Market Memory: An Abbreviated Tale Of Two Bottoms (Part 1)

As we sit at consolidation levels around 1,000 on the S&P 500, we are witnessing the critical nexus point of a binary event waiting to happen...

It seems that every single trading session bares witness to commentators and analysts on the financial news infomercials promulgating this idea of retesting the market bottom in order to validate the run to the upside. Perhaps, it highlights the conversation as a major benchmark and level of theoretical risk to the downside. Market memory, anniversaries and the unknown will always cause varying degrees of consternation that provokes one to question reflections seen in the rearview mirror. However, there are so many traders that have missed capturing the upside and full potential move off the lows that a viral contagion of sour grapes has spread in hopes that the market will sell off, simply to allow a safe entry point or second chance “once in a lifetime opportunity” for all those that missed the move to begin with.

This, in of itself, is very disingenuous and suspect analysis by many reasoned professionals that have motive to draw this market down again either by being unbearably short against the rising momentum, or by having itchy trigger fingers waiting for opportunities to buy. I’m not entirely convinced they’ll get an easy entry point anytime soon, which actually can cause this market to push much higher long before there is complete confirmation of a sustainable economic recovery. In fact, if you ever wanted a catalyst to push these markets even higher, it would be that fund managers are underinvested and being forced to chase performance to close out the year. Six months ago fund managers could get away with adopting the mantra “less worse” while losing money by a smaller percentage than the drop in the S&P 500, or being on the sidelines with cash; but now with the last quarter of the year approaching, those that missed the move and have underperformed are feeling the squeeze to demonstrate positive returns, otherwise, face the certainty of redemptions and withdrawals.

But being a contrarian does not mean you can afford to stand against the tide when the market does shift dramatically and finally sell off into a major correction. Not if, but when we sell off and, without question, there are legitimate reasons to doubt this market going forward, for fear of the unknown is only part of the major headwinds that we face. The real albatross hanging over this market is continuing job losses and deteriorating consumer spending that has the potential encumbrance to stall out any positive momentum. Tax selling may be another real driver toward the end of the year with the guaranteed prospect of capital gains rates expiring. Probably, more concrete, is the changing sentiment when macro-economic numbers can no longer sustain the unrealistic expectations and traders begin to pay attention to a struggling recovery. I, personally, don’t see how job growth--let alone job replacement--can even occur anytime soon, and playing these monthly unemployment lottery numbers as the economic bellwether sets the market up for a serious move up or down.

What is impaired may be forever damaged, and what has changed may have forever changed us all. I hope I’m wrong on this issue, but in a global financial system the changing dynamics in our competitive landscape makes those that yearn to turn back the clock to yesteryear incapable of direct participation, who will only find themselves as relics in the context of history. Yes, the overall economic data is showing signs of improvement off the bottom, but where is the sustainable growth coming from? People still refuse to accept that we are in a credit contraction worsened by deflationary pressures and that the old rules of borrowing equity off leveraged assets in home values has all but disappeared from the market. The operational mechanics that provided this supplemental household wealth has simply evaporated into someone else’s pockets--let alone thin air--as this global paper asset Ponzi scheme unraveled and seems less likely to return wholesale anytime soon.

Of course, earnings power by companies left standing will handily beat lowered expectations even with margin compressions due to a greater percentage of overall market share, or aggressive shredding off liabilities through labor cuts and less competition which will make best-of-breed stocks very good investments based on survival, not necessarily growth. It seems very likely we will see this divergent pattern to the overall economic conditions for some time to come. However, these are merely my assumptions based on events that are yet to fully transpire with definitive results and, regardless, as a trader you must be willing to maintain risk protection while navigating a course through uncharted territory.

So when we continue to hear hyperbolic references to the absolute market bottom on the financial news, and as reported in most financial journals, keep it in mind to ask which bottom are they referring to? Look, I’m still shocked the market fell as low as it did back in March, breaking the October and November lows of last year which I believed and still maintain were the true bottom. However, to be clear, it was a very misleading decline that took the S&P in the 660 range back in early March of this year compared to what occurred during the calamity of last year when no one could guarantee an absolute end to the madness. For me, personally, the market truly bottomed last fall throughout the crisis in October and November of 2008, even as the overall indices were trading much lower several months later in March 2009.

Look at the performance of some of the individual companies as validation when it was estimated nearly 40% of the underlying stocks within the S&P 500 were higher in March of 2009, despite the overall index itself being lower--mainly due to weak counterparts in the financial arena. This was a critical inflection point that demonstrated strength and real buying support in specific sectors without regard to the same financial media crying about another meltdown and scaring people out of the market. It’s important to understand that while the S&P 500 is highly regarded as the overall market barometer, or the benchmark to measure a fund manager’s performance, this market rally has proven to be much more specific to individual stocks, sectors and themes.

I’ve been very bullish on the stock market since the collapse last year because, to me, that was the “once in a lifetime buying opportunity.” But such opportunities occur more frequently than we’d anticipate, and I do feel much more trepidation as cheerleaders in the media start waving their pom-poms by calling the end of the recession. Of course, history tends to repeat itself and there are always moments of opportunity which all depends on which stocks you’re buying. Which is why I say, contrary to how the financial news seems to characterize their version of the market bottom, there were really two different market bottoms depending on which stocks you were playing. From a technical point of view, it would be more accurate to state those March lows were the proverbial “retest”--make no mistake about it that was a market crash in 2008--that many myopic professionals have been looking for and missed by shorting, or staying on the sidelines since then as the market rallied higher!

I think too many people in the media were continually miscalculating the strength in the market as it afforded tremendous opportunities throughout the crisis. By relying on the major indices as a whole, it became a matter of convenience to tell the story through the generalized market averages as front page news or breaking headlines, and by exploiting this defect the financial media was neglecting overriding facts that sector specific performance within the S&P, DJIA and Nasdaq told a completely different tale than the numbers printed across the tape on the big board. The weaker speculative plays and injury prone, financially maimed stocks were definitely capped with constricted p/e multiples, but real earnings power plus revenue growth was always in play no matter how catastrophic it seemed. Money has been put to work since the debacle began by initiating a buying spree on companies trading at historic discount prices.

The rise since pushing the S&P 500 back up across 1,000 and daring to break higher on the upside has been dramatic, but it cautions people to believe we have achieved too much too fast, such that we’re due for a serious meltdown or pullback in the markets. I assume there are a lot of professionals that are trying to be too cute in timing the markets and have completely missed the majority of the move to the upside. Their bearish sentiment and pessimism strikes as covertly insincere, but you cannot ignore their presence or manifesting ability to eventuate desired outcomes. If you can listen beyond the white noise, many fund managers admit at certain price levels they would be licking their chops as buyers of the market which implies they are currently underinvested and are begging for a retest, just so they can have a second chance opportunity. I hope they never get that chance because it would only mean an outcome of more chaos and panic after working so hard to stabilize the global financial markets.

And since the political rhetoric has reached a deafening crescendo of bailout fatigue, it would be difficult to orchestrate another wave of wide scale monetary injections to boost the economy and prop the markets with cartoon, superhero-like “plunge protection ninja teams” in the cover of darkness. This means that any potential retest of the March lows would only result in further deterioration of the economy and disastrous results in the market that could send the S&P 500 well below 600--forget the notion of a retest, it would be financial Armageddon. Let’s hope this is not the outcome because it would mean that all the stimulus and monetary easing has failed such that even the bearish argument is inadequate in recognizing the severity of what may come.

Can we have another major sell off that exceeds everything we’ve seen so far? Absolutely. I don’t deny it and have had many sleepless nights about playing Bear market limbo: How low can you go? There are plenty of soothsayers calling for markets to revisit the March lows hoping to make a name for themselves by saying, “I told you so.” I think the percentages are far less in favor of anything close to a significant market retest of the lows, but still the possibility exists and we have yet to fully recover with respect to the “real economy,” despite some very effective consolidation in the market.

I suppose what I’m really suggesting is that these so-called “market bottoms” are headline worthy news items, but don’t necessarily convey individual stories of stocks and serve as distractions more than anything else. We could pull back dramatically in the S&P 500 while certain stocks would hold up better than most others which suggests, quite confidently, there is money that can be put to work with the correct asset allocation. And as a long-term investor, there isn’t any time that I am not invested in the market. I don’t run to cash by liquidating everything as the market sells off, nor do I feel complacent or compelled to chase when things rise. The difference is that in order to manage a portfolio, I must maintain hedging strategies that allow me to stay invested in the market no matter where it trades.

But as stated before, calling the exact bottom of any market is a fool’s game because it is not a singular reflexive pivot point--the bottom of the market is a process that is formulated over time. Looking through the rearview mirror is easy to mark a moment in history, or graph it on a chart, but the struggle to endure and stay in the game so that you can actually exploit opportunity is the true measure of calling a bottom that can only come by realized returns in your portfolio; otherwise it’s all just conjecture and academic conversation.

Author’s disclosure: Long BHP, FCX, AAUKY, AA, ACH, X, V, NYX, NDAQ, DOW, DD, LMT, BA.

Comments

[knight:]

I think the bearish tone comes from people who truly dont believe the underline fundamentals have changed. This bear market will NOT end until the consumer has deleveraged themselves. Nothing has changed with the banks except mark to market rules. Personal bk are at a all time high and so are credit card charge offs. Once the 8k per new house bill runs out you will get a better picture on the housing numbers and you still have option arm/alt a and commercial mortgages to work out. I participated in the rally in the first 3 months more to do with luck than anything else made a 65% return and have been on the sidelines since. I could have made 100% or 120% but to me the risk/reward ratio doesn't justify it. If you are speculator than go for it but a solid return with capital preservation works fine for me.

Sep 06 08:48 AM

[User 482516:]

This is a must read!...author C. S. Jefferson hits a home run with this masterful article!

Sep 06 08:51 AM

[Kblackma:]

I'd like to see the numbers backing up the conclusion that most of the increase in the market has been driven by investment in undervalued sectors.... from what I recall 50% or more of recent market volume has been financials

Sep 06 12:12 PM

[RECESSIONPROOF:]

you can write 50 parts about bottoms, its endless story

Sep 06 02:23 PM

[Zekeko:]

It's a good argument to ask the mainstream media like CNBC what bottom are they talking about because that's all they talk about. Are we going to retest the bottom? CNBC may be the best contrarian play out there. When they pump you dump! When Cramer says buy you run to the hills! When they scare investors out you buy. I know it's never simple like that but I like your point that the Dow jones and S&P 500 are distractions when the real story is about individual stocks.

You may be right on that this market can jump higher because way too many people missed the bottom and aren't invested. Everyone on CNBC telling you it's overbought and about to drop wants to buy the market much lower that's all. And they are getting crushed shorting since 666.

Sep 06 03:19 PM

[Zekeko:]

Can you invest in huggies? Proctor and Gamble or Kimberly Clark may be stocks to own cause me thinks Shorts SHAT their pants and need a clean up in aisle 1.

I know people were shorting all week long into that jobs report number. I think I smell a doo-doo

Sep 06 03:44 PM

[J. B. Wulff:]

Even the best horse has to stop for water once in awhile. The market is an indicator of far too many things to ever enable a reliable prediction. Still, as an indicator it has historic value. We have seen a crash not unlike the Great Depresson event. Governments have stepped in more boldly in their attempts to stabilize the global economy. The DJI did not return to the 1929 peak level until after WWII! That had to include some inflation. I cannot believe that the market's historic rising trend has resumed without corrections. According to an item floating around the net called IOUSA, our country's real deficit is some $57 Trillion. That's adding up Social Security and everything else that is an unfunded liability. The prudent investor will be careful. The age old wisdom is, "The market will fluctuate."

Sep 07 01:10 AM

[iNVestorUnrest:]

ok that's the funniest comment I've read in a long time!!


On Sep 06 03:44 PM Zekeko wrote:

> Can you invest in huggies? Proctor and Gamble or Kimberly Clark
> may be stocks to own cause me thinks Shorts SHAT their pants and
> need a clean up in aisle 1.
>
> I know people were shorting all week long into that jobs report number.
> I think I smell a doo-doo

Sep 14 08:59 PM

[Zekeko:]

Thanks but it's true. Look at this mkt! Nobody wants to buy into the move but they have to. Watch out as shorts rush in again close to 1100. If they get clobbered again that will make the mkt go to 1200. Shorts will SHAT their pants again. Usually SHORTS are contrarian thunkers. Not this time everyone thinks the mkt should dump. It's the most obvious trade out there to short the mkt and this why we keep rising.


On Sep 14 08:59 PM iNVestorUnrest wrote:

> ok that's the funniest comment I've read in a long time!!

Sep 17 12:09 AM

[Cecily S:]

Market is making real traders look foolish betting against it I'm scared because I can't trust it. Every instinct is telling people to back out before they run it down.

Sep 23 03:45 PM