We're Due for a Serious Pullback 42 comments
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Welcome to Groundhog Day.
Last year, when Bear Stearns went under and the Federal Reserve intervened via Bear’s shotgun marriage to JP Morgan, the mainstream financial media went absolutely berserk with the “unprecedented market action.” Stocks then rallied in the three months following this, despite the economic and financial fundamentals worsening considerably. However, by the time the summer rolled around, things started to get ugly. And by the 3Q08… well I don’t think anyone wants me to remind them of what happened then.
The first half of 2008…
And the SECOND half…
Despite the media’s claims to the contrary, the Bear Stearns deal and subsequent rally were in no way unprecedented. There had already been three March financial crises/ bottoms and subsequent interventions in the 20th century alone-1907, 1929, and 1980. And while the ones intervening changed - JP Morgan in 1907, Herbert Hoover in 1929, and Jimmy Carter in 1980- the effects of the interventions were always the same: the intervention marked a temporary bottom followed by a brief two to three month rally, then a very ugly fall (literally and seasonally).
We’ve now added 2008 to the list of March bottoms/ interventions. And here we are, one year later, with the same exact trend playing out: a March low/ intervention (Obama’s $700 billion stimulus) followed by a summer rally (see chart below). Investors and pundits alike are excitedly claiming that the bull market has begun anew and the economy is showing “green shoots” of growth.
The first half of 2009…
The similarities between 1H08 and 1H09 are striking. Both followed March crisis/ interventions (Bear Stearns and Market Crash/ Obama’s Stimulus), both were initially dominated by short covering, both were lead by the previously worst performing sectors (financials), and both weakened in May.
Aside from the March Crisis/ summer rally pattern, there are also seasonal trends to consider. According to the Ned Davis (NDR) database, had you invested $10,000 in the S&P 500 every May 1st starting in 1950 and sold October 31 of the same year, your initial position would only be worth $10,026 today. Put another way, by investing only from May through October, a $10,000 stake invested in 1950 would have only made $26 in 57 years.
In contrast, $10,000 invested in the S&P 500 on November 1st and sold April 30th would have grown to $372,890. Out of 58 years, you would have had 45 positive and only 13 negative.
Thus, we have two powerful trends (seasonal and crisis specific) playing against the market today. It’s also worth noting just how overbought this market it. According to David Rosenberg (former Chief Economist for Merrill Lynch and one of the few big name economists who gets it right), not once in the last 60 years has the S&P 500 surged more than 40% prior to a recession ending. Instead, when the S&P 500 rallied 40%+ or more, the US was usually not only no longer out of recession but was nine months into recovery mode.
Now, the current consensus is that this recession will end in September 2009. If this consensus is correct (it isn’t as I’ll explain in another essay) then this 40+% rally puts the market where it should be trading in May 2010: a full year from today based on the rosiest economic view possible.
Seem to me we're due for a serious pullback in the next few weeks. And if 2009 plays out anything like 2008, the fall is going to be an absolute nightmare. I'll detail why I think this will be the case in tomorrow's essay. Until then...
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It's okay. I've long stopped taking seriously anyone's market predictions. Mr. Market does what he wants. He's an old dog that learns no new tricks and never gets tied to anyone's leash.
Just find a strategy that works for you and stick with it, and let the market prognosticators blather on like idiots. It matters not what they think. It only matters what you do with your own portfolio and your own reactions to whatever Mr. Market wants to do.
How's your portfolio doing? Care to share?
On Jun 04 09:30 AM Jason Tillberg wrote:
> AAII sentiment (Dumb Money) today shows:
> Bullish: 47.56%
> Neutral: 15.85%
> Bearish: 36.59%
>
> They were 70% bearish the week the market bottomed. This is the
> most bullish reading since.
Almost 100% of the Soviet Union followed Stalin.
Almost 100% of the Chinese people followed Mao.
Thank God America is different. We don't have any leaders to follow.
> If I'm "Dumb Money" (yes, I'm an AAII member), how come my portfolio
> is up over 60% from market bottoms? Isn't that beating the market?
>
Let's say you started with $10,000 and it went down to $4,500 (55% drop) and now you've gained back 40% (sorry, not buying the 60%) so that leaves you at $6,300, which is a 37% loss from the 2007 highs.
Kidding yourself about your results is a sure way to never learn a thing.
As an example, I've gotten beaten senseless the past month or more. It's a risky startegy based on a belief that the market will go back down and that is based on plenty of historical and current economic data. If I am wrong I will admit it and learn from it. Lying about how you got in 100% at the March lows and only bought the stocks that went up the most isn't fooling anyone and is only hurting you.
When it comes to investing you need to be stone cold honest with yourself or don't even bother. It's just money, after all, don't confuse it with who you are.
> All you can do is follow the price and volume traits of a market.
> We are clearly in an uptrend now, and until that changes why fight
> the trend. No need to predict the market, just follow it. A good
> way to do that is by reading IBD. There are also other ways as well.
> Guessing ahead of time is a fool's game.
I agree, unless you are guessing based on panic. Panics are a great time to guess against those panicing.
On Jun 05 10:35 AM YoYoMama wrote:
> If I'm "Dumb Money" (yes, I'm an AAII member), how come my portfolio
> is up over 60% from market bottoms? Isn't that beating the market?
>
>
> How's your portfolio doing? Care to share?
>
> On Jun 04 09:30 AM Jason Tillberg wrote:
The only way you could have been "beaten senseless" the last month is if you've been short.
Being short in an up market. Smart - or Dumb?
Sounds "Dumb Money" to me.
On Jun 05 05:21 PM Fred Voetsch wrote:
As an example, I've gotten beaten senseless the past month or more.
Make no mistake, when the bear comes back I will have much more money off the table this time.
On Jun 05 11:15 PM Kunst wrote:
> I'm up 14.6% since 10/9/2007, 24.1% 2009 YTD. I don't measure from
> market bottoms.
Greenbacks were (are) debt-free money.
There was this economic nationalism thing back then. You know, country before derivative-contract.
But that'll never happen again.
On Jun 04 07:33 PM Rant and Rave wrote:
> Millions of people are being fired, we are printing trillions of
> greenbacks, and it is hard to discern the future?
On Jun 04 03:12 PM Dave Wrixon wrote:
> Which planet are you from, again?
> On Jun 04 08:59 AM Birdfan wrote:
> The fundamentals are different this time. Corporate profits are up,
> the housing market has started to rebound and unemployment has bottomed.
> Consumer confidence is up and people have started to spend money
> again which will continue to help corporate profits. Most of the
> bad loans have been written down. I think we are poised for a recovery
> which I hope will be slow and strong.
I kicked myself for not getting into the emerging markets action in 2005, but I chose not to chase the returns, I kept seeing those markets fly, I kept kicking myself, but did not buy, and now these markets are back to 2004-2005 levels.
On Jun 05 07:48 PM E Nuff Sed wrote:
> While I don't know what will happen 6 months from now I do know that
> three years from now a lot of people would be kicking themselves
> for not buying into risky assets now.
Linking arms, thinking happy thoughts, and repeating "There's no place like home!" isn't going to bring about prosperity. It might create a temporary illusion, but I'm going to go out on a limb and say most Americans would rather have something real and sustainable. Jumping from one fantasy-induced bubble to the next isn't it.
I've never seen a problem solve itself, but maybe I haven't been ignoring them hard enough. I can tell you are upset and frustrated, and most of us can sympathize. But you might feel better if you get back on your meds.
On Jun 05 08:54 AM normthefedup wrote:
> Graham...what is WRONG with you???? EVERYTHING is different this
> time....let's just call the bazillion dollars that every government
> in the world is throwing at this mere pocket change and forget it
> ever happened....
>
> God almighty, will you doom-sayers EVER give it a rest??? Let the
> markets do what they do best...adjust to conditions...and level out
> at the appropriate rate. Dow 14000 in 2010? Nah...2012...maybe....
>
>
> Just shut the hell up and stop preaching the end of the world. As
> I've said about 500 times since this mess started, we do NOT need
> additional negativity. It's all negative enough on its own. I hope
> you had at least a half million in GM stock so you will have some
> indication of what the REST of us feel like when we look at our 401k's
> and IRA's. Just SHUT UP.