Ok, now I’m starting to get spooked.
Long-time readers know that I’ve frequently commented on the eerie similarities between how the financial markets behaved in 2008 and 2009. However, at this point, things are beginning to border on “conspiracy theorist.”
In both years, commodities bottomed first (Jan 23, 2008 vs. Feb 23 2009). In both years, the Feds stepped in with a major intervention in Feb/ March (Bear Stearns ’08 vs. Obama Stimulus ’09). This in turn kicked off a major rally in which both stocks and commodities soared higher together.
Both asset classes began to lose momentum in the early summer with the Baltic Dry Index peaking in late May ’08 vs early June ’09. Stocks and the Baltic then rolled over, falling into July:
June 1-August 5, 2008: Baltic collapses 28%
June 1-August 5, 2009: Baltic collapses 25%
Stocks first followed the Baltic, but then staged a massive reversal due to interventions/ short squeezes. In 2008, this came in the form of the Fannie/ Freddie bailout and the SEC banning cracking down on naked short selling. The actual bottom for stocks was July 15.
In contrast, the July 2009 bottom came July 10: the week Meredith Whitney forecast a short rebound in financials and the Federal Reserve pumped $80 billion into the markets (its first expansion in four weeks). We also got a major short squeeze from various brokerage firms banning inverse ETFs and the SEC jumping in with another move against naked short-selling on July 29.
Thus the short-covering rallies in 2008 vs. 2009 are as follows:
July 15- August 5, 2008: S&P 500 rallies 5%
July 10- August 5, 2009: S&P 500 rallies 14%
In both years, the Baltic Dry Index failed to confirm the stock rally: implying that the stock rally represented a disconnect from underlying economic realities (refer to the above listing of Baltic collapses June-August).
2008: the Baltic doesn’t join in the July party:
2009, ditto:
In a nutshell, the Baltic and the CRB’s drop served as a major warning sign in 2008. These two, more than stocks, represent a clear picture of the REAL economy. The fact that they didn't confirm the stock rally in 2008, meant that soon stocks would return to reality by falling. And this is precisely what is happening today. The Baltic continues downward and commodities are showing some signs of weakness. Meanwhile stocks are highly overbought and in serious need of a correction.
If we continue to follow the 2008 pattern from here, stocks will have a choppy August. We’ll then see a complete unraveling of the market rally in late August/ early September. This will then segue into a nightmarish September-October.
Bottom line: if 2009 continues to follow the 2008 pattern, we are in for a NASTY autumn. The fact that both the Baltic Dry Index AND commodities are not confirming today’s stock rally is a serious warning to the Bulls’ argument that this is a new Bull market.
My advice is to watch commodities and the Baltic Dry Index closely. These two sectors lead stocks on the upside. They’ll likely lead on the downside too. I suggest you watch commodities in particular. These, more than stocks, follow economic realities. So if commodities roll over in a meaningful way, stocks are on borrowed time.
Good Investing!
