Daily Investment Interpretations

October 28, 2008

2008-10-28: Wonders never cease! Bounding 885.39 (10.88%) in one day to 9,065.12, the Dow has bounced dramatically off its October 10 lows... its second largest point jump in stock market history (the sixth largest percentage-wise) after its 925-point, 10.9% hike on October 13th. The NASDAQ and the S&P 500 have followed suit in the face of nearly universal agreement that the stock market could only go lower. The NASDAQ has sprung up 143.57 points (9.53%) to 1,649.47, and the S&P has vaulted 91.59 (10.79%) to 940.51. The VIX has fallen from yesterday's closing value of about 80 to today's close at about 67. Gold and oil dropped only slightly in price today.
    This is a reminder of how difficult it is to try to time the stock market, and how the market defies the consensus. The stock market may well turn around and plunge lower from here... I personally suspect this may happen... but when I wrote, "Look out below!", I certainly didn't expect the indices to explode upward like this the next day. And of course, the stock markets don't do what most people expect them to do.
    In We are expecting the worst, says Cantor Fitzgerald's Pado, Mr Pado points out that at this time of year, companies are trying to look as bad as they can so that when they report year-end results, they'll shine by comparison. Also, the housing inventory data looks worse than it really should because banks have turned to multiple listing services to get rid of the houses on which they have foreclosed as soon as they can. This both  increases the number of listings of the homes and reduces the prices of the homes as banks race to dodge the costs and hassles of untenanted-home ownership.
    In A treacherous backdrop for bulls and bears, Michael Ashbaugh notes that all three indices are pointing down. He mentions, however, that although the NASDAQ Composite has broken below its October 10th intra-day low, neither the Dow nor the S&P 500 has done so, and had failed to penetrate that low on the 16th and again on the 22nd, which is what makes it a treacherous call that could go either way. And now, of course, the indices have rebounded strongly again. (One of the interesting questions will be that of whether today has given us a second greater-than-9-to-1 up day in the markets in 11 days.)
    On  Monday October 13th, when we had the fifth biggest up-day in stock market history, it was followed by a basically unchanged day, on Tuesday and then a fall on Wednesday below Monday's opening. We'll see what happens this time. We're due for a bear-market rally, but there's general agreement that there's too much optimism (the VIX notwithstanding) to permit today's surge to be the start of a new multi-year bull market. My notion is that with layoffs on the rise, with adjustable-rate mortgages due to reset all next year, and with employment mainstays like Ford and General Motors staring into a chasm, we're in for more down markets. But it's also true that the stock market turns up four to six months before the economy hits bottom. The only thing I know to do is to play this pragmatically a day at a time.
    Today, I sold 100 shares of QLD (the Proshares Ultra NASDAQ 100 ETF) at a slight profit, along with 500 shares of General Steel, Inc. (at $3.30 a share). I did this to raise a little extra cash. I would have had about $330 in extra profits if I had kept the QLD until the end of the day, but there was no way of knowing first thing this morning that we would have a nearly 11% rise in the indices for the day. I also bought 25 shares of the Inverse Ultra Emerging Markets Exchange Traded Fund, EEV when it was on sale this afternoon, as a counterweight to my UUPIC Ultra Emerging Markets mutual fund.  
    Here are two scary articles:
Bank of England: Risks remain for financial system
Europe on the brink of currency crisis meltdown    
and a not-so-scary counterpoise: Mark Hulbert:: Analogies to Great Depression needlessly scary.  
    One important footnote to Mark Hulbert's citing of dividends to mitigate losses during the depression: corporations cut their dividends to by-far the lowest levels in history during the dot.com boom, and while they've risen somewhat over the past eight years, they're still far below Depression-era levels. (I don't know the current dividend yield on the S&P 500, but I'm going to guess that it might be in the 3%-to-4% range.)  
    Asian markets are up again tonight (they closed higher yesterday after falling earlier in the evening). Personally, I don't plan any special moves until we see a stock market pattern that looks a little more durably optimistic. There's still plenty of "upside potential" if the markets continue to percolate, but there's also a good chance of another bear market rally even if the markets do follow through tomorrow. (UUPIX is still down by a factor of 11 from last year's high. The Proshares Ultra NASDAQ 100 fund, QLD, is still down by a factor of almost 4 from last year's high.)