Daily Investment Interpretations

October 30, 2008

2008-10-30: Gross Domestic Product contracted at an average 0.3% rate in the July-through-September quarter. The classic definition of recession is two successive quarters of GDP contraction, so we won't have confirmation before January whether or not this contraction fits the classic definition of a recession, but given the ongoing decline in nearly every economic metric, it seems assured that we are, in fact, in a recession. Other data shows a further thawing of the current credit freeze and is credited with contributing to today's market advances. The NASDAQ advanced 41.31 (2.49%) today to 1,698.52, the Dow added 189.73 (2.11%) to close at 9,180.69, and the S&P rose 24 points (2.58%) to end the day at 954.09. The VIX fell from 66.99 to 63.69.
    Another important consideration is that, at least in the commodities markets, we're seeing dramatic deflation. Mark Hulbert has just called attention to this in Deflating prospect. for perspective on what's happening to the consumer: Beaten down, American consumers burrow deeper
    After contemplating the stock market's hills and valleys between 1929 and 1932, I've realized how difficult it would be to try to guess when to get back into the market. There were six bear market rallies (please see the chart in yesterday's discussion) as the market  worked its way down from its 1929 high of 381 to its 1932 low of 41 Fortunately, we don't have to do that. Cabot's China and Emerging Markets newsletter has had a sterling track record for the past few years, and has been reducing its subscribers' exposures to the stock market for the past year. It's presently recommending 100% cash. I'm going to depend upon it to tell me (and you) when to get back in the market. I'm also going to seek opportunities to go toward cash. I've begun this trek by selling 1,200 shares of UUPIX for $8.26 a share that I bought last week for $5.42 a share.  
    There's some slight reason to believe that a November rally might already have started. Two weeks ago, after the greatest single-day point rise in market history, the indices gave back their gains two days later. This time around, they rose a couple of percentage points today (two days after the second-greatest point gain in market history). The markets are overdue for a bear market rally. This could be the beginning, as described in this interview: 'November will be better than October' (audio). The speaker observes that bear market rallies generally retrace 1/3rd to 1/2 of  their down-leg, and generally last three weeks to three months. He projects, as a likely high-water mark, 10,000+ and maybe, 11,000+ on the Dow (1,000 to 2,000 points--11% to 22%--above the Dow's current close). (This would correspond to 1,050 to 1,150 for the S&P 500.) Three weeks from now would be November 18th, and three months from now would be January 18th. Fridays have recently been down days. so we may not see meaningful action until next week. If there is such a rally, it could be an ideal time to lighten up. Of course, it will seem at the time that the rally is just going to keep going, but stop-loss limits, and experts' advice should provide some advance warning of an intermediate top. It would also be wise to sell gradually as markets rise.
    To sum it up:
(1) You might not want to buy or sell until we have further confirmation that this market is going to rally further.
(2) If it does continue to rise, then it might be a good time to lighten up by selling (gradually) stocks or funds.   
    San Francisco Federal Reserve Chairperson Janet Yellen had this to say today about the economy: Fed's Yellen Says Recent Data on Economy `Deeply Worrisome' and Fed's Yellen: US economy contracting significantly. Ms. Yellen has been upbeat in her assessments in the past. 
    Another article points out that No one's safe from contraction
    American Express announced today that it will lay off 7,000 employees, or 10% of its work force, which is why most stock market seers are predicting that we're not on the threshold of another primary bull market. (There's also the fact that we're in a secular bear market, with a wild guess at an end-date of 2014 to 2016.)
    Tomorrow, I'll try to add advice from some of my other investment newsletters.
    I want to reiterate that there are ways to make back money faster than we lost it. UUPIX at a price of $8.26 a share is still down by a factor of nearly 9 from last year's high. Also, emerging markets may recover before, and more than, U. S. markets.