Some Market Thoughts As We Get Started

An ugly February employment report was all the bears needed to close out the first week of March on an incredibly negative note. For the week, the Dow was off 6.2%, the S&P 500 was down 7.0%, and even the venerable Nasdaq finished the week 6.1% lower. Finally the bulls had some relieve with some late buying on Friday which lifted the Dow and S&P 500 to a positive close. The 651,000 job losses while not as bad as it could have been, still shook the markets . Unemployment rose to 8.1% the highest level since the early 1980's. Apparently, we have seen 2.6 million job losses in just the past four months! That helps explain why the Dow and S&P 500 are already off 25% or so year-to-date!

Now going forward what do I think. Well it is likely impossible to time the markets consistently, but it is probably a whole lot less risky right now to be a buyer with the Dow down 8000 or so points from its October of 2007 high! Markets are very oversold and a snap back rally of some sort is likely to commence soon. Given the negativity out there right now and the fact we are more than 50% off of most major indices’ highs, it seems that some sort of turn (even if an advance is of a temporary nature) should be in the offing.

Our money flow analysis shows a few bright spots as well. The number of new lows that have accompanied the recent downturns is decreasing, and the Volatility Index (VIX) has held to relatively low levels. This means that the “fear factor” might finally be wrung out of the market, which could pave the way for a lasting (and maybe permanent) rebound. Also with most major indices off 50% or more, the media has sort of grown tired of reporting about the devastation in the stock market. Maybe this means that the “panic” factor has been thoroughly priced in.

The U.S. economy will bounce once all of the uncertainty is wrung out. The new Administration has added a lot of uncertainty to the equation. If and when the Governement clearly addresses our economic concerns and when they add clarity to how they plan to deal with the economic crisis, the faster we might return to a more vibrant economy and stock market. Stock markets love certainty, and the lack thereof right now is clearly weighing heavily on equity prices. History shows that stocks generally turn well ahead of the general economy (6 to 12 months). As bad as the economic news is right now, the bullish camp is ready and waiting for the turn. There will be no bell, and there will be no siren. Nobody thought in October 2002 that stocks could ever go up again. But buyers then were well rewarded to the tune of almost 100% gains over the next five years. You also had to wait about six months and retest the market bottoms. But when stocks regain their confidence it will likely be off to the races for the bulls.