When Will the Market Turn Negative Again? 48 comments
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Earlier this week I published an article here arguing that, at best, any kind of sustained growth in the US economy was not possible for at least the next ten years. I invited rebuttals from readers but none of the comments disagreed with my gloomy outlook. So either there are a lot of lazy minds out there or my arguments really are irrefutable – Yikes!
So the question is: when will the market begin to reflect this reality? Well, almost all the big stock market crashes have happened in the fall; and this spring bear market rally looks uncannily like the charts for the 1929-30 market in the US and the 1990-91market in Japan. Both historical charts show double dips in the fall and late winter and then the big spring rallies. Followed by the really big drops. Although I’m not a chartist I believe that history can repeat its self just because human psychology is so repeatable. Also if this forecast recovery does not show signs of really happening by October or November skepticism will rule again.
So what strategy to follow here? First of all, kudos to all the black swans last fall, who held their Nov. 120 SPY puts bought at $1.50, and managed not to buy into the TARP fairy tale and sold them for thirty bucks or so. A 2000% profit in a few weeks is nice, but I unfortunately bought the fairy tale (or at least thought the market would) and dumped mine and will have to forgo early retirement for now. There may be an opportunity like this again but timing will be everything.
For the less greedy, simple shorting is a much more conservative play than jumping in too soon and watching your puts expire. I doubt if an even really sustained rally here can breach 10,000 on the Dow, as that would cause interest rates on US Treasuries to rise high enough that it would pull money back away from the stock market This would also once again quickly exacerbate the problems with the housing market, as interest rates in general would have to rise along with Treasuries. Remember that the US government has to raise five trillion dollars in the next year and half or so to pay for tax breaks and stimulus, and this will be a significant drain on the world’s capital. Even Mr. Bernake, during hearings this week, was beginning to sound worried at the prospect of trying to raise so much money.
As for myself I will try to time the next big drop (right now I would say October again but that may change) and maximize profit with a leveraged position. In the mean time I am shorting SPY, JPM, or SPG or buying DXD during the big moves on rally days, holding overnight and trading out the next morning. It’s actually a way for a bear to make a little $ change even when the market is moving against him for a week or even months. The trick is to have the discipline to short on the rallies and cover on the dips before they end and not be afraid of missing the big one. Of course that will be the trick – knowing the big one when it really does come.
I won’t go long (except on some gold stocks) just in case the market comes to its senses sooner than I expect.
Disclosures: Short SPY, JPM, SPG, or DIA, Long DXD, only overnight, for now.
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This article has 48 comments:
When GS says it's time.
1. Population grows a little over 1% per year.
2. Productivity grows around 2% per year.
Population is not going to stop growing and people keep getting more productive.
This has been the case as the US economy transitioned from an agriculture-based economy to an industrial-based economy to a services-based economy. There have been worse financial panics and real estate bubbles, worse recessions, and worse economic policies, yet we still grew a little over 3% through it all.
On Jun 05 03:14 PM herbert hoover wrote:
> When Will the Market Turn Negative Again?
>
> When GS says it's time.
On Jun 05 03:32 PM thiazole wrote:
> It will turn negative when the Fed starts raising interest rates
> to fight off inflation (or at least as people begin speculating this
> event). It will probably be spring to summer 2010.
I also suspect that many of the bears that are still around will be bulls when the market is about to crash again. Wrong minded people tend to be wrong all the time, I've found.
On Jun 05 08:59 PM untrusting investor wrote:
> Bet your wrong. Try summer to fall 2009. Oil has doubled already,
> and if that is maintained for even a short period of time, that spells
> big trouble for any economic recovery. 10-year Treasury rates are
> already under significant pressure, and the rising rate spells big
> trouble for any housing recovery. Already as mortgage rates rose
> above 5%, applications fell off a cliff. Lastly, any continued devaluation
> in the dollar will test more inflation, more rising prices, more
> pressure on interest rates. Bet you see a significant new downleg
> in the market starting again this summer.
I am expecting the S&P to be down about 15-20% by July 4.
On Jun 05 09:01 PM palmj wrote:
> om your lips to Congress' ear! A comprehensive plan for a sustainable
> America. I would add two more items to the agenda: eliminate paid
> lobbyists in Washington and level-fund all
> campaigns for election to public office. In the age of the internet,
> there
>
> good finance articles-> www.alexandria.lib.va....
It's the clear and present jumps of $3-$5 a day over a course of a week or two that hugely impacts the economy. If that occurs then you are correct, all bets are off because inflation is waiting around the corner.
On Jun 05 08:59 PM untrusting investor wrote:
> Bet your wrong. Try summer to fall 2009. Oil has doubled already,
> and if that is maintained for even a short period of time, that spells
> big trouble for any economic recovery. 10-year Treasury rates are
> already under significant pressure, and the rising rate spells big
> trouble for any housing recovery. Already as mortgage rates rose
> above 5%, applications fell off a cliff. Lastly, any continued devaluation
> in the dollar will test more inflation, more rising prices, more
> pressure on interest rates. Bet you see a significant new downleg
> in the market starting again this summer.
On Jun 06 01:22 AM IronBob wrote:
> Please post facts. Oil has not doubled. In fact, it's not even close
> to double. Steady and sporadic increases in oil prices usually don't
> have that much of an impact.
>
> It's the clear and present jumps of $3-$5 a day over a course of
> a week or two that hugely impacts the economy. If that occurs then
> you are correct, all bets are off because inflation is waiting around
> the corner.
The recent rally has been fuelled by a massive injection in liquidity by the central banks around the world and investors are expecting higher as a result of the inflated FED balance sheet.
However, where I think the market is wrong and this is why I have remained so bearish lately (not because I want it but) is the velocity of that money supply is nil. Banks are simply not lending money. Therefore, the mass of money is staying in the FED and banks balance sheets but is not flowing into the real economy.
The consequences are: the deflation will remain the biggest threat and deleveraging will continue for consumers and corporates. Once the market has realized that (and I may be a bit early in my call but who knows how to time these things) then they will fly back to safety which means buying US 10 years treasuries and selling equities. My gut feeling (for that is worth) is calling for the market to double bottom by September.
If you want a similar period of reference you have to look at the depression of the 30s or the big recession of the 1870s. You can't compare the current recession to the 90-91 or the 70s because they were different animals.
In short, the S&P 500 should be below 666 by September and probably much lower by 2010 if the deflation scenario materializes so let's hope that the market is right and that we have stagflation.
The recent rally has been fuelled by a massive injection in liquidity by the central banks around the world and investors are expecting higher as a result of the inflated FED balance sheet.
However, where I think the market is wrong and this is why I have remained so bearish lately (not because I want it but) is the velocity of that money supply is nil. Banks are simply not lending money. Therefore, the mass of money is staying in the FED and banks balance sheets but is not flowing into the real economy.
The consequences are: the deflation will remain the biggest threat and deleveraging will continue for consumers and corporates. Once the market has realized that (and I may be a bit early in my call but who knows how to time these things) then they will fly back to safety which means buying US 10 years treasuries and selling equities. My gut feeling (for that is worth) is calling for the market to double bottom by September.
If you want a similar period of reference you have to look at the depression of the 30s or the big recession of the 1870s. You can't compare the current recession to the 90-91 or the 70s because they were different animals.
In short, the S&P 500 should be below 666 by September and probably much lower by 2010 if the deflation scenario materializes so let's hope that the market is right and that we have stagflation.
The recent rally has been fuelled by a massive injection in liquidity by the central banks around the world and investors are expecting higher as a result of the inflated FED balance sheet.
However, where I think the market is wrong and this is why I have remained so bearish lately (not because I want it but) is the velocity of that money supply is nil. Banks are simply not lending money. Therefore, the mass of money is staying in the FED and banks balance sheets but is not flowing into the real economy.
The consequences are: the deflation will remain the biggest threat and deleveraging will continue for consumers and corporates. Once the market has realized that (and I may be a bit early in my call but who knows how to time these things) then they will fly back to safety which means buying US 10 years treasuries and selling equities. My gut feeling (for that is worth) is calling for the market to double bottom by September.
If you want a similar period of reference you have to look at the depression of the 30s or the big recession of the 1870s. You can't compare the current recession to the 90-91 or the 70s because they were different animals.
In short, the S&P 500 should be below 666 by September and probably much lower by 2010 if the deflation scenario materializes so let's hope that the market is right and that we have stagflation.
Seriously, what concerns me the most is that most of my laid off friends are draining their 401k accounts to supplement their weak unemployment benefits. According to our government statistics, nearly 10% of the population is unemployed. If the unemployed drain their retirement accounts (which we all know what is happening since their incomes are falling), that's 10% more people who will definitely be dependent on the government in the future too. Where is the recovery in that? The stock market has to dip soon, this foolishness can't go on any further.
On Jun 06 01:22 AM IronBob wrote:
> Please post facts. Oil has not doubled. In fact, it's not even close
> to double. Steady and sporadic increases in oil prices usually don't
> have that much of an impact.
>
> It's the clear and present jumps of $3-$5 a day over a course of
> a week or two that hugely impacts the economy. If that occurs then
> you are correct, all bets are off because inflation is waiting around
> the corner.
seekingalpha.com/artic...
HardToLove
On Jun 06 10:24 AM I need a bailout wrote:
> The stimulus package is about to kick in. Just might keep this rally
> going and actually work?!
On Jun 06 10:09 AM Obi-Wan wrote:
> If I had a nickel for every post that said 'the market is on its
> way down any day now' posted since the March lows, I'd be able to
> retire myself..
Oil prices are going up because demand is going up, and that implies the economy is getting better. But, since I always get 2 or 3 thumbs down for saying that, lets just entertain the possibility that the crude inventory numbers are wrong and that consumption isn't increasing, but that the price increases are caused by speculators. What happens when oil prices start to stagnate the recovery? Oil speculators dump oi, oil prices crash, and the recovery happens anyway.
On Jun 06 11:28 AM Windsun33 wrote:
> Eventually all of those people are right - timing is the issue. People
> saying it would go down more in March and April were following the
> herd, just as those that say the bull market now will keep going
> are following the herd. Eventually the two herds collide and you
> have a mass stampede and lots of trampling - then the bears move
> in to eat the carcasses :)
How Low Can The Dollar Go? Check out this great video from Adam Hewison's Blog > tinyurl.com/kn73da
crudeoiltrader.blogspo...
usdebtclock.org/
We've overspent our welcome. The most cogent argument I've heard that the dollar index won't go to hell is that everyone else is on the highway, racing to the hot place with us. Based on the behaviors of BRIC, I am not so sure.
> I'll give you the two reasons why the US economy will grow again:
>
>
> 1. Population grows a little over 1% per year.
> 2. Productivity grows around 2% per year.
>
> Population is not going to stop growing and people keep getting more
> productive.
>
A great long term view if you believe that the economy is going to grow at an average rate and that the stock market is under valued or priced at fair value with long term pressure to the upside.
But the stock market has been over priced for about 2 decades and continues to be over priced and has yet to drop back to fair value (though it got close at 6500).
The problem with your view is that it is obviously based on a limited amount of experience.
History and common sense suggest the market will drop well below fair value to average-out the time spent above fair value. Look for rising divendends and lower P/E ratios over time.
It will probably take ten years or more of a market at lower values or a very steep decline to very low levels before we see that 'opportunity of a lifetime'. The clear signal will be when everyone hates stocks and have for years. The late 1970's or early 1980's is a good example.
Don't be fooled by the 2000 to 2007 period. The bubble was further inflated during this time and so it has to be considered as part of the bull market. Dow theory, IMO, concurs with this view.
We are getting there but have a long ways to go.
I suggest subscribing to Richard Russell's newsletter. He is a top Dow Theorist and is older than dirt so he has a longer term perspective and lots of experience.
ww2.dowtheoryletters.com/
++++++++++++++++++++
U.S. Inventories
U.S. crude oil supplies rose last week as fuel consumption tumbled, an Energy Department report on June 3 showed.
“The latest upward move in oil prices was mainly driven by an improvement in sentiment rather than fundamentals,” said Eliane Tanner, an analyst at Credit Suisse Group AG in Zurich. “U.S. inventories are increasing again and U.S. demand destruction is going on. This is, in our view, a major risk for crude-oil prices in the near-term.”
Stockpiles climbed 2.9 million barrels to 366 million, according to the Energy Department report. The gain occurred as imports jumped 9.9 percent and refineries increased operating rates to the highest in six months. Fuel demand fell 900,000 barrels to 17.7 million barrels a day last week, the lowest since May 1999
++++++++++++++++++++++...
On Jun 06 11:30 AM thiazole wrote:
> Anyone who follow oil knows that oil always peaks out in early summer/late
> spring, then falls in the middle of summer before coming back up
> in the fall (because of hurricanes). Oil is probably on the verge
> of its early summer peak before prices start falling again.
>
> Oil prices are going up because demand is going up, and that implies
> the economy is getting better. But, since I always get 2 or 3 thumbs
> down for saying that, lets just entertain the possibility that the
> crude inventory numbers are wrong and that consumption isn't increasing,
> but that the price increases are caused by speculators. What happens
> when oil prices start to stagnate the recovery? Oil speculators dump
> oi, oil prices crash, and the recovery happens anyway.
On Jun 06 11:36 AM thiazole wrote:
>...Right now, 90% of economists believe a recovery will happen
> this year, and every business cycle economist I've seen agrees (and
> they are the only economists worth listening to about these kinds
> of things anyway).
90% of economists say the recession will end in 2009: www.wusa9.com/news/loc...
Crude inventories rose last week, but they were down in each of the three previous weeks. Use the "last week" link and see for yourself: biz.yahoo.com/c/e.html
The dollar will get weaker, but the weaker it gets the more we will export. That IS a good thing. The trade deficit is at the core of what is wrong with our economy in the first place. The more we export the easier it will be for us to get out of debt.
On Jun 06 03:46 PM Windsun33 wrote:
> Yes, and 90% of the economists were wrong in 2007. I see no reason
> why they should be right now. Not that I am buying into your 90%
> figure, because I sure don't see anything like 90%, more like 60%
> - and if you take out those that have their hopes pinned on the Obama
> Miricle, it is probably about half of that. (BTW, it's herd, not
> heard).
12/30 spot price: 33.97
6/4 spot price: 68.45
looks like a 2 bagger to me
On Jun 06 01:22 AM IronBob wrote:
> Please post facts. Oil has not doubled. In fact, it's not even close
> to double. Steady and sporadic increases in oil prices usually don't
> have that much of an impact.
>
> It's the clear and present jumps of $3-$5 a day over a course of
> a week or two that hugely impacts the economy. If that occurs then
> you are correct, all bets are off because inflation is waiting around
> the corner.
"Bloomberg also surveyed strategists at 12 of Wall Streets biggest firms, and it was unanimous. Every one of them is bullish. Indeed, for Wall Street strategists who earned a record $24 billion in bonuses this year (an average of $137,600 per head) , 2007 looks to be developing as the best of all possible worlds."
On Jun 06 05:39 PM thiazole wrote:
> Oh yeah, and show me where 90% of the economists were wrong in 2007.
> As I recall, this was the most widely predicted recession in history.
> Remember when people started talking about Starbucks sales predicting
> a recession back in September or October 2007? After that it just
> snowballed.
There are two - or more, if you count things like housing by itself - recoveries to consider. One is the stock market, one is the economy. They are not totally seperate, but the market can reach all time highs while the unemployment rate hits 20%. But the market is working from a smaller base - even now in 2009, the 40%'ish overall rise in the market has been on much less volume than was "normal" in 2007.
10's of trillions of dollars basically evaporated, and that cannot come back into the market or the economy because it does not exist any more. The velocity of money is much less now than it was two years ago, and that will have to rise considerably for the economy itself to pick up.
On Jun 06 08:58 PM Windsun33 wrote:
> One example from www.bullnotbull.com/ar...
>
>
> "Bloomberg also surveyed strategists at 12 of Wall Streets biggest
> firms, and it was unanimous. Every one of them is bullish. Indeed,
> for Wall Street strategists who earned a record $24 billion in bonuses
> this year (an average of $137,600 per head) , 2007 looks to be developing
> as the best of all possible worlds."
>
> On Jun 06 05:39 PM thiazole wrote:
On Jun 07 12:02 AM thiazole wrote:
> Well, duh! That was in late 2006! 2007 as a year WAS a good year.
> It was a good year in the stock market and the economy grew in 2007.
> The recession didn't start until December of 2007. So they were right.
> Find something in late 2007 that showed that 90% of economists thought
> the economy was wonderful.
On Jun 05 09:34 PM thiazole wrote:
> Your on. If you are still around in 2010, I'll find you on this forum
> and link these two posts. My gut feeling is that after the market
> continues to be cycle between flat and bullish for the next 8-12
> months, that all the bears here will have either changed their names
> or given up on this forum all together. I enjoy serving crow, though,
> and will eat it myself if I'm wrong.
>
> I also suspect that many of the bears that are still around will
> be bulls when the market is about to crash again. Wrong minded people
> tend to be wrong all the time, I've found.
1) Dec.23/08 closing WTI oil price = $30.28
2) June 12/09 closing WTI oil price = $70.02
That sure looks like a 131.24 % increase in the price of a barrel of oil to me in about 6 months.
Saw one commentator note that every time in stock market history when oil has increased by more than 80% in a relatively short period of time, that the stock market has crashed fairly soon afterwards. Now I have not personally checked the stats on that but it makes sense to me and certainly jives with the two hugh oil spikes I remember in the 1970s and 2008. Time will tell, but I would not bet against it, and particularily given the pretty weak fundamentals in the US economy and the weak fundamentals and overvaluations in US stock prices given the current bear market rally.
On Jun 06 01:22 AM IronBob wrote:
> Please post facts. Oil has not doubled. In fact, it's not even close
> to double. Steady and sporadic increases in oil prices usually don't
> have that much of an impact.
>
> It's the clear and present jumps of $3-$5 a day over a course of
> a week or two that hugely impacts the economy. If that occurs then
> you are correct, all bets are off because inflation is waiting around
> the corner.