SeriousBull

Is it time to bottom fish?

Tags: Dow Jones + investing + Market + S&P500 + Stocks

The first two weeks of 2008 produced the poorest market returns since 1982.  Yet today the market made a strong rally on news of IBM’s above-average earnings that sharply beat analysts’ expectations. What does this portend for the market and will this rally now continue? 

Unfortunately No, because nothing fundamental has changed to warrant a stock market rally.  Our view is that the economy is substantially weaker than in 2006 and so that the market should decline to 2006 levels. This means a decline in the S&P500 from 1401 to the 1250 level and a Dow drop from the 12,778 level to 10,500-11,000. 

As for arguments that there are too many pessimists and that’s a bullish signal, or that the weak dollar will mean strong US exports offsetting domestic stagnation, or that financials have bottomed out, SB argues that bad fundamentals will trump conjecture and slower US domestic growth combined with greater unemployment will translate into reduced earnings and lower share prices. Financials have more write-offs to make as housing prices need to decline an additional 10-15% to attract buyers and reduce inventories now topping 2 million excess units. The only mitigating force may be a short term tax stimulus combined with additional rate cuts, but these will likely only modestly boost consumer spending. Moreover, if we get some kind of stimulus package, we expect stagflation to only worsen and Gold to blow past the $1000 price level.  We say this because looking at twenty year market cycles over the last 100 years, the probability is for a flat to down market which so far in the 2000’s is proving to be the trend.

Our advice to investors is to play defense and use Risk management techniques to profit in this market.  This is no time for buy and hold strategies. Losses can be too great causing emotional selling and debilitating loss. Instead invest pro actively to find opportunities in sectors while all the time hedging your bets to build in flexibility and marginal profit. One such strategy which we have used YTD is to be long the S&P500 and short the Financials. There’s always opportunities but a market like this one requires strategy and discipline. It’s not a market for the passive or short term minded investor.

January 14, 2008 - Markets