Stocks: Where We Go From Here
By Jim Welsh | September 24, 2008 | 3:36 PM | 1 Comment
In my January 21, 2008 letter, I forecast that the S&P could decline to 1175. As I explained then, “This technical estimate is based on the chart of the S&P and how it has traded over the last year. In March 2007, the S&P made a low at 1364, and a low of 1370 in August 2007. The top in October was 1576. The difference between the high in October and the two lows in 2007 is 200 points. This suggests the S&P could fall as far below the 1370 area as it was above it in October 2007.” In the February letter I noted that the 1175 level “marks the halfway point between the low in 2002 at 775, and the October 2007 high at 1575. Bear markets frequently retrace half of the preceding bull market.”
Now that the S&P has traded down to 1135, and we have The Plan waiting in the wings, it is worth asking if the bear market is over. Given the poor outlook for the economy and credit creation, I don’t think this cyclical bear market is over. The bear market of 2000-2003, lasted 30 months, if one marks the bottom as October 2002, or 36 months if the March 2003 low is used. This suggests the current cyclical bear market could last until March-September of 2010. In addition, there has been a 16-17 year pattern in the stock market that dates back to 1949. Between 1949 and 1966 stocks rose in a secular bull market, fell in a bear market between 1966 and 1982 and zoomed between 1982 and early 2000. I believe a secular bear market commenced in 2000 that could last until 2016.
I recommended cutting exposure in July 2007 and October 2007, when the S&P was 1525-1550, and in May when the S&P was 1420-1440. In July, I suggested a rally to 1310-1325 would present another opportunity to sell. There is a good chance the market will rally in coming weeks. The ban of short selling on 800 stocks until October 2 will remove some selling pressure. The passage of some version of The Plan should bring in some buying and cause selling pressure to abate. My guess is that the S&P could climb to 1280-1320, and provide another opportunity to sell. I would recommend a modest short position if the S&P moves above 1313.
Last month I recommended a small trading position in the China ETF (NYSE: FXI) below $38.00, the Emerging Market ETF (NYSE: EEM) below $38.00, and the oil stock ETF (NYSE: XLE)) below $69.00. Given the market environment, trading stops should be used. FXI $34.00, EEM $34.45, XLE $65.50.
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