Wednesday, February 4, 2009

The Obama Bottom

There is an old Wall Street axiom that says, “So goes the month of January, so goes the year.” Then there is another forecasting methodology that says, “If the winner of the Super Bowl is a National Conference team or was an original National Conference team then the market will be up for the year.” The last forecasting model is that each full week of January represents each of the quarters of the coming year and the total return that can be expected for each quarter.

The month of January saw just under an 11% decline in the S&P 500. We started off the year with a great deal of hope and the extension of the rally that started in December 2008. As we got closer to the new administration being sworn in the market continued to decline. In fact the day of the inauguration the market set a new low for the year of 805 on the S&P 500. The “Obama Low” of 805 seems to be holding after several tests so far this year.

I have noticed that each time we sell off, the bottom is a higher bottom than the previous bottom. The process of higher lows is another sign of a possible market bottom or at least additional base building. There is no question that “Bear” markets can and do have powerful rallies. I do believe, as I have indicated before, that I’m expecting a blow off bear market rally in the first quarter.

On a historical basis the stock market leads the recovery in the economy. This big rally that I believe is coming, could be devastating to investors who get sucked in and buy on the rally and then watch the markets fall back to at least 805 or retest the previous low on the S&P 500 around 7500. I will use the rally if it happens to raise additional cash for redeployment later. Unless I can find better income producing investments I will not sell income producing assets.

The bond market spread between 90-Day T-Bills and 30-year Treasury bonds have widened substantially. When the correction comes after the rally, I would expect to see longer-term Treasuries fall in yield and increase in price as demand for them comes based on fear of falling stock prices. The problem is that even at these levels yields on Treasuries don’t look that attractive to purchase.

"How big could the rally be?" you ask. I think we could see a 15% to 20% move up from the 805 level in the S&P 500. If I'm correct this upward move would take us to the 950 to 975 level. There is even the outside chance of 1,000 on the S&P 500. The new Secretary of the Treasury has an announcement next week about the administration's approach to the financial crisis. His announcement could be the catalyst to move the markets.

Dan Perkins

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