Bottom Pickers, Rejoice: Opportunity Lies Next Year

From the latest Moody's analysis, I highlighted in black areas the approximate time period where the S&P 500 (SPY) index bottomed.

click to enlarge image

Considering where we are on the right of the graph, long term investors are best off waiting.

First we need default rates to spike. Notice both corporate default rate spikes here are pretty smooth on the way up, and likewise pretty smooth on the way down - not a terrible amount of room for false signals.

Assuming trends and history repeat, squinting the eye at this chart reveals a likely stock market bottom a year from now, assuming default rates spikes tend to take a year to a year and a half to play out.

Disclosure: Author has a short position in SPY

Comments

[curious cat:]

michael, i have no problem with the graph and the relationship, but is it possible that the defaults are going to be slowed or interrupted and the rate will not get higher, but stay level for a while? if the fed has access to this info, aren't their current actions going to affect the rate of defaults? maybe they can't stop them, but why can't they slow them down? isn't that what the market for securities is telling us now, that people believe their actions will be effective?

2008 Apr 06 10:29 AM

[steve west:]

the author is misguided. He is equating default rates to the stock market and he has 1. no idea when default rates will slow and 2 can not prove a direct correlation between default rates and market activity. Finally default rates and market rates are NEVER in sync.
the market is a leading indicator while corp. default rates are a lagging indicator - meaning that companies and homeowners default at capitulation stage - the market anticipates this and would correct 6 months early. the author is about one year off in his timing

2008 Apr 06 05:11 PM

[cyberman:]

So, Steve, if Krause is off by a year his long term investment advice to wait is off as well. By your account does it mean long term investors are already too late given the market's action foretelling the (coming spike in) defaults by a year as you suggest? (I realize you were not providing investment guidance based on this data)

2008 Apr 07 12:28 AM