800 to hold on the S&P
Filed Under: Hot Fudge
According to the median estimate in a poll taken by the National Association for Business Economics (NABE), the U.S. is said to have entered into a recession that will persist into next year, and various other world economies would tail into the recession. It is said that after growing 1.4 percent this year, the U.S. will contract 0.2 percent in 2009. This report coming from the NABE with 96% of the survey respondents, admitting the US is now in a recession, which should be obvious to anyone given that the stock market is down about 45% so far. Also as a part of today’s headlines, we see manufacturing contracting, and the New York Fed’s general economic index is recorded to have fallen 25.4 points below, representing the lowest since data recording began in 2001.
The market is down more than 45% currently, and Friday witnessed another failed intra day rally. Natural human psychology makes one believe that with every steep drop in the market, prices begin to look more attractive. I’m sure traders/investors both have had this feeling for the past 6 months now. However this particular time, I get the sense that this is for real. Prices have certainly come down a whole lot, and stocks are oversold, the price-earnings ratio on the S&P is down to about 12. I am getting more and more convinced that “the bottom” is in sight.
Economist have finally accepted the US to be in a recession, and have said it has been in one for almost a year now, stock prices are really cheap now. While cheap stock prices in the form of low P/E ratio are certainly not an accurate indicator for stock market bottoms, I would like to consider a few others that may make up for some psychological argument and some technical also:
New VIX High: On October 24 the VIX made a new high, crossing the 89% mark and has since then fallen, in the rise of the volatility seen in the past trading week, the VIX is rising again, however the region between 70% and 80% offers a strong resistance for the VIX, and I would expect the VIX to trade in between this range for the next couple of weeks, if not months, as the market solidifies its bottom. Though there may be extreme unease in the market in the days to come I believe we’ve seen the height of this on October 24.
Feeble Hands throw in the towel, and Big Money too: Just like when the average Joe starts talking about a high flying stock or commodity, one can begin to believe that the stock or commodity is overbought and would likely crash, an example being the case of the dot com bubble, where Mike my barber talked about wanting to launch a web magazine for different hair cuts and clippers. I believe the same logic can be applied vise versa. Weak hands had given up on the market about 6 months back, but when the crème de la crème of money begins to throw in the towel also, we get a sense that things are rounding up. The Financial Times reports that Hedge fund redemptions in September was about $43 billion, given that this is likely to cause a domino effect, further depressing prices and causing more fund withdrawal. Most hedge fund investors represent the top 1% of the US big money. There is the strong likelihood of more hedge fund liquidation in the coming weeks, but by December, most of it would have subsided.
Perma-Bears turning Bullish: Since the beginning of the downturn, the stock market has wiped out trillions of dollars of shareholder value, and I would believe that the market has reached a point where even the shorts would begin to agree that it would take some nerve to continually go short on the market. I am not discounting the possibility of the market going lower, but I’m not so convinced now, I believe many short sellers if anything are beginning to see the market as one full of bargains, and not over valued for a continued short.
Barry Ritholtz, of the Big Picture blog in his post here pointed out a few known bears that have flipped bullish in the past couple of weeks.
When folks who find a short even in a bull market begin to say for themselves that the market is looking bullish, regular bulls should begin to see the market as bullish also.
Bad news is not so bad: The past week produced some of the scariest headlines, though the stock market’s week’s close was down about 5%, not the greatest, at this point the market seems not to be trading on the news. The news of Japan’s recession and the US recession was released, and there’s a lot of other economic report that is scheduled for release this week. The market is not likely to be optimistic about any of the reports due this week, and more than likely has priced in the effects of any negative economic gauge. We are at a time when a 100 to 200 point decline in the Dow is not seen as an extraordinary drop, news of a US recession is not so much of a big deal, and it’s likely this would be the reaction towards the upcoming economic reports.
2002 lows: In 2002 the S&P saw a low of 768, the October 2008 low is 818, and that is 50 points above the 2002 low. The market is likely to test this October low again, haven attempted to test twice already. If it breaks, I would expect the 2002 lows to hold firstly as a technical support, secondly the resistance between 70% and 80% in the VIX, and finally because of the anticipated fear of investors that there is a likelihood that the market would dip below the 768 low. This fear would drive many to exit the market before a retest of the October lows. This will make the 768 level hold as a strong technical support to the market.
38 % fib Retracement: Another case for technical analysis is what a friend of mind pointed out here. The Dow is at a 38% Fibonacci retracement from the 1900s to now. That is a pretty strong support for the market, and the damage that would be done if the market falls below that would be severe. However I’m inclined to believe that this level would hold in the market
My final thoughts are that the S&P would hold somewhere around the 768 to 800 level, and we are likely to witness violent upswings and downs in the next couple weeks or months as more exit the market, and more continue to bargain hunt. The current lows on crude oil would definitely jump start some more industrial activity, the credit issue seems to be easing, judging by the falling Libor-OIS spread which is a gauge of the scarcity of cash. The Fed and Treasury are doing all they can do to “inject liquidity” and make cash available (not judging that it’s the right thing to do) to avoid a complete meltdown, prices have definitely come down across board, and the cost of living is not longer as high, which would add a little to the spending power of American consumers. I also strongly believe that the government would come up with a program for GM, and would certainly not allow GM to fail
I want to clearly sate that this is not a call for a bounce back in the economy, which it may or may not be, but rather a case for less dramatic declines in the equity market, and the beginning of some stability. The US economy is dependent on other world economies which are far behind in the phase of slowdown the US has gone through, but I expect things to begin to stabilize, and while the world is “recessing” the US will begin to stabilize, and the next couple of months may be characterized by 20% rallies and 15% declines, then 18% rallies and 25 % decline, but I don’t expect to see S&P at 600. However, if the market does fall heavily again, and like a friend of mine said “in the event that 1929 does happen again, if history is anything to go by, we already know that all will be fine eventually”
I probably sound nuts, but if I’m wrong so be it! But I strongly believe I’m correct here.
Discuss this post at the futurescafé forum
Recent Posts:
Iran’s barter trade, a pattern to come
