Daily Investment Interpretations

November 7, 2008

Caveat:  I want to emphasize that I absolutely don't know what the stock market is going to do next. I read what I can and after that, it's a judgment call. 

2008-11-7:  The stock market indices rose today, climbing 2 % to 3%. Better yet, much of this rise took place in the last five minutes of the trading day, implying strong end-of-week buying interest. The NASDAQ Composite gained 38.7 points (2.41%) to close at 1,647, the Dow added 248 points (2.85%) to end at 8,944, and the S&P increased 26.11 points (2.91%) to hit 931. Oil was essentially unchanged for the day at $61, and gold added $2.00 to end at $734.20. The VIX slumped to 56.1.
    This certainly wasn't because there was good news today. Au contraire, the unemployment rate, running 6.1% in September, and expected to hit 6.3% in October, actually clocked in at 6.5%... worse than  its worst reading in the 2001-2002 recession, and the worst since 1994. And this is only the beginning, folks. Today, top hedge fund managers used words like "funereal", "shock and embarrassment", "carnage", and "rubble", and on Oct. 16th, one of them wrote, "In the third stage of a bear market, everyone agrees things can only get worse. There's no doubt in my mind that the bear market reached the third stage last week." (the week of the October 10th bear market low).
    In the meantime, Todd Harrison reaffirmed today (November 7th) his conclusion that the stock markets have seen their 2008 lows (on October 10th). Then tonight, the Cabot newsletter is advising that the Economic Cycle Research Institute's Weekly Leading Index has hit its lowest level on record, dating back to 1949. The implication is that the forecast two to three months out calls for levels of distress not seen since World War II. Basically, the economy is falling off a cliff. 
    Paradoxically, the Cabot newsletter thinks that the stock market may be building a bottom here, since it's looking out six months or so into the future. The newsletter says that in order for this is to happen, the market indices will have to retest their bear market lows, typically five to eight weeks after those lows occur. Right now, on November 7th, we're sitting exactly four weeks out from the October 10th lows, so by or before the 5th of December, the markets should revisit their October 10th lows. If they pass that test and turn up... if the S&P holds above about 850, and the Dow doesn't go below 8,000... there's a good chance that we've seen the worst in this bear  market (though not in the economy; that will take another six months). So what should we do right now? In terms of playing this rally, nothing. If the market retests its October 10th lows and passes them, that will be the time to buy. If it retests its October 10th lows and fails them, then we'll be glad we didn't buy anything now, and we might (or might not) want to cash in some of the equities we have left, since new lows will be in the offing. If the markets don't retest their October lows, then when they peak later this year or early next year, that will be a signal to sell at the intermediate top, since the bottoming process necessary for a true recovery won't have taken place.
    The Cabot newsletter is quick to state that even if the markets pass a retest, it may still signify only an intermediate peak, and they cite the two-and-a-half month rise in April and May as an example of what we might expect.
    I have an uneasy feeling that this may be more of an economic storm than some may anticipate, but maybe federal stimulus plans can forestall this downward spiral. But it would seem as though it will take a long time for the world to pay off its debts and then, at least for the United States, to rebuild its pool of investment capital.
    Here is a good article by Kevin Depew: Five Things You Need to Know: Why Not Hyperinflation?
    GM announced today that it had burned through $2.5 billion of its savings last quarter, and that it might face bankruptcy next spring without a federal bailout. "Brother, can you spare a billion or two?"