August 2nd, 2009

Where Were You At Obama’s Election?

That’s not intended as a political question but rather interest in your portfolio’s health since then. The reason for framing the question this way is because Friday was a watershed day: the market closed at 987.40, nearly the identical level it was on November 4, 2008, Election Day, or 1005.75. It closed up 39.45, or 4.08%, from the 966.30 pre-Election close and has not been as high since.

After careening down since last labor day, through the Lehman bankruptcy and the Merrill Lynch acquisition, market psychology was temporarily bolstered over the succeeding weeks by announcements of the G-7 meeting and decision for a coordinated effort “to combat the crisis including the use of ‘all available tools’ to support key institutions and prevent their failure.” (If you are a masochist and want to relive those awful days, click here for an excellent timeline of all the gory details assembled by the St. Louis Fed.)

When you look at those two Index closing levels, you might think the last 9 months has been a boring, flat market. Au contraire, my friends. There’s been the equivalent of a bear market with a 32.73% decline to March 9 and a booming bull market with a 45.96% recovery since March in between. How did your portfolio perform over the same period. Having an average 40% in cash over the past nine months, my portfolio has gained only a disappointing 3.5% from last Election Day, net of dividends, commissions, interest, gains/losses and additions/withdrawals.

So for me, and perhaps some of you, the game is just beginning again. I can drool at all the profits that could have been made if only I had been less fearful and jumped back into stocks in a big way soon after the bottom (see March 19, “The Debate is Settled: The Market Has Hit Bottom“). I sought a safe haven, found it in cash but may have stayed there a bit longer that I should have.

As an aside, remember the Coppock Curve, Mean Reversion and MTI Indicators. I last checked in on them on May 1; two months later they look even more accurate at predicting the bottom. Coppock got it right again as the Curve has clearly trended up since May:

And the Mean Reversion Indicator? It’s still eerily similar to the path off the 1973 bottom (as a matter of fact, see the predictions of May 1 for a July close of 999.60 vs. an actual of 987.48). I wonder how long that parallelism will continue:

Finally, the MTI gave an “all-clear” signal on June 1 when the Index crossed the 200-day Moving Average. But that’s all history. Where do we go from here? I focused on all the money that’s parked on the sidelines needing to be invested as a possible catalyst for further market appreciation. “Z”, a loyal reader, recommended the following references as support to this notion: “Six Good Reasons to Like Stocks” from Barrons on August 3:

“There will certainly be a ton of buying power available once any bear conversion takes place. Cash holdings amounted to about 95% of the value of U.S. stocks at the end of the first quarter. Paulsen argues that given the current environment of inflation and interest rates, this ratio of cash to market cap should stand at around 50%. That would leave, by his reckoning, nearly $5 trillion of cash currently sitting on the sidelines available to push stocks markedly higher.”

and “Parked cash hoard: Fuel for further stock gains?” from Fidelity Investments on June 22 (the numbers are different but the conclusion is the same):

“Although investor cash levels have fallen from their record high in March, their value is still equivalent to about 40% of the entire U.S. stock market. This level of cash—as a percentage of what it could purchase of the overall stock market—remains much higher than the 27% peak rate seen during the 2000-2002 bear market, and well above the historical average rate of 16%….the cash stockpile on the sidelines remains so much larger than it historically has been that it would only take a smaller percentage of stock market re-entrants (relative to past cycles) to provide a significant boost to stock prices.”

So where should we look for stocks to lead the next leg up. Which stocks were involved in the Bull Market of Spring 2009 and which ones might take us through the end of the year?

More than half the stocks in the Telechart database, 56.3%, were higher this past Friday than they were on Election day. But what was most amazing is that the sectors up the most are those you wouldn’t necessarily expect, like retailers. As Bob Doll of BlackRock calls it a “relief rally” where investors said to themselves “Maybe this isn’t another Great Depression, and I’m underinvested in equities — I have to participate”; the speculated on the stocks that had been hit the hardest. Paul Lim, in today’s NYTimes, interviews analysts who rationalize that large caps with good fundamentals will support the next leg up.

I’ll go with the laggards since Obama’s Election: Banking, Real Estate, Transportation, Energy, Chemicals and Consumer Durables. That’s close to 1000 stocks of which many have formed beautiful reversal bottom patterns they’re about to break above. I’ll post a spreadsheet for you tomorrow.

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  • The Small Fish

    Great commentary as usual. When many technicians are arguing that a possible top is near, it is refreshing to read your take. I think there are quite a few intermediate to long term indications of further upside.

  • Manoj

    Guru,
    Isn't a good idea a make a portfolio of say 25 stocks which strongest bullish charts. It will be a refrence portfolio to compare with. Obviously it will keep changing

    Thanks
    Manoj

  • Guru

    Manoj,

    I tried that about 6 months ago but it was time consuming to update it daily. Plus, I found that few were actually clicking to look at it.

    I can try it again, perhaps in a Google spreadsheet format instead of html.

  • Anonymous

    "Banking, Real Estate, Transportation, Energy, Chemicals and Consumer Durables"

    UYG, URE, DIG, & UYM..that's how i play it