December 2nd, 2010

The Launch of Optimism?

Let me take you back to the sweltering days of last summer. The market peaked last April and declined 16% by the end of July. Some looked at a chart of the S&P 500 and saw a top similar to 2008, just before the Financial Crisis had fully bloomed. CNN reported on July 1 that going all the way “back to World War II, a decline of 15% off the highs has often turned a correction into a Bear Market — a drop of 20% to 30% — according to Standard & Poor’s chief investment strategist Sam Stovall.” It was pretty scary times.

On the other hand, I saw an inverted head-and-shoulder and the possibility of a new bull move emerging. In “Healing Damaged Investor Psychology” of August 2, I wrote:

“There hasn’t been a blow-out rise, a throwing of caution to the wind. Instead, it has looked like a consolidation (or base, depending on where you start counting) with the market transitioning from relief that the bottom has been put in to optimism of possible renewed growth. It feels like the end of an accumulation phase and the beginning of the mark-up phase.

Yes it’s taken a long time but the trauma of the Financial Crises Crash was severe. We can talk about interest rates, earnings vs. top line growth, balance of trade and other currency issues. But bottom line is that there’s also a lot of damaged investor psychology involved and that psychology requires time and therapy to heal.”

Looking back four months, in retrospect it may actually have turned out to be a base rather than a top (so far, at least!). The mistake I may have made was that we were probably moving from hope to relief rather than transitioning to Optimism.

And what does investor psychology say today? As I wrote to subscribers of Instant Alerts this morning “You’re beginning to hear more and more of the “Talking Heads” begin to focus on the fact that “things are improving” than those saying that say “we have a long way to go”. Here’s the schematic at which we attempt to ground our chart analysis of the market with a dose of emotional reality:

If investor psychology in August could be described as moving into Relief, then today I see the market nearing the end of a period of Relief and beginning to move into Optimism and clears the way for an extended move higher.

One subscriber brought to my attention the following excerpt from Bloomberg this morning:

“The Standard & Poor’s 500 Index will climb 9.9 percent by the end of next year as revenue and economic growth boost earnings, according to UBS AG’s Jonathan Golub. The benchmark gauge for U.S. equities will reach 1,325, representing an increase of almost 10 percent from yesterday’s closing level, with earnings expanding to $93 per share, the chief U.S. market strategist wrote in a note dated yesterday…… His 2011 forecast compares with Goldman Sachs Group Inc.’s 1,450 projection and Birinyi Associates Inc.’s 1,333 estimate, both announced today.”

I didn’t realize we were so influential down on Wall Street. They all must read this blog because on Monday before Thanksgiving, in “Listen to One Opinion or the Sound of the Thundering Herd“, I established “a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape”. It’s always nice to be in such distinguished company.

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  • Anonymous

    Let me get a shot on the SP500 PO target in the next 12 mos. I predict from the momentum established from 1090 to 1228 w/o a conventional pullback, and then a subsequent pullback, and then a retracement back to near 1250, I get a PO of 1590. That's a 30% rise! Whatchauthink??? I'm betting on it with call buying and put selling. If I'm right and statistically I'm on the right side of the argument, I'll get this trade at a huge discount and laugh all the way to the bank. If I'm wrong then well I'll be wrong, but again the stats are compelling to do this. Any takers???

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