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Daily Commentary
Significant Low To Play Out Over Next Week
David Goldring
Tuesday, June 10, 2008
The major indices closed the session in mixed fashion yesterday, with the Dow rebounding but Technology issues leading the Nasdaq lower. The S&P 500 (1361.76) reached our mid-point at 1350 and the Nasdaq (2459.46) tested the 50 day average to the decimal point prior to a 30 point rally. Going back we have always felt the rally off the March 17th low needed to be “tested” prior to the second phase, and that is what we are seeing now. The bears are becoming increasingly emboldened and the more universally accepted thought is that we have just experienced a classic secular bear market rally. We disagree and believe the recent correction is a buying opportunity ahead of a sustainable rally into the 2H. Our rhyme with 1990/1991 is still very much alive and as we have said for weeks now, look for a significant low to play out in early June. The jump in the unemployment rate to 5.5% got the market spooked on Friday but it shouldn’t have. In the last sixty years there have been twenty times that we have seen a percentage gain in the unemployment rate that was similar to or greater than Friday’s increase. Of those twenty occurrences, the stock market was higher a year later 90% of the time and the mean gain was 25%! The Fosback indicator looks at Industrial Production, Manufacturing activity, Non-farm payrolls and Personal income; and gives a buy signal when all four are below the level they were at six months ago. The buy signal has been given four times since 1979 and the mean gain of a stock on the NYSE was 37% a year later and over 100% three years later. A fifth buy signal was just given in May. Whenever consumer confidence has fallen this low (59.8 in June) the stock market has rallied substantially over the following year. For example, the last time the index fell below 63 was March 6th 1982, and the market soared over 40% a year later. Bull markets are born out of pessimism and an underlying undervalued condition. The IBES valuation model remains severely undervalued and towards thirty year lows, and investor enthusiasm remains very negative. We believe that March 17th was the birth of a new bull market similar to the October 1990 bottom. We believe that the recent pullback is analogous to the early January 1991 shakeout, and if history were to repeat itself exactly (which it never does) then the low now on the S&P 500 would be 1328 and 2387 on the Nasdaq and would be made June 16th. With this in mind we will look to add long side exposure aggressively over the next week. The market moves in anticipation of what the future holds and that is why reading today’s headlines is never a successful strategy. While Oil prices are soaring to $140 today, we suspect they will be substantially lower a year from now. While consumer confidence is so low today, history has shown that from 59.8, the only direction left is up. The single best time to buy stocks is when the economy is in a recession but there is light at the end of the tunnel. As Bernanke said yesterday ‘the risk of a substantial downturn has receded”. In terms of where we are in the investing cycle and underlying valuation, we feel it doesn’t get much better than this and we are looking at a rare opportunity to get long.
S&P 500 (1361.76) looks set to retest yesterday’s low at the open. The mid-point of the March 17th low to May 19th high is 1348.61. Any move below this will have technician screaming foul and predicting a retest of our 1255/1270 lows. We feel as though a break below the mid-point may well lead to accelerated near term selling pressure, but that this will be short term in nature and set up a great buying opportunity ahead of the second phase of our rally. The April low is 1324.35 and the up sloping 200 week average is at 1319, and represents the most downside we think we will see over the next week of anticipated panicky action. Certainly any give up of the 200 week would give us cause for concern, but we remain very confident that in terms of price and time we are extremely close to a significant bottom and higher low to the rally that started March 17th.
Nasdaq (2459.46) well we got our 50 day test, and now that it is in, it lends much greater confidence that should we recapture our 200 day average, we will see a sustained march higher back to the December highs. We are set to open up around 2440, and the 50 day is now at 2433. The two May lows are 2429 and 2430 and yesterday’s low is at 2429. Any break of 2429 would lead to accelerated near term selling pressure and is an obvious stop loss point. Often when the stop loss is this obvious, it is often broken to force the selling pressure prior to the real buying interest. While we could well see a panicky few sessions and a move to the 0.382 Fib level at 2400 or even the 20 week at 2375, this would be the time to buy aggressively ahead of the rally we see developing into the 2H.
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