Can the Dow and S&P Last 15 Rounds? 25 comments
-
Font Size:
-
Print
- TweetThis
If the first 2 weeks of trading are any indication, these next 6 rounds (two quarters) will be a very bruising indeed, with steeper drops to come. Using other analogies, the ping pong ball still has not reached the bottom of the stairwell. And though she is now on stage, the fat lady has not yet sung.
Back in October, we cautioned about 4 Horsemen of the Apocalypse appearing on the horizon, posing a threat to our stock market. They were Fed Policy, Economic Data, Corporate Quarterly & Annual Reports, and Political Events. Well, they each have arrived - - - and from all appearances, they will not soon depart. In general, stock markets are fed by 4 forces: economic growth - profit growth - interest rates - inflation.
Regardless of whether these market factors are viewed in the lens of a past, present, or future tense, we here in the U.S. are facing the worst of all scenarios - - - the economy and profits are slowing, not growing, while inflation is rising, and interest rates are soon to follow. (There is little room for Mr. Bernanke to do any cutting, and sooner or later the dollar does have to be defended.)
Recent statistics have been miserable to read: Dow and S&P now in bear territory;
Fannie Mae (FNM) and Freddie Mac (FRE) at their lowest prices since 1992; weekly jobless claims topping 400,000 (another sign of economic weakness); Wachovia (WB), second-largest chain of U.S. banks, expecting a second quarter loss of $2.6 to $2.8 billion; General Motors (GM) fighting bankruptcy rumors.
We could fill more paragraphs with similar notes, but by now you have the picture.
Our economy is in deep doo-doo, is not likely to emerge soon, and there is more bad news to come. Continuing to cloud the future is the fact that our U.S. economic problems are now affecting other major world economies. This bout of global flu will have to run its course, and that means our trading partners in Europe and Asia will have to suffer. And much like the U.S., there will be no quick fixes for them either. As a famous econ professor put it, “economies are like ocean liners; their momentum prevents any quick change of course”.
We expect that before things turn around the Dow will have reached the 10,200 area.
A similar drop for the S&P would take that index down to the 1,100 range. Given no exogenous events like earthquakes, terror strikes, or missile launches to create a sudden drop, the best analogy remains the ping pong ball, bouncing down the stairwell.
Such an up and down scenario will present many opportunities for traders, and also for investors looking to average down on their holdings. Income seekers should investigate Canroys like Harvest Energy Trust (HTE) and Penn West (PWE). Value seekers should be looking at stocks like MV Oil Trust (MVO), Continental Resources (CLR) and Mariner Energy (ME).
More cautious investors should consider adding some UltraShort S&P500 ProShares ETF (SDS) on its drops. Obviously, you should do your own due diligence, and then consider using some technical indicators like Bollinger bands or the E-Zone System to find your best entry points - - - and especially those exit points if you are trading.
Disclosure: Author holds long positions in HTE, PWE, SDS, MVO.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Bill Gross
-
3
Tyler Durden
-
4
TraderMark
-
5
Peter Schiff
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 25 comments:
Remember to take your gold along.
For the first time in history (of this fiat money system) total bank credit in the USA is declining, link:
research.stlouisfed.or...
Actually this decline is more than it shows in the graph, I have seen a more recent version that shows a clear tipping point.
In the graph from the link you see total debt of the US commercial banks is about nine trillion, the US financial sector as a whole has over on gross domestic product of debt on herself. Link (see the one last column):
www.federalreserve.gov...
Actually it says 15945.7 billion US$ or 16 trillion and thus more than one GDP. When people start thinking about how this mountain of debt is going to be paid for, there is plenty of room for the stock indices to decline much further.
Just a little experiment of thought: Suppose there is a 5% interest level on this 16 trillion, that means yearly interest paid is 800 billion US$.
Of course a lot of that interest is from the fin sector to the fin sector, but in the end these interest payments work as a big tax on the entire sector.
Thx jegan ;-)
The CanRoys are stocks trading on the Nyse, it doesn't matter whether they are over/under valued or the Country of Origin. As the Tide goes out only special situations have a chance of rising.
With Financial Institutions facing the reality of their unmarketable assets, they will continue to dump. Some will hold out and pray, like Goldman, so later quarters will feel the pain again.
For now, I would think a sustainable bear rally will be in the offing after the TooTs have their heads handed to them again.
Oil may be near a top at this point but natural gas certainly is far from one..and most CanRoys are largely gas oriented. It really pays to listen to someone who actually knows something in this area.
Most of these canroys are hedged, some better than others.
I do think that HTE and PWE hedges are some of the best, and this will protect their divvys.
Just MVHO
PWE around 28 would be a decent entry point.
Most people here will push stocks they like and pan the ones they don't. It is human nature to do so.
I will do the same, but I like to look not only at fundamentals but Insider Activity and Technical Analysis. And I have even cut off my nose to spite my face because I felt everyone else was wrong and I alone was right.
As for PWE and all of its backers, I wish all of you to buy it and drive its price above $40 so I can get out at the level I was stupid enough to stay in.
Second, in this extremely volatile and fickle commodities market, it is impossible to count on the dividend rate staying high. The dividends will fluctuate along with the price of crude. When dividend cuts occur, as they must, investors will run like lemmings off the cliff and drastically cut the share price.
Third, no one knows what will happen as we get closer to the Can. tax gouge that is scheduled for 2011. It is impossible to tell when investors will start pulling out (if this is not already happening).
There are many uncertainties and it makes no sense to get a hefty dividend if it is all lost in share prices. Maybe when this very erratic and confused market stabilizes it will be possible to trust the trusts will provide a decent overall return. There is an old and mostly forgotten investing principle which still holds true for high yields like these: RISK=REWARD.