Are We Seeing Shades of 2003 Markets?

We have an interesting start to the year, as there has been broad based anticipation for a good start to 2009 - but not to the extent to jinx a prolonged rally.

Via Bloomberg:

Wall Street is starting a new year, and there's always more money at the beginning of the year," said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees $160 billion. "The markets will see beyond the current bad economic data and begin a broad-based move upward in the next three or four months.

It is worrisome to a contrarian to see everyone so cheery when we're on a very similar path to that of the 2003 tech bubble:

Notice the strong start to 2003, as the DJIA started off up 500 points in 3 days of trading (this was uncommon back then...). More importantly, notice the "triple top" formation at 8,800 which acted as a form of resistance, where the index proceeded to plummet to the real bottom (the one nobody expected).

Let's now look at the Dow Jones of today:

After the November lows, we now see a similar triple top formation, at 8,900. We just broke through that level today, but it was done on light volume...

Reasons to be Negative

I don't find it inconceivable to follow the path of 2003, where the luster of unfounded confidence wears off, and people of the present day realize that Russia will probably default (due to decreased oil revenues, leading to decreased tax receipts), and commercial real estate will bear an atomic bomb on mortgage lenders, who are already at a tipping point (the liquidation sales we saw during Christmas? That's probably indicative of trouble for many retailers).

Reasons to be Positive

• The Financial Times reported that Mutual Funds suffered a $320 billion outflow, the likes of which have never been seen (this does not include money market funds, which saw a cash inflow of $422 billion - since people were selling stock, this is a logical place to stash money in a brokerage account to get a reasonable yield).
• US Treasury debt is an unreasonably low yielding investment, meaning this is where everyone is hiding from risk - which is a misconception, since the principle investment on a 10-year note is only protected by a 2.10% interest rate, meaning any indication of a sell off could drastically hurt a US debt holder. Should treasuries sell off, certain sectors within equities would be a logical home for this capital - the question is always when.

It is clear that investors have allocated their savings out of equities and into low-yielding US treasuries and Money Market funds, in return for safety, which is a bullish indicator for the future (since equities have historically outperformed bonds, barring periods of severe inflation), and since we will always seek good returns on investment; unless severely discounted, bonds typically don't meet this criterion.

Therefore, I would personally wait for either of those negitives to unfold, then re-evaluate the positives as a corollary to invest on the long side in the future.

Disclosure: None.

Comments

[investor88:]

Good stand not to dabble with position stated as "none" although there are glimpses of hope as the article points out.

Jan 04 09:02 AM

[Paul Price:]

And your conclusion is...?

You didn't make a case for going long or short. You merely said that in 2003 things got better early in the year before bottoming in March.

Is there a point to this piece?

Jan 04 09:10 AM

[Know when t...:]

Point is, if you buy and the rally continues you are a winner. If not, you are a loser. Does anyone know for sure? No

Jan 04 09:46 AM

[Alphameister:]

Not sure what the point is, but I personally would love to see a repeat of 2003---even if that includes a final low as in March of that year. Also, check the difference between "principle" and "principal."

Jan 04 10:14 AM

[David in En...:]

Unlike the other commenters, I liked this piece. My understand from it is that if there is a high volume positive move next week it will be time to go long, at least for a bit. And, if not, not.

Jan 04 10:47 AM

[dcb:]

I don't want to argue either point. I did set my stops to fridays lows and depending on what happens Monday will make my moves accordingly. the point is that if you are out and it runs up you loose. but a move down takes you out to reinvest later. worth the gamble with minimal lose, good gain.

Jan 04 12:35 PM

[Christopher...:]

There is indeed a point; be cautious of overt optimism, and a broad based "bottom calling" sentiment. The negative and positive breakdown was to outline what might happen in the new year (things that aren't priced in, if you believe in the efficient markets hypothesis).

The point is with low yields, we will eventually be forced back into equities, and US Debt won't be a good investment unless the Fed actively targets long-term rates.


On Jan 04 09:10 AM Paul Price wrote:

> And your conclusion is...?
>
> You didn't make a case for going long or short. You merely said that
> in 2003 things got better early in the year before bottoming in March.

>
>
> Is there a point to this piece?

Jan 04 07:49 PM