March 21st, 2010
I feel the market is tilting? Its rate of ascent since the March 9 low has continually and inexorably been flattening with the rate of change, or slope, shifting from steep to nearly flat as depicted in the following charts (click on image to enlarge):
We all look back fondly to last year when, if you had the courage, you could buy nearly any stock and see it appreciate handsomely within weeks or months. Then in November, rather then bouncing off the lower trendline and heading to new highs, the Index began barely crawling along the lower boundary trendline. On January 19, it hit the magic 1150 level and broke below the support.
We hoped that the break would be minor and the bull market continue albeit tempered. But those hopes were dashed when the lower boundary of that less steep upward channel was also broken. The correction finally found an intra-day bottom at 1044 followed by the most recent nearly 10% bounce.
Paul Lim in Sunday’s NYTimes recaps the challenges of the second year of a bear market recovery:
- In nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market…[but]…if the rally continues through 2010, the year “is unlikely to be anywhere near as rewarding as the past one,”
- … second years of rallies are almost always less fruitful than the first. Only twice has the S.& P. 500 index gained more than 12 percent in the second year after a market bottom. And the average gain was just 9 percent,
- …Year 2 has been particularly challenging after bear markets related to recessions. In the second year after the most recent bears in this category — which spanned from 1980-82 and 2000-02 — stocks gained only 2 percent and 8 percent, respectively.
- … using 10-year average corporate profits, the market’s price-to-earnings ratio is 20.6. That’s noticeably higher than the historical average of 16. In periods when the market’s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8 percent after inflation…Assuming that inflation is around 3 percent, stocks are likely to return less than 7 percent, which is lower than their long-term historical gain of around 10 percent a year.
If last week marks another top, then the market’s upward bias will be further compromised and trend flattened even more:
I looked at all my postings since January 1 and they reflect the ambiguity of the market itself. In January, I write about “dominoes” falling in a long anticipated and significant correction. In February, I advise using bounces as opportunities to further lighten up. Finally, in March, I assemble watchlists of stocks that could lead the market as it moves in the next leg of the bull market.
While there’s no market momentum, I got swept up in the excitement of 9 consecutive up-days and identify one bright spot, stocks in Retail-Restaurants group. Tread carefully, however, because this market can still move in either direction when volume returns.