Market Psychology | Stock Chartist

April 12th, 2011

Chernobyl, Fukushima Dai-Ichi and the Market

I’m always on the lookout for things to write about and subscriber questions are always an interesting place to begin. For example, someone wrote this morning asking the following:

“Japan has now raised their reactor crisis to Level 7, the highest level and equal to the Chernobyl disaster. Is there any chart information from the Chernobyl disaster that might help us?”

At first I thought linking a nuclear reactor disaster to the US stock market was unusual but, after giving it some more thought, I realized that actually there was value in looking back to see how the market reacted then and comparing it to what might happen in reaction to the current one. Understanding similarities and differences between the two events at the disaster and the market levels could, after all, be quite meaningful.

The Chernobyl disaster occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR (now Ukraine). An explosion and fire released large quantities of radioactive contamination into the atmosphere spreading over much of Western Russia and Europe. It was considered the worst nuclear power plant accident in history, and it was the only one classified as a level 7 event on the International Nuclear Event Scale until the Fukushima I nuclear accidents of March 2011.

The battle to contain the contamination and avert a greater catastrophe ultimately involved over 500,000 workers and cost an estimated 18 billion rubles, crippling the Soviet economy……Estimates of the number of deaths potentially resulting from the accident vary enormously: the World Health Organization (WHO) suggest it could reach 4,000; a Greenpeace report puts this figure at 200,000 or more; a Russian publication, Chernobyl, concludes that 985,000 excess deaths occurred between 1986 and 2004 as a result of radioactive contamination. (from Wikipedia)

The market’s reaction at the time was as follows (click on image to enlarge):

It might first appear as though the disaster damaged the market by stalling attempts to move higher as the S&P 500 Index began trading in an 11% range between 229 and 254. If Chernobyl did have a direct relationship to the consolidation pattern during most 1986 then it pales by comparison, however, with the market’s own melt-down and the largest one-day percentage point loss on Black Monday in October 1987 a little over a year later:

Put in an even longer-term picture, Chernobyl appears as little more than a bump in the road of the longest bull market in history that began when the S&P 500 successfully first crossed above 125 (Dow Jones Industrial Average above 1000) in 1982 and ended with the bursting of the Tech Bubble in 2000:

It’s difficult making “if-all-things-are-considered-equal” sorts of comparisons because Russia in 1986 was different than Japan and the world economy and trade are today. I would say, however, that the market today is at about the same early phase in coming out of the current secular bear market that begab with the Tech Bubble Crash in 2000 as it was in 1983 coming out of 1966-1982 secular bear market. If, in fact, we are in the early phases of this recovery then, over the long-run, the Japanese nuclear disaster will also appear as a blip on future long-term charts.

Thanks for the question, Chuck.

January 7th, 2011

Investor Sentiment and Market Direction

One of the wonderful things about coming out of a bear market is that there always seems to be a lot of historical symmetry one can usually find.

I should first point out that contrarians, these days mostly economists who dare comment on the stock market’s outlook, seem to latch on to bullish investor sentiment as an indication that the market is overvalued and destined to decline. For example, two weeks ago Paul Lim wrote in the Sunday NY Times in an article entitled “Why Investor Optimism May Be a Red Flag“:

“…. investors are finally getting their risk appetites back. And it may also be an indication that people are becoming greedy after the easy money has already been made in the market…..some market strategists worry that investor optimism itself may be a headwind to another strong year for the market …. It just goes to show that by the time the market thoroughly convinces investors to be optimistic, most of the good news is already behind us.”

(Of course, the Times reversed themselves this week in a piece entitled “Can You Trust the Market?” where they repeated the statistic on the $80 billion investors withdrew from equity funds in 2010 with the following explanation: investors are leery of the market including two crashes in ten years, the “flash crash” and Republican efforts to stall further financial industry regulations.)

Does optimism lead to a decline or does optimism coincide with a strong market? Does pessimism lead to an advance or does pessimism coincide with a bear market? It’s truly a chicken/egg question. Rather than attributing a causal relationship between investor sentiment and the direction of the stock market, it is safe to say that they tend to move in tandem. When sentiment is optimistic the market advances and when sentiment is pessimistic the market declines.

Intuitively, though, the high bullish sentiment that contrarians fear seems to me to augur well for the market’s outlook. I didn’t have any evidence to support my belief until recently when the Bespoke Investment Group, the purveyor of a plethora of market statistics of all sorts, published a chart of investor sentiment over the past 10 years in a piece entitled “Bullish Sentiment: Down But Still Lofty”. Their statistic combines the level of bullish sentiment readings from the Investors Intelligence (II) and American Association of Individual Investors (AAII) surveys.

Rather than focusing on small changes in the level of this indicator, I compared the sentiment indicator against that S&P 500 over the same period and arrive at a decidedly different conclusion:

What struck me was the apparent symmetry in market sentiment between the early stage of the recovery out of the Tech Bubble Crash and the current bull market. The last time sentiment was this positive was from mid-2003 and the beginning of 2004. It wasn’t until the market began to consolidate did the sentiment indicator start become less optimistic. From the bottom of the Tech Crash in March 2003 to February 2004, sentiment fluctuated between 100 and 130.

The sentiment indicator hit 130 for the first time again this past August as the market began moving out of the 14-month trading range. If the previous recovery is any indication, the market could continue to rise and sentiment could continue to fluctuate at optimistic levels for several months before a correction sets in and the indicator begins to turn bearish.

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.

August 31st, 2010

A Fan of Upward -Sloping Trendlines

I must confess that I too am confused, frustrated and starting to lose both my patience and my motivation. I read other blogs, newsletters, financial sites and come away convinced that no one knows with any degree of certainty what’s coming down the road.

If you’re a fundamentalist, then you can make a strong argument based on the economic picture that there’s another leg down, perhaps down 35-30% from current levels back to the 750-800 range (one bear prognosticator predicted on Bloomberg a 5000 target for the Dow by 2012). If you’re a technician than you pick from either the Elliottician’s view of the S&P 500 down to 500 or a more bullish view that index moves to 1250-1300 sometime next year.

One thing you can count on however, is that there’s little value of sloping trendlines as the foundation of any of these predictions. A sloping trendline can pivot at any angle and the angle you probably will select will link to the most recent pivot you see. In other words, sloping trendlines are highly unreliable either as support or as justification for predicting a major decline should they be broken.

For example, take the ascending trendlines we’ve been drawing for about a year coming up from the March 2009 lows. We’re looking for the fifth of these upward sloping trendlines. While each may have indicated an opportunity for a short-term trade (short the index), none marked the beginning of a long-term market decline.

First there was the trendline (1) connecting the 2009 bottom to the January 2010 high. Then a trendline (2) connecting the bottom to the February 2010 low and April 2010 high. And so on and so on. With each of these upward sloping trendline there were calls that a break would lead to the decline back below that history 2009 low or further. [Each of these have been part of a Fibonacci fan pattern but, honestly, I just figure out how that works or what it means.]

But the market didn’t crash. For some inexplicable reason, the market was able to hold its own and stay within the 1025-1150 trading range. That’s why I put much more stock in the relevance and power of horizontal trendlines. There’s something unequivocal about them. You can be more confident that decisions were made at these levels in the past (whether for individual stocks or a market index) which may impact current or future decisions at the same level. Should there be a break of a horizontal trendline it would, therefore, more clearly indicate a directional change of momentum.

I’m concerned but haven’t panicked – yet. There is a head-and-shoulder reversal lurking somewhere in this one-year horizontal congestion but, again, psychology doesn’t sync with this being a top. If it is a top, then a new category will have to be added to the emotions of euphoria, excitement, etc marking tops. …. we’ll have to add exhaustion.

August 11th, 2010

Saved at the 50-day Moving Average

Is the market rigged as has been discussed in an on-going debate in the commentary section of this blog? When people use the term “rigged” they mean “manipulate fraudulently; to arrange or tamper with the results of something” as defined on Dictionary.com.

The implication is that the stock market is a zero-sum game where every participant is either a winner or a loser with no middle ground. This mistrusting belief on the part of many individual investors is being stoked by the media who tell us that quants, “black boxes”, hedge funds and other forces we don’t know and can’t see are front-running our orders, accounting for 80% of all the volume on the market and accounting for such incredible events as the “flash crash” last May when, according to Wikipedia

“the stocks of eight major companies in the S&P 500 fell to one cent per share for a short time, including Accenture, CenterPoint Energy and Exelon; while other stocks, including Sotheby’s, Apple, and Hewlett-Packard, increased in value to over $100,000 in price.”

All this points to a convenient scapegoat for the market’s volatility and, indirectly, someplace for us to point for our difficulty at making any money (more correctly, our losses). In my opinion, all the problems actually began last October when the sideways movement began.

So are these black forces winning at our expense? Are we unable to make any money because all the black forces are conspiring to take all the individual investors’ money? In “Accidents, Coincidences or Mysteries” of July 27 I included a minute by minute chart of the S&P 500 and wrote

“The day opened with a nice pop that was quickly and summarily disposed of while the rest of the day saw three attempts at crossing above 1116. That may seem like an arbitrary level but we’re no stranger to that number because it’s exactly the same level that the market struggled to climb above several times late last year.”

Today’s action adds to the mystery while it enlightens and illuminates. This time the focus is on the 50-day moving average which today was at 1087.75 with the market nearly touching and bouncing off that line 4 times today (but lost steam at 1094):

Rather than acting like Darth Vader today, it almost felt like those “black boxes” and their algorithmic trading actually came in with their huge buy orders after the market’s horrible open at the 50-dma and actually salvaged the day for us little guys.

So which is it? Are they trying to take our money or are they trying to prop up the market? My guess it’s neither. It’s not about us; they’re trading in whatever way they think will make them money. An clearly moving averages, which are easy to calculate and program can act as a trigger that anyone can use, even the individual investor.

Now that the market for some mysterious reason stay just at the 50-dma today let’s see what happens tomorrow.

August 2nd, 2010

Healing Damaged Investor Psychology

There’s so much conflicting and contradictory information that investors don’t know whether to sell or to back up the truck and load up? For example, In a recent Seeking Alpha blog article entitled “Warning Signs Suggest Market Headed for Another Collapse“, the author compared the head-and-shoulders formation in 2008 just before the Financial Crises Crash of 2008-09 to one he sees in the recent market action (something I wrote here often about). He concludes:

“a head & shoulders formation is arguably the most bearish technical formation in the books. The time, breadth and size of this head & shoulders is exactly the same as what we saw in early 2008 just before entering the biggest bear market in modern history. The neckline on this formation sits at around 1040 on the S&P 500. A substantial break below 1,000, the low of this current correction, could spell disaster for the broader markets ….. The long-term prospects of the market are completely in question until we see a rally above 1,220 on convincing volume.”

A major fallacy I see in his comparison is that it totally ignores market life cycle and investor psychology. Remember the two charts I frequently inserted last year depicting the various psychological phases the market goes through during its life cycle?

I look at these schematics and ask myself “In what sort of frame of mind are most of “talking heads” today as they give their views, concerns, strategies or advice?” Are they euphoric about stocks today? Are they thrilled with the opportunities they see in the market today? Are they filled with optimism and excitement at the market’s prospects?

If they are they would be tell tale signs that the market is approaching a top, on the verge of a collapse. This is how the big money guys spin their spiel so they convince the little guys to get into the market so they can distribute to them stock they accumulated a long time ago at much lower prices.

I just don’t see that happening and I don’t feel immersed in that sort of psychological atmosphere. Rather than excitement, thrill or euphoria, I sense more of the same sort of anxiety, depression, hope and even despondency resulting from continued uncertainty and fear that is associated more with bottoms than with tops.

We all know that the market hasn’t done anything for almost a year (actually, since last August or 11 months). How flat has it been? Here are the changes from the end of each of those months to last Friday’s close. The table shows the sort of percentage change investors would have realized had they invested at the end of each month and held through Friday’s close:

That sort of performance sure doesn’t look like a top to me. There hasn’t been a blow-out rise, a throwing of caution to the wind. Instead, it’s looked like a consolidation (or base, depending on where you start counting) with the market transitioning from relief that the bottom has been put it 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, bottom line vs. top line growth, balance of trade and other currency issues. But bottom line, there’s also a lot of damaged investor psychology involved and that psychology requires a lot of time and therapy to heal.

June 1st, 2010

Market on Verge of Being Oversold

Unfortunately, nothing good seems to be on the market horizon. As a matter of fact, after ricocheting off the bottom of the 200-dma, the market seems to be in a free fall to the 300-dma at 1039.5, just 3% below today’s close of 1070.71. There’s only one silver lining for this dark picture from a technical perspective and that’s how precipitous the decline so far has actually been.

I’m encouraged by the fact that there haven’t been any crossovers among the four moving averages and they’re still in a bullish alignment (50-, 100-, 200- and finally the 300-dma) although they have begun to turn down or flatten out. I other words, the decline from the April peak has been so swift and deep as compared to the ascent leading up to it that the moving averages haven’t been able to turn down, let alone cross under each other. (click on image to enlarge)

Remember, the downside target of the ascending broadening wedge described in an earlier post is the 950 range. That also happens to be the area of the necklines for both the Tech Bubble Crash bottom in 2003 and the Financial Crises Crash bottom of 2009. It does sound too pat, neat and symmetrical for it to work out just like this but it does set up a technical support level target for this correction’s eventual destination.

Now that the Index has crossed under the 200-dma what happens next is up in the air. Over the past nearly 50 years, the index has

crossed back above the 200-dma 41% of the time,
continued to decline and crossed below the 500-dma 33% of the time and
waited for the 50-dma to follow and cross below the 100-dma 12% of the time (the remaining 11 outcomes, or 14%, produced single instance occurrences)

Although the lower probability outcome, I feel the next milestone will by the index crossing below the 500-dma on its way to the 950 area.

History tells us that time is more important than the steepness of the change for causing market momentum and psychology to change direction. A correction will not extend into a bear market which, in turn, will not become a crash unless the market takes long enough for the moving averages to change direction and begin to cross over themselves until their alignment turns negative. Without time, they become very oversold.

Market sentiment, like a ocean liner, doesn’t turn on a dime. It takes time for the majority of market participants to turn from being constructive about the big picture to being pessimistic. As negative as everything sounds today, the indicators don’t seem to be saying that yet.

July 30th, 2009

The (Opportunity) Cost of Discipline

Some of you have written asking whether the MTI had yet given an “all-clear signal and I answered saying that it had – on June 1, over two months ago – but I held off committing until I saw confirmation that the inverted head-and-shoulder reversal pattern was successfully completed.

On July 23, when the Index burst above the neckline with a 2.33% move on higher volume, I continued playing it safe (i.e., overly conservative), waiting until it moved above the 300-day moving average which coincidentally meant also crossing above another significant resistance trendline. I thought that would represent the beginning of that “traders’ remorse” correction extending to the end of summer.

A few weeks ago in “Half-Full or Half-Empty Views: A Head and Shoulder Market Top?” of June 30, an extremely popular post where I compared what many saw as a top vs. my inverted head and shoulder bottom, I wrote:

“There’s no clear-cut requirement is for a right shoulder. The preference, of course, is to have it match in time and scale the left shoulder. But (and this is what it now looks to me like) it can turn out to be shorter and shallower due to the strength of the market driven by the sidelines money waiting to be invested.”

Even back to March 19, in a post called “The Debate is Settled: The Market Has Hit Bottom“, I wrote:

“The raging debate is whether the market has hit bottom. My unconditional answer is “yes”….I’m not clairvoyant but the “market” is….Market prices have taken all these risks into consideration today or, more correctly, the millions of investors, large and small, have factored these and many more issues I haven’t even thought of into consideration and determined that stock prices will more likely move up rather than down in the near term…..I’m having a really hard time sticking with my discipline, though, and resisting the urge to jump into each of the stocks that triggered alerts today. Even though we’re approaching the end of those 6 months and many stocks are now beginning to break to the upside, I’m still cautious because it could still blow up. It’s painful to sit watch these “opportunities” pass you by while you’re sitting on a large chunk of idle cash but the prudent thing to do until the market tells us otherwise. We’ll have a second opportunity soon…..Nothing moves in a straight line. After their initial breakouts, there’s a high probability these stocks will temporarily stall out (it’s called “traders remorse”) and return to test as support the trendlines that are now resistance. And when the test is successful and the upward trend is confirmed, that’s when we’ll jump with everything we have.”

Here we are four and a half months later, 25% higher on the Index and with 30% of all stocks having more than doubled from those extremely low, distressed prices. And we (at least I have) have been sitting on our hands waiting for that retracement. It just hasn’t come and perhaps won’t until much of that sideline money has been put to work.

It now looks like as if that sidelines money is being plowed into all variety of stocks without waiting for summer vacations to end. Tomorrow, the end of July, may see the Index cross above the 300-day moving average and nudge up against that long-term resistance trendline. And if it does so, I will have no choice next week but to ring the bell, blow the whistle, let the light turn from yellow to green and declare that there is little immediate term risk of a retest, a collapse back recent lows. The bull market will have officially begun. Optimism will again break out all over this land (click here to see chart again).

I’ve been identifying stocks that looked to be leaders in this market (“golden cross”, new highs, leading industries, foreign). Tomorrow, I’ll revisit a group that a while back I wrote would be a great barometer indicating whether this market was truly ready to take off: the Financials Sector, especially Money Center Banks.

May 10th, 2009

Comparing Market Crash Bottoms: 1975, 2003 and 2009

Millions of people (institutions and individuals) continually translate the economic and financial environment here and abroad into sales and earnings growth prospects as the continually look for companies’ whose stocks are they assess tobe undervalued or overvalued and thereafter make decisions about buying or selling stocks.

Our focus, however, will be on the distillation of all these varied opinions into a concrete, market Index, its value today and its past trend. What follows may sound like black magic, hokum, tarot card reading, astrology or secret code but it’s actually a discussion about the trendlines and moving averages that are a shorthand for talking about investor psychology and sentiment as it continually changes.

No one individual knows the future but collectively, in their buying and selling, the investment community votes through their actions on what they think that future might be. All we have to do is try to figure out how those opinions are changing.

I’m looking for confirmation that market momentum has swing from “bear” to “bull”, that the major market trend has truly flipped from moving down to up. But you can’t see a trend when the only recent action is the market going straight up like a rocket. Usually, a run-up eventually loses steam, turns, creates a pivot point and retraces a portion of that run. Trends don’t only have upper boundary resistance line, they’re also matched by lower bounder support trendline. Since March 9 all we’ve had is an upper boundary, no real lower boundary. Thank you in advance for the opportunity of thinking this through out loud with you.

The Index just barely crossed its 180-day moving average; it also did so a year ago … for just one day. I’m hoping this time will be different but may be one of those who seem to be stuck in the recent past and is overly cautions to take full advantage of one of the best bull runs in history (up 36% in two months). First, here’s a comparison of the previous times when the market has crossed above its 180 day moving average:

What distinguishes this bear market from the previous two is that while the decline to the takeout (when the Index crossed back above the 180-day moving average) is similar (each between 30-40%) but this Bear Market was shorter (43% shorter than the Tech Bubble Crash) but more steep with the decline from peak to trough at 54.2%, (20% more than the previous two). But if the market has hit bottom, then we should be looking at the other side.

How does the current recover chart compare with the 1973 and 2003 bottoms?

1975
The 1974 bottom formation took six months and took the form of a double bottom. The distance between the neckline and pattern bottom was 26% and covered 5 months. Interestingly, the Index matched the distance below the neckline with that above the neckline rise 26% during the next 5 months before retracing back to the 180-day moving average. [Actually, the Index fluctuated around the 180-day nearly two months before continuing its ascent].

What distinguishes this recovery is that trading volume spiked just prior to the market’s crossing the neckline and continued to be propelled by nearly twice the trading volume.

Within a month of the Index’s cross, both the 60- and 90-day moving averages turned up, crossed the 180-day moving average. This was happening just as the Index crossed above the 300-day.
2003
The Tech Bubble Crash also ended in a double bottom formation, this one taking nine months before the Index was able to cross above the neckline; the distance between the bottom and the neckline was 20%.

What makes this recovery distinctive is that all the repair work was done beneath the neckline. The cross above the 180-day moving average on March 11, 2003 was significantly below the neckline as did the cross of the 60- and 90-day moving averages over the 180-day. The Index actually crossed the 300-day moving average just before it was about to cross the neckline. No significant volume increases accompany this work.
Current
Work with me on this as I try sorting out the future course of this recovery. Accepting that I come at this with a bias, here’s how I view this chart:
- Rising wedges usually end with prices/values coming out the bottom rather than the top of the wedge.
- As pointed out at the beginning, there’s a 36% distance between bottom and neckline. It’s too significant a move to sustain a cross of both the neckline and the 180-day moving average.
- There doesn’t appear to be any significant ratcheting up of trading volume. Furthermore, 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 60- and 90-day moving averages haven’t turned yet and there’s too much of a gap (13%) between them and the 180-day before they can cross. It could take several of months before that cross will occur.
- The pattern conflicts with symmetry sensibilities; the earlier bottoms were nearly perfectly symmetrical. The symmetry in this base would result from the formation of a right shoulder.
- Time would allow the 300-day to continue its descent aiming at a convergence and the Index crossing above it around October.

My plan is to wait for the market to drop back to the 800-850 area before more fully shifting my focus from market timing to stock selection. And then again, the market may surprise, cross the neckline and bid its time on that side waiting to converge with the 300-day. I may regret having been so explicit but it’s my feeling and opinion.

January 17th, 2009

The Inauguration and the Market.

When most people see into the future they usually merely extrapolate recent experience. Some, however, move to the next step in projecting the future and try to identify when and why the extrapolated trend will change (sort of like taking a contrarian view).

Most projections you see or hear today see the damage that’s already been done to the economy last year, especially during the fourth quarter (remember, the recession was said to have begun in December, 2007). They extrapolate into 2008 and see major bankruptcies in retail (Sears, Gap, Macy’s), banking, home construction and, even, in state, city and local governments. They see oil as having declined from $140 to $35 per barrel and can only see the price dropping to the $20′s (remember when oil as $140 and most saw it going to $200?).

It’s easy measuring what’s happened over the near-term past and seeing what a continuation of that trend might lead to over the near term future. For example, it’s relatively easy to see China’s pause after the Olympics and the slow-down it’s experiencing due to the global economic recession lead to continued and deeper recession there leading to social conflict and strife.

But what’s not easy to do, and quite risky I might add, is to see these trends turning and even reversing. If you’re selling something (like a financial newsletter or a political platform) it’s an easier if you appeal to people’s fears than if you appeal to their hopes. More of the same is more believable than something that doesn’t yet exist, can’t be described and can’t be experienced.

Take, for example, a recent Bloomberg article in which both John Murphy chief technical analyst of StockCharts.com and Ralph Acampora, a true guru of technical analysis say that they hope that the October lows will hold but, if they don’t, the Dow will decline further to 6000 (and the S&P 500 to 600, by inference). That’s where we are today in the market.

But I’m going to go out on the limb and say that I think we did hit a bottom and it will hold. Furthermore, I believe sometime before the end of 2009, the S&P 500 will have hit 1100 and be struggling to move solidly into a bull market, mark-up stage. On what do I base this speculation?

On a long-term market view I reported on October 11 in “The Magic Number is Actually 7.5% per Year”, [Confession time: the title actually said "8.12%" - it was either a typo or purely a calculation error to be corrected now!] In that post I included the chart I’ve updated below (please click on it to enlarge):

Back in October, I wrote:

A band of 44% above and below the regression mean bounds the Index throughout the period and contains the Bull Market of the 1950-60′s, the secular Bear Market of the 1970′s and the Bull Market of the early 1990′s (except for the tech bubble leading up to Y2K). Interestingly, all the Bull and Bear Markets prior to the Tech Bubble, grew at either the upper, lower or midpoint at the 7.5% rate.

Here’s what I all this means for us today? The good news is that after last week’s collapse, the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be very near the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.

Those of you who’ve enlarged that charge can see that the lower boundary has moved up from 789 in October to 803 last Friday. Since the chart is based on month-end data, November’s intra-month low close of 752 would have been marginally below the lower boundary. But the market bounced back and Friday’s close of 850 is not more than 5.8% above the lower boundary.

Can the market decline back to that lower boundary? Perhaps. Will it break through? I think not. The only times it fell below that line were:

Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.

Extrapolation is easy and safe. The risks and rewards are in seeing when and how things will be different.