'Split the Difference' Bull Market Gains Steam

On Friday I laid out my very unscientific idea that the current market rally could be as simple as stocks getting pushed back to the midway point from the lows to about half way from the highs. From the article:

There is some reason behind the buying. I think the theorem goes something like this;
-When all stocks were going to zero, the DOW was at 6600 and the S&P was at 666
-When the credit boom was at full throttle the DOW was at 14,000 and S&P was at 1500
-If you split the difference right down the middle you arrive at DOW 10,300 and S&P 1083
-This seems like a fair compromise
I know, very scientific. This would be my guess and so those would be my upside targets.

Going through my daily reading I came across these two nuggets that show I am not the only one thinking this way. The first article is from Minyanville contributor James Kostohryz who is about as bullish as you can get:

In my article Your S&P Roadmap, I laid out a framework that demonstrated that equity prices had massively overshot to the downside and were extremely undervalued. Valuations had reached a point that reflected “irrational despondence,” and will only begin to enter into a “normal range when the S&P 500 crosses above 950." The midpoint of the “normal” valuation range is 1,100.
My target for the countertrend rally has been for the S&P to reach between 950 and 1,100. I now believe that the 1,100 is most likely. However, under certain circumstances, I believe it is possible for the S&P 500 to reach the upper end of its normal valuation range - which would place it at 1,350.

Another "midpoint" proponent.

The second item was a comment left on this article on Clusterstock that caught my attention:

Ken G said:
Let's take stock (pun not intended).
The S&P's alltime high was 1,576 in October 2007. The bear market low was 666 on March 6, 2009. From peak to trough we dropped 57.7%. Now, we have recovered all the way to 948 intraday (rounded), a 42% recovery from the low but still 40% below the alltime high.
Ok, so the glass is half-filled with water now. Or is it half empty? Well, the numerical average of 1,576 and 666 is actually 1,121, so we are still in the lower half of the 10/07 - 2/09 range. We can even go higher, I suppose, until we get to the midway point of 1,100 (plus or minus), but will that mean our problems are solved? Depends on when you bought, or when you sold, I suppose.

Amazingly another "split the difference" call!

I think the name should catch on soon enough.

Market Positions
I opened some market positions Monday evening and I thought I would share my foray into the markets with the readers. As always, none of the following is INVESTMENT ADVICE. I am sure you can lose money easy enough all on your own and do not need to copy my dumb ideas. I thought I would show what lines I am thinking along.

Silver
Silver has broken above the area that I was watching ($15) and I like how it looks right here. When viewed through the lens that the dollar MUST go down for stocks to go up silver is a good play on this dichotomy.
Positions:
-SLV buy $15-$16. Upside target $20-$22. Stop set at $13.
-PAAS buy $22.50-$24. Upside target $30-$32. Stop set at $18.
Here I went with both the silver ishares and a silver miner to capture the expected upside.

Gold
As much as I love gold, it does not look as appealing as silver does to me right here. Still, great basing has occurred and another run at $1000 looks likely.
Position:
-GLD buy $94-$97. Upside target $105-$115. Stop set at $87.

S&P Index
If indeed we are going to get back to the half way point, the S&P still has room to run. I believe in putting your money where your mouth is and thus I will take a position that jibes with my "split the difference" bull market call.
Position:
-SPY buy $93-$97. Upside target $110-$120. Stop set at $89.

I think that the two factors that make these positions attractive to me is that the dollar needs to continue its way down for the stock market to go up. Minyanville calls this "dollar devaluation versus asset class inflation" and the dynamic has been very real for a long time. I also think that the midpoint theorem has legs and so there is still some room to capture some upside on the S&P.

Some factors going against these positions is the great run all the selections have had already may cap any more running room. Boom Boom Bernanke is set to speak on Wednesday and his comments on the rise in the Ten year notes could kill off the metals inside of an hour (or they could explode higher). Also, if the midpoint idea gets too ingrained then there may well be some shenanigans pulled to stay below that level to keep up the appearance that the markets are really "free". The last force against these buys is that I have taken these positions is usually reason enough for a sharp downside move as soon as my orders are filled at the high of the day.

Disclosure: Long positions in SLV, PAAS, GLD, SPY

Comments

[jeandit75]

Does it make you feel better to have someone else believing in the same thing as you. Come on! Don't be a sheep. When are people gonna start following the herd just because they think someone else may know better than they do.

Look, if it looks bad, smells bad and tastes bad, are you gonna eat it just because someone respectful said to do so?

We are in the biggest recession since the 30s and the market correction has only lasted 16 months or so vs an average 30 months for the most recent recessions which were never as close to being as dramatic.

This recession is different from previous ones because it involves massive delevraging. When you have understood that you will come to the same conclusions as me:

1) the USD is world's reserve currency and should remain after this depression is over;
2) the flight to safety is far from being over and will come back sooner than many expect as the risk for appetite goes away. This will result in long term bonds coming down to their lows again;
3) equities are set for a massive correction is history is a guide, they tend to match the ISM Manufacturing which will see more contraction following this restocking typical phenomena.

In short, anyone believing in the "green shoots" theory is just feeding the banks and giving them time to increase their equity position while awaiting the next downturn. Don't be stupidly stuck in it just because the US administration, the FED, and the major brokers encourages you to do so.

Good luck everybody.

2009 Jun 02 02:35 AM

[Economic Disconnect]

Jeandit75,
It makes zero difference to me whether anyone else is thinking along the same lines, what I was trying to highlight is that in this market things have become very disconnected form basic fundamentals and thus I tried to find a reason, any reason for the action of the last two months. I feel that it is not enough to just write about ideas, but that by buying SPY I am staking out that the split the difference theroem has validity.
The current downturn has been bad, but certainly not as bad the the 1930's episode. Bubblemeter has a GDP contarction graph you can see here:
tinyurl.com/kln66w
Which shows that the 80's recession is more akin to the current one. But there is still a long summer ahead.

2009 Jun 02 07:19 AM

[optionsgirl]

What you are calling "split the difference" is sometimes called a 50% retracement by technical chartists.

2009 Jun 02 11:50 AM

[Economic Disconnect]

optionsgirl,
we can call it many things (fibonacci retrace, etc) but it seems clear that the first step "back" for the markets is going to be right around the mid point discussed.

2009 Jun 02 12:58 PM

[optionsgirl]

Right, but what I am really saying is this is so fundamental a concept you have applied to your recommendations, it mystifies me why you bothered to make it sound so "hokey", as if you stumbled upon this idea while looking at your investments. Furthermore, while silver can definitely soar, there is a real good chance that it will hit 17 and that will be resistance. Time will tell. Lastly, while you may not like gold as much as silver, your article would have been more interesting if you had stated "why" in terms
of your investment thesis. Is it because the dollar amount you need to commit to that position? After all, gold is at $983.50 per ounce right now. If you want a quick trade, doesn't that make gold more attractive than silver, while you wait for silver to climb above $16 an ounce, you can get there faster with gold? (and the etf's that track the physical metals).
I am not trying to disparage your article. I think you did a good job showing your stop losses and contemplating where these investments might go. Only, why write like you are addressing a bunch of hayseeds?

On Jun 02 12:58 PM Economic Disconnect wrote:

> optionsgirl,
> we can call it many things (fibonacci retrace, etc) but it seems
> clear that the first step "back" for the markets is going to be right
> around the mid point discussed.

2009 Jun 02 01:27 PM

[Economic Disconnect]

optionsgirl,
I am not a chart type and technical analysis is not my main mode of investment planning, so I tried to use some humor in the "split the difference" post. As it is, technicals align nicely with my simple "hokey" idea. I write in simple terms because that is how I think about things, simply!
As far as gold vs. silver I like silver more than gold at this point because it is less closely watched and many less headlines will be screaming "silver hits $20" than there will be "gold breaks $1000" and all the attention that brings with it. As far as pricing, I tend to think in % return when buying, so the numerical value of a buy is not as important as what % I am aiming to harness.
Thanks for the constructive advice, I appreciate it.

2009 Jun 02 02:04 PM

[optionsgirl]

Good explanations, I truly meant it constructively. But, there is sooo much being written about silver and so much interest pouring in, I believe you will see a lot of headlines when it makes a double top and pierces the old resistance (aka exceeds $21+! LOL)


On Jun 02 02:04 PM Economic Disconnect wrote:

> optionsgirl,
> I am not a chart type and technical analysis is not my main mode
> of investment planning, so I tried to use some humor in the "split
> the difference" post. As it is, technicals align nicely with my
> simple "hokey" idea. I write in simple terms because that is how
> I think about things, simply!
> As far as gold vs. silver I like silver more than gold at this point
> because it is less closely watched and many less headlines will be
> screaming "silver hits $20" than there will be "gold breaks $1000"
> and all the attention that brings with it. As far as pricing, I
> tend to think in % return when buying, so the numerical value of
> a buy is not as important as what % I am aiming to harness.
> Thanks for the constructive advice, I appreciate it.

2009 Jun 02 04:09 PM

[optionsgirl]

Part of the deal is issuing warrants at $3.68 for only half a year after settlement- so that would be Nov. 4,2009, if the deal closes by 6/5. You have any thoughts on that?


On Jun 03 06:50 AM Freya wrote:

> Oh, The news out of Hecla was interesting in this Credit Crunch environment.
> How were they able to raise $60 million in private Capital?

2009 Jun 03 02:13 PM

[Economic Disconnect]

Freya and optionsgirl,
in my newest article I was confused about the Citi new issuance of shares from 15 Billion all the way to 60 Billion. This seems crazy and maybe you can chime in on that item as well.
Thanks for any input

2009 Jun 04 08:41 AM