The S&P 500 topped on 10/09/07 at 1565 and bottomed on 03/09/09 at 676. We have had the biggest move upward of the Bear market retracing almost half of the decline. The S&P 500 is up about 48% since the low in March. The 64 (add as many zeros as you like) dollar question now becomes, has this been a Bull market rally or a Bear market rally.
There will not be complete agreement on the answer until we surpass the previous high or low. Just as economists can’t say for sure that we are in or out of a recession until long after the fact, a similar situation exists in the stock market. It could easily be a year or two before we have a definitive answer. Regaining 50% of a decline is a relatively normal occurrence in a bear market, so you can have a rally the size of the one we have experienced over the last eight months and still remain in a Bear market. The first approach to the 50% retracement mark is a logical point for a sell off, since it’s somewhat of a reaction level to begin with and if we were to go too much higher from here, the weight of the evidence would start to accrue to the bulls, and the stock market usually takes every opportunity to keep the majority of participants guessing. I think it would take a powerful bull to blow through the 50% level and, as most of us know, the economy is still weasing. I think, for the market to remain at these levels or move much higher, the economic numbers are going to have to improve more than they have to date.
We have dodged the depression bullet but the recession, while technically it has probably ended, lingers. The recovery will be weak at best. We don’t quite know yet whether the cash for clunkers program was the spark that rekindled the economy or was just a shot of alcohol on the fire. Unemployment is high and will probably remain high for a while yet. I doubt that the consumer is going to come rushing back to the mall for a spending spree. More people are going to be tight fisted for a longer period of time than you would normally see after a recession. The worse the downturn, the more cautious the consumer will be on the other side. If the consumer doesn’t show up, that will reduce China’s growth rate and so on.
It’s been a mistake to bet against this market for the last 8 months. A long term chart for perspective. This is the S&P 500 from the ’82 low.
The market has been stronger than most people thought, climbing a wall of worry, being that the number of skeptics was sizable. The sideline money that’s been waiting for a pull back to get long, has had to pay up to get in, fueling the rally. This is the NYSE Composite, which is a broader market index.
I think it has been a Bull market rally. At this point, in order to take out the March lows and prove the Bears right, I’d say we would have to see the implosion of at least two major corporations or something on that order of magnitude. If GM were to require more cash than the administration and or Congress were willing to come up with and one of the big banks were to default on some debt obligations, we could see the market tank again. I think that’s unlikely, but it is certainly within the realm of possibility.
However, the rally in the stock market looks like it’s getting tired to me. We could go a bit higher from here but it would probably be a mistake to chase the market now. The technical indicators suggest, at a minimum, we are over bought, but we are also at the primary downtrend line on the S&P 500 which is another good reason we could see a sell off. This is the S&P500 from the high in ’07.
The most likely scenario going forward is a trading range, until the unemployment rate starts to come down. The banksters and the hedgehogs will run the market up and then drive it back down again. As of right now my best guess is a trading range bounded by the 700 – 800 neighborhood on the low side and 1100 – 1200 area on the high side.
If we are at or near an intermediate term top and you have the ability to move to the sidelines and avoid the decline, it will probably be worthwhile and you might want to consider doing so now. So buy low, sell high, and remember the trend is your friend and pigs get slaughtered.