By Howard Gold | 14 March 2009
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Most believe we're getting pretty close to a market bottom, but we'll have to go through more pain before we get there. None thinks the current rally is for real. Shilling, a longtime Cassandra and publisher of "Insight," has warned about the housing and credit bubbles for years and repeatedly predicted that the current recession would be deep [[and would be deflationary, which it is, so far: normxxx]]. His 13 predictions for 2008 were right on the money.
Excess Housing
And guess what? He's still bearish on housing. Shilling estimates there's excess inventory of 2.4 million homes on the market and "it's taking a long time to work that [down.]" That's why home prices have a way to go before they bottom: He's looking for a peak-to-trough decline of 40% in housing prices nationwide. As of the fourth quarter, the 20-city Standard & Poor's/Case-Shiller home price index had fallen 27% from its high in 2006.
At the bottom, Shilling expects some 25 million borrowers will be underwater on their mortgages. That's half of all mortgages and one-third of all owned houses in the U.S. Similarly, he doesn't think the current recession will end until at least early 2010. That would make this the longest recession by far since World War II.
He thinks the market might actually bottom some time this summer at around 600 on the S&P 500— at 15 times estimated earnings of $40— six months or so before the economy does. But he doesn't see prosperity just around the corner. "It took about 30 years to build up the credit bubble," he says. "My guess is, five to ten years to unwind this." [[Which about takes us to the end of the secular Bear market which started in cy 2000.: normxxx]] "What it probably means," he explains, "is longer and deeper recessions and shorter recoveries— and reflecting that, shorter, less exuberant rallies and more frequent and deeper bear markets."
Short-Term Concerns
Options specialist Larry McMillan, president of McMillan Analysis Corp., typically looks at trading patterns over weeks and months rather than years. But he still doesn't like what he sees. "I don't see a bottom in this leg here," he says. "I find this market to be strangely calm. People have not panicked. All the pros are 'picking the bottom'."
That, he argues, means investors haven't capitulated yet, the true sign of a market bottom. McMillan has been cautious since late 2007, although he has traded in and out of rallies. He can't say where the ultimate bottom will be. "I don't have a target," he says. "I'm looking for a spike in volatility that washes this thing out."
He's waiting for the Chicago Board Options Exchange's volatility index, or VIX, to shoot up into the 60s from the 40s and 50s now, and then fall back. "That to me would be capitulation," he says. Until then, he advises being out of the market— or staying short.
Market Projections
Technical analyst Sandy Jadeja, chief market strategist for ODL Markets in London, did have a target: 6425 in the Dow Jones Industrial Average. On March 9, the Dow hit 6440 at one point before that massive Tuesday rally. He thinks that the following Wednesday's higher close for the Dow is a good sign for the short run. (The Dow was also up nicely the following Thursday morning on retail sales data that were slightly better than expected.) He's looking for a rally that would take the Dow back up to 8300.
But don't count on much more than that, he cautions.
He says 6400 is "a critical level going back to 1987, the 1930s and the 2002 lows." He expects it to be retested, and if the market can't hold that support level, then it could go a lot lower. He thinks the bear market could hit bottom in 2010 or even 2011 or 2012. "5300 is the most probable low," he says. But Fibonacci and Elliot Wave analysis— tools used by some technical analysts— may point toward 3700-3800 as the ultimate bottom. Ouch.
Less Gloomy
Another prominent technician isn't quite that gloomy. Dan Sullivan, who has published "The Chartist" newsletter for four decades and has beaten the market consistently over the last 25 years, according to the "Hulbert Financial Digest," advised clients to go 100% into cash as early as January 2008. He, too, is looking for a 15%-20% rally that would take us into the 800s on the S&P 500, but then he says we'll retest 676. "I think it's a bear-market rally, so I'm advising subscribers to sell into the rally [or stay on the sidelines]," he tells me.
Like Shilling, he expects to see a market bottom or new buy signal some time during the summer. But for now, he says, "this is not a good time to buy." That's my [Howard Gold's] take, too. Although the Dow and S&P have lost more than half their value— no doubt the lion's share of what we're going to see in this bear market— I think we have more to go on the down side in view of the knotty problems we face.
So, if you're young and saving for a distant retirement, this isn't a bad time to make regular contributions to a 401 (k) plan. But if you'll need that money sooner, I'd keep my powder dry, and wait for those who really got it right to change their minds. [[Not that there's much evidence of consistency among even the better market timers.: normxxx]]
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Normxxx
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