January 27th, 2009

Base Building Is Our "Zoloft"

All you have to do is see what most media is writing these days and you’ll get the impression that the stock market could be headed nowhere but down. Here are some of those dire headlines (for actual links go to The Kirk Report):

  • Economy in shock
  • Bankers fear unemployment
  • Unemployment sweeps nation
  • Layoffs spread to more sectors of the economy
  • Expectations for retail sales remain low
  • Cast your vote. Recession or Depression?
  • Consumer confidence dips in January
  • California is now broke
  • Hotel industry enters tailspin
  • Downturn batters chemcial firms
  • Several auto parts suppliers are preparing for possible bankruptcy
  • Auto dealerships prepare for a major shakeout
  • Astonishingly bad earnings from tech
  • What’s up with timber?
  • Pain within the shipping industry is set to continue
  • The state of the airline industry
  • Fixing foreclosures won’t be easy

Where’s my Zoloft or Prozac? It’s enough to make most crawl into bed in the fetal position. But buried among these headlines are two others:

  • The bloggers remain very bullish!
  • Newsletter gurus haven’t given up yet

How can that be? And the answer might just be that those blogging gurus just might be looking at the market internals, the market’s technicals rather that the economic fundamentals. They’re looking at the market’s reaction to the news rather than the news itself. They’re remembering that the market has lead the economy by around six months out of each major economic recession. Could that be true as money is being thrown by the new Administration and Congress at the economy today?

Last week, in “Measuring the Reversal and Bottoming Process“, I offered a different sort of scorecard on the market’s progress in fixing itself. Here’s an undate of scorecard:

The number of stocks that have crossed over their 90- and 180-day moving averages has increased significantly since the October lows. Even in this past week, more stocks can be added to this list, especially for those stocks crossing above their 90-day MAs. This is very constructive with more and more stocks turning the corner.

I remember last summer, after the market had already dropped 20% from the October, 2007 peak, major long-term investors would get in front of the cameras saying that “long-term investors could really find great values out there”. But now, after the market has declined another 20% all they can see is another 20-25% decline to a 500-600 S&P or a 6000 Dow. We’ve been conditioned for the worst and many are making the common mistake still looking at stocks through a rear-view mirror when forecasting the future by extrapolating the past.

In an earlier report, I described how the leaders out of the Tech Bubble Crash in 2003 were stocks that had made “Golden Cross”, seen their prices cross above the 180-day MA along with their 90-day MA. Today, still only less than 2% of stocks have been able to achieve that benchmark. When that number increases to around 5%, as I think it will, there will be another clear confirmation that it is safe to enthusiastically get back into the market.

Subscribe below or click here to learn more about help for navigating turbulent markets.