Markets Unplugged

There is a lot of speculation at present that we have seen the bottom of this bear market, and because the markets are forward looking, even though the news is terrible we are going to see a rebound any time soon. Is this the case? Are we really at the bottom? Let’s take a look at some key fundamental and technical data.

Last week we saw the S&P500 undercut a key resistance level (838) hitting a low of 818, and then staged a dramatic rebound hitting an intra-day high of 913, which promptly faltered the next day, to close at 873. The volatility in the markets at present is extreme with the S&P500 moving around 10% intra-day. The fundamentals of the US, and world economy are terrible, at best, so the most likely explanation for the rebound on Thursday is that there were a lot of triggers set to go off if the key resistance level of 838 on the S&P500 was breached.

Since most traders think alike – an obvious place to put a buy order would be somewhere below the previous low of 845 set on the 27th October. As I have said in my previous posting, the 838 level is a key resistance area, marking the 50% Fib retracement of the 1982-2007 bull market, but it has more significance than that, it also marks the low set in March 10 2003, at the point at which the tech-wreck bear market of 2000-2002 bottomed out before staging a dramatic recovery.

The fundamentals of the US economy look appalling, with umemployment over 6% and expected to rise to 9-10% in 2009, GDP growth close to 0% and expected to turn negative in 2009, and US house prices are around 15% from their peak and falling rapidly, with the US consumer stretched to breaking point. There is not one single asset class (if you don’t count Treasuries) that is rising, with stocks, commodities and housing all in a tail-spin.

Still, the optimists are saying, that we are at the bottom of the market, that when all the news turns negative, when sentiment is at an all-time low, that is when the market turns upwards, as the market is forward looking. But there is a key difference between this market today, and the market we saw after the dot-com bust, or even the early 90′s recession. In fact the only other time that the market has behaved as it is today, is the Great Crash of 1929-1932. The key difference between now and 2002 is – there is no housing bubble for people to jump on to rescue the consumer and generate additional spending.

We are now seeing the downside of years and years of excess leverage and debt being unwound. In fact there is no bubble in anything right now, no easy bull market for the public to jump on and ride to pull the market out of it’s downward slide. The reverse wealth-effect of falling house prices is going to be a huge pyschological effect on the consumer, forcing people to tighten their belts and change their spending habits.

Since the consumer has not quite woken up to that fact yet (look at the increase in credit card debt since mortgage-equity-withdrawals were taken off the market), this adjustment is painful and is going to take a number of years. I am not ruling out a rebound in stocks, in fact the market is due a rebound having fallen so far so fast, but this will be nothing other than a bear market rally, which when it falters will probably plunge lower than the current lows. We could see this rebound any time in the next 6 months. I am expecting the market to fall another 20-30% from it’s current levels by the end of 2009. It’s going to be a wild ride though, hang onto your seats!!