Daily Investment Interpretations

January 13, 2010

2010-1-13:  The indices all climbed today almost as much as they declined yesterday. The NASDAQ Composite rose 25.59 points, (1.12%) to close at 2,307.90, the Dow gained 53.51 points (0.5%) to close at 10,680.77 and the S&P 500 closed up 9.46 points (-0.91%) to 1,145.68. Oil fell further to $79.87 a barrel. Gold added $9 to end at $1,138. The VIX subtracted 0.4 to close at 17.85.
    I mentioned yesterday that there will probably be at least one 10%-or-greater correction this year, and that it/they will have to be scary enough to cause enough professional money managers sleepless nights that they'll be willing to sell stocks at lower prices than their pre-correction levels. However, over the next few years, barring a severe "black swan" event, the world's economies will recover, and world stock markets will probably be higher than they are today. 
    Nearer-term, Todd Harrison points out that "individual investor exposure to stocks is the highest since October 2007 while exposure to cash is at levels last seen in August 2000". He observes that greed has replaced fear as the motif describing  current stock market psychology.
    Topstock Portfolios confirms that investor sentiment is at levels not seen since the fall of 2007. These markers are worrisome because they suggest that the fuel that has powered the current market rally has been expended.
    In August, 1982, after rising from 777 on the Dow (which was both a cyclical bear market bottom, and a super-bear market bottom), the Dow peaked at 1200 on June 25, 1983 (10½ months later). It then entered a greater-then-20% corrective phase that lasted until August, 1984, over a year later. We're approaching 10½ months from March 6, 2009. This kind of horrendous correction could happen again. Short-term, it looks to me as though a "buy" signal is still in effect, but a major correction could come at any time. And we are still in a roughly-16-year, super-bear- market half-cycle until 2014-to-2018. While I certainly respect the prognostications of Blackrock's chief investment officer, Bob Doll, there may be thrills, spills, and chills before we get where Mr. Doll anticipates that we're going, and I don't think my nervous system could stand another back-to-back downturn. Accordingly, I'm not going to get aggressive just yet.
    Meanwhile, China's FXI (see below) is continuing to fall, and is well below its 50-day moving average.