Joseph Calhoun

The Gloom Talk from the Top Needs to Stop

To everyone making political comments here: I'm a libertarian. I don't like politicians of either party. They are all working for their own best interests, not ours. If you want to believe in a party, I suggest Mardi Gras.

To whoever said I could be optimistic because of the various bailouts: I opposed them all. The bailouts have prolonged this situation.

To those who say I'm cheerleading: I am trying to see the positive signs as they emerge. We know that the largest gains in bull markets (or bear market rallies) come at the beginning. If you don't catch somewhere near the bottom, you'll miss a big part of the move.

To whoever wants to ban short selling: Short sellers aren't the problem. They add liquidity to the market and provide information. In short, the short sellers were right.

To whoever says we live in a "corprotocracy": It's called fascism and both parties are the problem. Replacing fascism with socialism isn't the answer. You are right; we need to limit the power of government as the founders intended.

My main point in this article is that the debate isn't new. We've been here before and if the politicians will just let things run their course, we can get through this. We will get recovery not from the stimulus but from monetary policy. At some point in the future that will mean inflation, but at first it will mean real growth. Stimulus spending that is monetized will cause an increase in GDP. That's basically what happened in the Depression; it wasn't the increase in government spending, but the fact that the Fed monetized it that caused GDP to grow at 9.4% per year from '33 to '37. We will recover.

I don't write the headlines here and I wouldn't have chosen this one. The rhetoric is not helpful though. Sentiment plays a big part in markets and economies. I expect Obama to change his tune tonight. He needed to talk things down to get the stimulus package passed before the recovery started to happen on its own. Otherwise, he couldn't take credit for it. Now he'll turn into a cheerleader and as monetary policy gets us out of the hole, he'll claim credit. Underserved but that is politics.

I could be wrong and maybe we are headed for another depression, but obviously I don't think so. We'll see who's right, but I respond to what the market tells me, so I reserve the right to change my mind.

An Investor's Look at Early Cycle Indicators

A couple of quick points. In the past, the ISM has not had to return to expansion (over 50) for the market to make a bottom. It is enough for the index to bottom and start rising toward 50. I don't know if this is the bottom. It may be and it may not be. I certainly wouldn't invest based on one data point.

2001 is a somewhat special case. The ISM bottomed right after 9/11 and rebounded until May of 2003. The market rebounded right along with the ISM. The Dow moved from roughly 8000 to 10500. After the ISM peak in the spring of 2002, it fell back and bottomed in November 2002. The market moved in lockstep with the ISM. As I remember it, there was a lot of talk about a double dip recession at the time. The point is that the ISM bottoming was still a good coincident indicator.

One last point. In order for this to be a bottom for the market, the ISM will need to rise over the next few months. It isn't enough just to hit bottom. In the 1982 recession (the second half of the double dip recession of the early 80s) the ISM fell, hit bottom and just went sideways for a year. The market fell the entire time and the bull market didn't start until the ISM started rising in August 82.

Investor Sentiment and Market Returns: Now's the Time to Be Bold

I've used this indicator for years and what you really want to see is a market rally and the number of bulls staying low. That indicates that individual investors have given up. Bulls were down in the low 20s at the January lows but as the market rallied, bulls jumped quickly into the mid 30s. If we get a rally and the number of bulls stays in the 20s, the bottom is probably in.