By Jeffrey Saut, Raymond James | 2 March 2009
According to the invaluable Bespoke Investment service, "Of the Russell 3000’s current components":
1) The average stock is down 53.16% during the bear market.
2) Just 4.13% of stocks in the index are up.
3) A whopping 59% of the stocks in the index are down more than 50%.
4) 7.3% of the stocks in the index are down 90%.
5) 125 stocks in the index are trading for under $1 per share.
6) Nearly half (46%) of the stocks in the index are trading for less than $10/ share.
Since the Russell 3000 and ValueLine indices are likely the best proxies for the average retail investor’s portfolio, is it any wonder participants are currently apoplectic which, combined with the housing horror and the job horror, has left consumer confidence plumbing all-time "lows?" Ditto, most of the indexes we follow are plumbing "lows" well below those last seen in 2002 and 2003, begging the question, "Are we about to experience another huge leg down in the major market averages; or, is this an "undercut low?"
In last Tuesday’s verbal strategy comments we spoke of veteran strategist Bob Farrell, who often spoke of "undercut lows" as being one of the better bottoming formations. For example, when the major averages trade below a previously well advertised stock market "low," causing participants to panic and sell e-v-e-r-y-t-h-i-n-g, such sequences often mark major tradable "lows." Clearly, we got an "undercut low" last week; and, we suggested that with such a breakdown if we could get a downside— I think I am going to be sick— type of trading hour, it might just "lock up" a tradable "low" for the equity markets.
Unfortunately, we never got such a "give up" hour in Tuesday’s session, and we subsequently had to leave to speak at various conferences and seminars. In Tuesday’s comments we also opined that a potential downside inflection might be near, providing we were not in crash mode, since our proprietary oversold indicator is about as oversold as it was at the November 2008 low. We further noted that we were getting "hate mail" for trying to stay somewhat constructive on stocks for various reasons.
Ladies and gentlemen, in my 38 years at this perch, such a string of "hate mail" has typically been associated with downside inflection points. Moreover, the 12-month Relative Strength Index (RSI) on the S&P 500 (SPX) is below 15. Since the 1930s, such a reading has only occurred six times and has almost always marked a bottom, even if only a short/intermediate-term bottom.
Also arguing for the potential of an "undercut low" (below the much-watched 741 basis the SPX) is the chart below that shows the uptrend line from the 1982 stock market "low," which connects the various lows since then, and currently resides somewhere between 700 and 714. Moreover, bear markets typically do not end until "the bear" has retraced more than 100% of the bull market that preceded it. Since the tactical, not secular, bull market began in October 2002 at 768, hereto this metric has been filled.
Additionally, the DJIA lost 11.7% in February, leaving its six-month losing skein at an eye-popping 39%. And, while not as long as the nine consecutive monthly declines into the May 1942 epochal bear market bottom (coincident with the Battle of the Coral Sea), it has certainly been more severe in terms of price. Obviously, the second largest stock market decline in history (~53%), the worsening economic news, and the housing debacle have caused consumer confidence to crumble (25.0 February vs. 37.4 January), while consumer expectations have sunk to their lowest level since December 1973 (27.4 February vs. 42.5 January), begging the question, "How much worse can things get?" Well, unless we are going into a stock market "crash," [[you mean what we have so far doesn't qualify!?!: normxxx]] with a concurrent depression, we don’t think the news backdrop can get a whole lot worse; and that over the next few quarters things might just get better.
In past missives we have posed the question, "What if, by flooding the system with money, creating [[hugely: normxxx]] negative real interest rates, reintermediation, and stabilizing the financial meltdown, Ben Bernanke is closer to fixing the economy than anyone currently thinks?" If so, what should precede a stock market rally would be a rally in corporate bonds, a rally in copper, a rally in TIPs (Treasury Inflation-Protected Securities), and a general rally in all reflation "plays" as the current pricing of extraordinary levels of deflation into stocks/Treasury Bonds fades. And, that is what has started to happen with copper rallying 7.9% last week, crude oil better by 15%, and unleaded gasoline surging 18.6%.
Energy is particularly interesting to us since we have maintained the belief that crude oil bottomed back in January in the low $30s. Current energy-centric names on the Analyst Current Favorites list include: Consol Energy (CNX/$27.25/Strong Buy); Continental Resources (CLR/$15.89/Strong Buy); Inergy (NRGY/$22.52/Strong Buy); and Transocean (RIG/$59.77/Strong Buy).
The call for this week: I am certain I will get more "hate mail" this week for trying to stay somewhat constructive on stocks and because I am leaving again to give a keynote address at Raymond James’ national conference, making it difficult to script anymore strategy "calls" for the week. That said, I will indeed try and do a call on Thursday morning. Nevertheless, we suggested last Tuesday that if the markets could get a "pornographic plunge" type of hour, with a concurrent "look" below 7000 on the DJIA, it might be sufficient to lock in a tradable low provided we are not in crash mode.
Regrettably, we never got that "I think I am going to be sick" type of hour. So we begin this week with the same strategy. And this morning the preopening futures are down hard again on negative comments from Warren Buffet, another AIG Gotcha (AIG/$0.42), and more HSBC horrors (HBC/$34.80). Meanwhile, there is a TD Sequential Buy Setup (aka, Tom DeMark) on a daily, weekly, and now monthly basis, which is interesting because the DeMark indicator measures "trend exhaustion." Consequently, we are attempting to focus on what could go right for the equity markets and the economy.
Click Here, or on the image, to see a larger, undistorted image.
ߧ
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
No comments:
Post a Comment