get another wave of negative surprises and a call for a double-dip recession?
• Disillusionment with Obama could set in quickly. Those looking for their brand of radical transformation from Barack Obama are likely to be disappointed. Obama’s cabinet appointments have shown that he is, at best, bent on evolutionary rather than revolutionary change. The finance posts were filled mostly by people who were prominent in the former Clinton Administration. The appointment of Gates at Defense is nothing more than a signal of “steady as she goes”. Soon after the Inauguration, any market expectations that the miracle worker St. Barack of Chicago would fix everything could very well come down to earth.

Enjoy the party, but don’t forget to leave before the coach turns itself back into a pumpkin.

Comments

[investor88:]

A very balanced and sensible article by Cam Hui. There are dangers of falling into the abyss [test new lows when it will be time to buy!], sharp rallies and pullbacks. Look out for a rough 1q2009 [can trade it if you are nimble enough].

Good luck to traders. Fundamentalists probably will find the going rough, watch BRK.A for directions as this is the king of fundamentalists.

2008 Dec 19 03:27 AM

[mauijeff:]

I think you little day traders should move out of your mother's house and live in the real world. After the first of the year many retailers will be closing stores or going out of business, creating a commercial real estate crisis. This combined with the failed attempt by the Fed to get more people to take on debt will make it apparent to everyone that we are in big trouble. During this time all you trading monkeys will still be looking for a market bottom. Grow up monkeys, they have been waiting for the brake out in Japan for 20 years.

2008 Dec 19 03:45 AM

[Vienna:]

MauiJeff has it right, I tend to cal them the lemmings. US just love their statistics, and as we all know, they will always be incorrect and just be made up to satisfy the people.

And if you look at your lovely statistics they will ONLY show the past but never the future. This time US will be in problems.

I don't know about the true debt, but while auditing in the US I saw a TV advert. - NO THINK ABOUT THIS: 2 cases I saw

how to open a company with no cash, no credit and debt. The basic info on TV was - get 20 credit cards with 2000 USD limit, pull out the money and you have 40.000 usd founding capital for your company.
and the most ridiculous about this: you could even buy a book for 49,99 usd that would in detail explain how this works - well someone that has nothing and gets nothing will have nothing, and if he needs a book about this he is just to stupid to have a company.

An person with no lining and working permission in the US had 3 credit cards with 6.000 debt. The companies tried to sue him to pay, but he was found not guilty, since the credit card companies just send them to fucking everybody.

Speaking with people in US they did not find anything spectacular about this, just common business, well seems quite awkward to me and people in Europe.

So I agree, don't get any big ideas until you get you things straight, which I do not think will happen, since people in US are so overconfident that they can screw everything.

Steel industry is gone, automotive is gone, banks are going bust, infrastructure is down, schooling is down, debts high, reliance on foreign industry high ......

think about where this is going, and stop the statistics.

2008 Dec 19 04:17 AM

[Moon Kil Woong:]

I would worry less about February and more about January. Although it is fun to speculate as long as you know it's just that, speculation. I think the author knows this and i detect a bit of humor in the article too.

2008 Dec 19 05:12 AM

[M dub:]

Cam,
Nice article, nice call. I also think there will be a much bigger test of the low we printed recently. And people don't even know how desperate times will become, sadly. The american mind is very soft, and until they can get "toughened up" a bit they won't have the intentional fortitude to swallow some bitter tasting medicine. First the market psyche builds in a 1990 style recession, then 1982, then 70's style, and so on. But this is the perfect storm, and we're pressing further out to sea based on all past storms. We'll see how it works out.

At the minimum its going to be a deep world recession, but to some it will be worse. We, O keepers of giant debt balances, may be that someone.

See you in Feb.

2008 Dec 19 12:02 PM

[The Simple ...:]

New Year rally following tax loss selling seems like a sensible near term forecast.

2008 Dec 19 02:48 PM

[bobace:]

The long run was manufactured by Wall Street with total backing of government and Treasury. Why do you think this story is going to fail? The Media is the Message. It don't matter what the truth is - consider the CPI gerrymandering. The printing press will inflate the economy sufficiently to put the "real" economy back on track. The only losers are asset owners (including stocks). Those fortunate and healthy enough to work will find solace in NOT becoming a statistic in the War on Deflation.

2008 Dec 19 07:59 PM

[bobace:]

Agree - another simple accountant.


On Dec 19 02:48 PM The Simple Accountant wrote:

> New Year rally following tax loss selling seems like a sensible near
> term forecast.

2008 Dec 19 08:02 PM

[E Nuff Sed:]

Yep. Time to start lightening up on equities after about 3rd week of January.

2008 Dec 19 10:10 PM