Learn to love the sideways market
Posted
Feb 21 2008, 09:41 PM
by
Charley Blaine
So, you're wondering, when is the stock market going to take off again? Didn't the market bottom in January and won't it just start up another bull run?
Maybe, but the charts are telling me something different. What they tell me is that the Standard & Poor's 500 is settling into a trading range of 1,300 to 1,365. The Dow and the Nasdaq charts offer similar hints. And that would actually be good news because it would imply a bottom is starting to form to the sell-off since October. For another look at the data, check out the Bonddad blog's analysis.
You'd better hope the market trades sideways for a while.
What scares me is that the market could tumble further and retest the S&P 500's intraday low of 1,269.87 on Jan. 23. And if the index were to fall through that level, it might fall to around 1,225, which would bring the total loss for the index to about 22% from its closing high of 1,565.15 on Oct. 9. It could fall all the way down to 1,100, a level the index traded around for about 10 months in 2004.
Yes, I mean 1,100. Yes, that translates into a loss of nearly 30% from the October high. Yes, that's painful. But it could be worse. The S&P 500 fell 49% between 1,527.46, its high on March 24, 2000, and 776.76, its low on Oct. 9, 2002.
So, if all goes well (and you want things to go well), the market will trade in range of 1,300 to 1,400 for the next three or four months, maybe into the latter part of the summer. And then, if all goes well, the traditional fall rally would start to kick in. Here's why.
The Fed's interest-rate cuts. Won't they start to have an impact on the economy soon? Probably not until the latter of the year.
The government stimulus package. The Feds won't send out the checks out until May at the earliest. So, it will be summer before the cash starts to move into the economy. That assumes everyone spends the money on stuff as opposed to, say, paying off credit card debt.
The credit system mess. The damage from the subprime mortgage crisis just keeps bubbling away in ways nobody expected. Check out "Fresh credit market turmoil" on NakedCapitalism.com. More write-downs are coming from the banks, the investment banks, the insurance companies. And getting a mortgage will be a problem because nobody but nobody wants to make a big loan in a down market. Lastly, I worry that one of the big banks or investment houses will shock us all with a problem nobody saw. Maybe it will be Societé Générale. You should hope that it is. In the meantime, check out Floyd Norris' column at The New York Times on how there isn't a towering figure like J.P. Morgan stepping to the plate to lead the bankers to happier times.
The tech sell-off. The Nasdaq is off 20% from its Oct. 21 peak. The Nasdaq-100, which tracks the large Nasdaq stocks, is off 21%. That's an ugly bit of selling. Google is down 27% this year alone and 32% from its peak in early November. That's really ugly. And it suggests that, yes, the stock did become wildly overvalued last year along with a lot of other techs. (Apple is off 40% just since the end of December.) But the good news for Google shareholders is $500 for the stock looks to be a powerful support level. Besides, Google's shareholders are big boys; 80% of the stock is owned by institutions. Take a look.
The commodity bubble. We're in the midst of the biggest commodity bubble I've seen since the end of the 1970s. Gold is pushing toward $1,000 an ounce. Crude oil crossed $100 this week. Silver is at levels not seen since 1980. One can argue that growth in China, India and elsewhere will keep commodity prices high. But a bubble is a bubble, and it will burst. How do I know? I hear lots of people saying, "It's different this time." If you want an idea of what might happen, check Bubble Meter, a blog that tracks the housing bust.
