June 27th, 2008

Dodging the Bullet, Again?

I looks like the market may have dodged the bullet, one more time. It looks like we’re going to close today just above the lower boundary of the horizontal channel that’s been in place for …. my, has it been that long? ….. nearly six months. Just heard it was the worst June since 1930! So there’s been six months of spinning wheels not going anywhere. It sure tries one’s patience.

The fall since May has been precipitous and we’re probably now over-extended and over sold. There could be a very short term bounce at this level. But ever time we try something conventional to make some money, it turns out to be a disappointment. Like finding stocks that demonstrate some upside momentum, like the stocks making new 4-year highs that I’ve here before. When the market swoons like it’s done for the past 4 weeks, even those stocks get hammered and relapse back below their breakout levels.

This market serves only one purpose and that “50% of a stock‚Äôs price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own”. I’ll say this categorically (only to impress the point) that unless and until the market gains a solid footing and starts some upward momentum, no stock will really work.

I’m not a seer and can’t claim to know what’s going to happen next week but I can say with some certainty that if the market breaches that support, the market will be pretty much in a free fall. There wasn’t much to stop it from dropping like a stone from October to mid-January (18% in about 3 months!). And if this support level fails (and my bet is that it will), we could see another 15-20% drop to 1150.

Traditional stock charting calls for consolidations to be mid-point between the top and bottom of major moves. The horizontal channel is a consolidation pattern even if there as a brief “false breakout” above the upper boundary in May. The move leading into the consolidation was 18% from October’s high of 1552.58 to January’s low of 1274.29. Applying an identical 18% move down from the May 19 high of 1426.63 yields the next low point of 1170.91. That’s fairly close to the level in my first bear market call on March 1 in a piece called “1973 and 2001 Market Crashes and Today’s S&P 500 Index” that I’ve mentioned several times since.

The 1973-74, which I included in my upcoming book, “Running with the Herd”, clearly shows the progress of one of the worse bear market crashes (48% from peak to trough extending 21 months):

Notice that it wasn’t a uninterrupted decline; there was what appeared to be a correction in the fall of 1973 only to be resumed in October. And after the bottom was reached, it took almost two quarters for a reliable base to be completed.

I don’t believe the market we’re going through will be as severe but I do believe there’s more to come. And when a bottom is reached (it might just be 1150), it will take 3-6 months for investor confidence to be restored into the market.

And then again, yes, the market could dodge the bullet again and the this channel could be the bottom. The market could turn back up as it did in January and March …. my gut tells me that it won’t, though.

The Market Timing Indicator hasn’t been wrong in 45 years and it’s signaling an extremely risky market. Only a move by the S&P500 Index back to 1400, or 10% higher, will change that from a red to a green signal.

So don’t think you can out smart the market, that you will find an irresistible golden needle in the market haystack. The odds are you won’t. And those great stocks you already own. You’ll see them declining even more. Just my opinion but I’ve upwound new positions I put on over the past several months, have converted to a substantial cash position and have put on a nice chunk of silver and UltraShort etf’s.

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