May 21st, 2012

Echoes of 2009, 2010 and 2011

Today’s post features excerpts from the Recap Report I sent to Members this past Sunday evening. After seeing today’s (Monday) recovery, I thought it would be worthwhile for all blog readers also to see it.

As part of each Weekly Report, members also see the current position of the Market Momentum Meter and what extrapolation of alternative market trends in terms of S&P 500 levels over alternative time horizons might produce in respective Meter signals.  This is important for evaluating true market risk and portfolio strategies for dealing it.

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This week’s Report is very difficult to write. There was so much going on last week and the market acted so horribly. Europe was still a huge question mark, the over-hyped Facebook IPO was characterized as a disappointment (to all but Zuckerberg and about 1000 other insiders). Worst of all, the market had its worst decline of the year with a drop of 4.30%; the tech heavy Nasdaq Composite Index did even worse with a 5.28% decline. Stocks in the Model Portfolio fared poorly declining 5.95% but fortunately the 40% cash position cushioned the portfolio’s net drop to more constrained 3.92%.

This is the third year in which the market has tanked entering the summer months (the “sell in May” syndrome working overtime). The one consolation is that in both of those prior instances there was a respite and early stirrings of a recovery soon after the Index penetrated below the 300-dma (in time not in level). This Friday’s intra-day low touched the 300-dma and closed just above it (click on image to enlarge):

I know this looks complex with many horizontal trendlines but one can think of it in terms of the market climbing up a step set of stairs. Each resistance level that the market has successfully crossed above winds up later being a landing it steps on in preparation for the assault on the next resistance level.

That’s what may be happening again (speaking technically only and putting aside any discussion of the continually evolving fundamental causes like Greece, unemployment rate, declining price of gold, oil and other commodities, a harder than expected landing in China and the ever nearer Presidential election).

If this will be the third time around, then the current correction is close to the end/bottom. There may be another 2-3% left on the downside to 1250-1260 or to about the level of the neckline of the previous head-and-shoulders top.

As they say, there are harmonies (or echoes) in the market but never exact replicas. If this is the extent of the decline that the market suffers after having all this bad news thrown at it then the optimist in me thinks that any positive news on any front could result in a bottoming and reversal of direction again (and we won’t know what positive news it was that caused the market to reverse course until way after the fact).

Rather than thinking about how bad things could get, a better “contrarian” approach might be to think of this correction as our last opportunity to climb aboard the train that we missed climbing on three times before (2009, 2010 and 2011 bottoms). Some called the March, 2009 low at 666 as a “generational bottom” and it truly was. We had an opportunity to make up for being to fearful to act then in 2010 and again in 2011. This may be the next and hopefully last opportunity. Let’s not obsess above the bottom of the value and look instead to the climb up the other side to the market’s previous all-time high peak of 1576 made in October, 2007.

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