Roger I. McNamara's  Instablog

The following is set forth not without a measure of embarrassment, but it is necessary under the circumstances.  Medicine is most often unpleasant on the way down, but if used properly strengthening in the longer term.

Accordingly, some may recall that approximately one month ago --- it was Monday November 8 --- I occupied this space with an essay proclaiming that a stock market top of some consequence had been reached the previous Friday, when the S&P 500 took out the April highs to finish the day and trading week just shy of 1226.  Even more humiliating is the additional commentary in that piece to the effect of a test of 1100 or thereabouts, a 10% shaving had such a drop unfolded.

Under no circumstances did I foresee a modus vivendi struck between the Administration and incumbent Congress on personal, corporate and estate marginal Federal income tax rates.  Mr. Obama campaigned both forcefully and effectively in 2008 on numerous topics --- none more so than two pillars of the then outgoing Bush Administration: a bilateral trade pact with South Korea and the schedule of income tax rates enacted in the 2004-06 time frame.  Now each has come to pass, and each the result of, among other things, exertions of Mr. Obama and his Administration.

Permit me to suggest setting aside --- assuming that to be ever possible --- the immediately surrounding politics as to whether or not Mr. Obama can muster enough Congressional votes among his own party to continue the tax advantages for another two years beginning January 1 upcoming.  The agreements he has reached with the leaders of South Korea and Republican members of the United States Congress are --- here I must pause to breathe slowly and deeply --- unequivocally bullish for U.S. common stock prices. Even if rejected by either of the full houses both the free-trade agreement and tax extensions will be overwhelmingly enacted in the next Congressional session.  It is even conceivable that the tax code revisions will be made permanent come 2012-2013, but there remains plenty of time and opportunity to churn through that appealing possibility.  Even should end of year tax selling mesh with a host of other forces beyond my capacity to imagine to apply a lid on the remaining weeks of this year, 2011 figures to arouse those spirits capable of rewarding the longs while subtracting net worth from the shorts. Picture the S&P scraping 1450-1500 my mid Summer, which is to say plus 20% or so from current and within eyesight of the 2007 double top.   Most of today's publicly available consensus calls on next year economic growth are unduly tepid, destined for upward revisions as events unfold.      

Along with it, an ongoing markdown in bond prices.  With little fanfare the redemption yield on 10 Year area Treasury notes as already punched through and over 3%, whereas not long ago numbers like 2.40 - 2.50 carried the day.  I believe this process will continue until a zone of 3.75 to 4.00 yield-to-maturity has been reached.  In the money market a resurgent economy should eventually notify Mr. Bernanke and Co. that 25 basis point rates are accomplishing nothing constructive, enabling them to rise to a more sober minded and mature range of 2.5-3.0%.    



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Some readers may be kind enough to recall a few essays I posted in this space toward the end of September --- Markets are Always Right, Sep 20; Fun With Numbers, Sep 27 --- each concluding with the guess that stock prices would continue their climb up the scales, for index tracking perhaps to 1210-1230 basis S&P 500.   As of Friday November 5, here we are.  Now the pressure is on.

Not on me, mind you, but I suspect it will be soon on stock prices.  The central point, it seems to me, is that the 17-22% lift from the late August lows (SPX, NDQ, respectively) is best not construed as the onset of a new and extended bull market.  Rather I believe the U.S. market --- again using the S&P 500 for easy reference --- remains in a long term trading range whose boundaries will continue to be set around 1000-1050 when all seems bleak and hopeless, 1220-1240 when the stars sparkle most brightly.  Those wiser than I have already offered public commentary on the proper interpretation of both last Tuesday's mid-term political sweepstakes and the Fed's QE2 specifications released a few days later.  It was in some anticipatory combination of either or both of these that got the bull market juices flowing.  Now what?

Another trip wire is destined to be sentiment, which as pointed out in today's edition by Michael Santoli over at Barron's has draped itself in the glow of individual and institutional investor enthusiasm.  It may all by itself prove insufficient to topple the current price level, but it for certain will not serve as a springboard to another launch.  A few other contrasts between now and late August are arresting, if not revealing.  At its closing low of 2114 the Nasdaq Composite needed to stretch its neck to look up at a 7% dive below its then 200 day moving average, along with its 14-16% descent below the 52 week high.  It faces this morning's opening no less than 11.7% above that moving average, and of course Friday marked a new 52 week high.  Similarly with the S&P 500:  late August 6% under its moving long term average, today 9% over it.  The Index stood 14% or so beneath its 52 week high back then, while joining its brethren in establishing a new one year best late last week.  Meanwhile daily turnover, though energized a little by a late week spurt, continues its overall downward vector in evidence now for at least the last six months.

Admittedly the SPX is priced less than 14 Times plausible earnings estimates for the upcoming 12-16 months, surely not excessive in any historical context.  It remains to be seen if the estimates materialize, along with the public's extended tolerance of a sub 2% dividend yield.  Mr. Bernanke's pushing and shoving notwithstanding, my belief is that investors should get set for a rise in domestic interest rates across the maturity spectrum, 100-200 basis points along the front end, a little less from intermediate term on out.  But that is matter for another essay, which I promise is not too distant in the offing.      

The magnitude of the coming stock price down slope?  Nothing earth shattering or record setting, but why don't we set the initial marker down roughly 10% from Friday's (Nov 5) windup, enough to return the S&P 500 to the neighborhood of 1,100 vigorously pursued by the Nasdaq to an address beginning with 2,300.  When reached we can --- and should --- take it from there.   

Disclosure: None

Decades ago a gentleman considerably wiser --- and far wealthier --- than I was at the time or likely ever will be advised me that Figures Lie and Liars Figure.  So it is with trepidation that on this platform I venture another essay devoted to equity markets and related averages.  But stock markets and whatever impact they deliver to items such as the National psyche and probable election outcomes are measured with numbers.  Accordingly:

Roughly three months ago heavy doses of attention were focused on the "Death Cross" or "Double Cross" --- an event in which 50 day moving averages touched and fell through their 200 day cousins. Prior occasions could unquestionably be seen as triggers to sustained bear markets, and it certainly looked for all the World as though trading patterns of late June into much of July carried the stamp of deeper and more serious downturns immediately ahead.  The twin crossings  befell the Dow Industrials, S&P 500 and Nasdaq Composite on different days, but they were compressed between closing trades of July 1 through July 8.  By way of contrast between then and now (close of Friday, September 24)
                                                                                                                YTD
                       Spot Close   50 Day MA   % +/-    200 Day MA   % +/-    % Chg
     DJIA - Then  10,138.99    10,350.11  ( 2.04)     10,363.19    ( 2.16)   ( 2.77)
     DJIA -   Now  10,860.26    10,414.32    4.28       10,464.98      3.78      4.14
 
Percent change for the period:  7.11

                                                                                                                YTD
                        Spot Close   50 Day MA   % +/-     200 Day MA   % +/-   % Chg
     SPX - Then    1,027.37     1,111.32   ( 7.55)       1,112.22   ( 7.63)  ( 7.87)
     SPX -   Now    1,148.67     1,099.91     4.43         1,117.17    2.80      3.01

Percent change for the period:  11.8

                                                                                                                     YTD
                          Spot Close    50 Day MA    % +/-    200 Day MA    % +/-   % Chg
      NDQ - Then    2,093.88      2,250.54    ( 6.96)      2,252.66      ( 7.05)   ( 7.72)
      NDQ -   Now    2,381.22      2,239.45      6.33        2,280.69        4.41      4.94

Percent change for the period:  13.7

Assuming the foregoing are of any interest to any reader, thoughtful observers will ask the truly important question:  what next?  For most of the last year it has seemed to me that reliance upon historical patterns will prove less useful in navigating the current pass than has on occasion time been true.  (The "on occasion" qualifier is in deference to survivors, if any, of Long Term Capital Management, who could offer an in depth seminar on the traps awaiting those placing financial market bets based on relationships and correlations of yore). The "Then" numerical summaries printed above were traced in an atmosphere dominated by "double dips" for National output and extended bear markets for its common stocks.  No proof or insurance can be submitted that the bears of last Summer will not eventually be ratified by events.  For now I prefer to stick with what I posted here a few weeks ago:  the stock rally looks suspicious to me predicated mostly on declining daily volumes (turnover), but the short covering is sufficiently intense that the ride may continue to be enjoyed up to a S&P 500 level of 1200-1220.       




Disclosure: None