August 31st, 2009

Comparing Labor Days in 2003 and 2009

For a long time, I’ve seen Labor Day as a demarcation of sorts in this market recovery. The first time was on May 6 in “Breakout or Resistance: The 200-day MA in the Beholder’s Eyes” when I wrote:

“I see this process possibly taking the summer (remember “sell in May and go away”) with the break above the neckline coming around Labor Day. In the interim, be prepared for the market to correct by 13% to the 800-850 area.”

A few days later I added “volume trails off during the summer months. If there’s going to be a significant volume increase, in all likelihood, it will come around Labor Day.”

The correction never happened even though it looked like it might with all the discussion of a head-and-shoulder top last June and July. But by then the market’s strength became more obvious and it felt as if Labor Day would bring additional moves higher.

The next time I mentioned Labor Day was on July 22 in “Stock Picking Now Feels Like Shooting Fish in a Barrel” where I inserted a spreadsheet of “Stocks on the Move” (click here for the spreadsheet) and wrote:

“I don’t mind saying I have a hard time deciding which of these 135 I’m going to add to my portfolio but I would feel comfortable and sleep well with nearly any of them (with the caveat that the market remains constructive by crossing above the neckline by Labor Day, as we expect it will).”

And it did continue steadily moving up. On August 7, in “Difference Between Correction/Consolidation and Reversal”, I added still looking for the elusive correction:

“The market might straddle the 300-day MA like it straddled the 200-day. It could end back at 950 just about the time that a traffic jam is created as the 4 moving averages converge with the neckline. That could be around Labor Day or mid-September and could be a glorious day because it would technically mark the true beginning of the Next Bull Market.”

I was too conservative again – or has the market just stubbornly remained uncooperative – as the 300-day moving average failed to resist the drive higher. As Labor Day arriving next weekend, what will the next few months bring? Do I dare speculate again?

When the market succeeds in crossing 1035-1040, (a hurdle I think it will easily cross in the next couple of weeks) it will have a clear shot at a 10% surge to 1125-1150 by year-end. There was little resistance a year ago as the market crashed in 26% free fall through those levels in only 10 trading days last September and October! Will the ride back up be any less memorable? I think not; I hope not.

And if it does, what might come next. What might 2010 look like? Let’s look at the Tech Bubble Crash recovery, 2003-04, for an answer to that question:

The market came out of the Tech Bubble double-bottom with a 26% move in 2003, across the neckline in June 2003 and directly into a 3-month Traders’ Remorse Correction. That’s the sort of correction everyone looked for but never materialized this past summer. After traders overcame their remorse, the surge began around Labor Day 2003 [so much for September and October being the worst months of the year] and carried the market ahead 16% to mid-February 2004 when it entered a long, excruciatingly boring nine-month consolidation with no more than 7.5% range from peak to trough.

Some argue that we’re facing a W-shaped recovery and that the market will soon begin declining to form the second half of the W. Alternatively, if you embraced the alternative view that infrastructure spending will soon accelerate and accompany revived and renewed consumer and business confidence and sentiment then an optimistic outlook is that the second half of the W will be no more painful than a long consolidation similar to 2004. It sounds too pat and simple for an exact replay of the Tech Bubble Crash recovery but it could be a model of what might happen.

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  • Minnesotalee

    I went back to CY02 through CY08 for the Sept/Oct time period to determine the loss in the SP 500 during this period. See below:

    2002 -3%
    2003 +4%
    2004 +2%
    2005 -2%
    2006 +5%
    2007 +4%
    2008 -25%

    Except for 2008 and the Lehman effect, I necessarily don't see a connection. Also since CNBC/many guests constantly are looking for a correction, you can be certain that one will not be coming. The charts whether MTI or P&F have shown (today) a slight pullback and that's all you're going to get. Since the restart in March I've been on the watch for a V-shaped recovery. Guess what so far so good. Don't see the W coming anytime soon.

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