A Welcome (if only temporary) Return to Stability
By Frank Barbera CMT. November 4, 2008
While it is still “too soon to tell” whether or not a long term low will be established in the stock market in the 750 to 800 zone for the S&P, one thing is certain, prices have finally begun to stabilize. At first blush this may sound silly, as we all know the stock market has enjoyed a powerful rally over the last few days. However, Step #1 in arresting a bear market is to STOP going down. Put another way, you need these bullish interludes, these powerful bear rallies, to help begin the process of stabilization. And believe me, stabilizing the capital markets after the kind of pasting they have been through in recent weeks will be a “process” with many powerful rallies and declines.
In my last GST newsletter that went out the morning of October 28th, with the S&P 500 sitting at 859.95, we told subscribers that the S&P was about to embark on a powerful rally back up across the trading range to above 1,000 in the short term. Flash forward five days later and the S&P has now moved above 1,000 and still appears to have some additional strength ahead during the course of this week. At the same time, I also told subscribers that the US Dollar was ready to reverse and that process is also now underway, with the Dollar Index experiencing several of its largest down days in the last few decades over just the last few days. For resource related stocks, the downside reversal in the Dollar has been a boon, as the OIH, Oil Service Index, and the Amex Gold Bugs Index and the HUI have both rallied powerfully in just a short period of time. In the charts below, we flash back to last week's update when we highlighted the HUI and the OIH at 172.69 and $85.35 respectively. This morning the HUI breached 221 on the upside and the OIH moved above $101. That’s a move of +28.48% and +18.82% respectively in just five days time.
Above: OIH reprinted from last week's update.
Above: HUI reprinted from last week's update.
Getting back to the broad stock market, perhaps the best case outcome that can be hoped for under present recessionary conditions would be that of a long base building process akin to what was seen back in July 2002 to March 2003. For those who don’t remember that far back, it was a period (shown below) of 8 months where prices just meandered back and forth in a huge range. To draw a very rough parallel, we have aligned the recent panic low on October 10th, 2008 with the equivalent panic low of July 23rd back in 2002. Notice that back in 2002, the final price low was not seen in July, but rather was seen in mid October on October 9th, 2002. In the current instance, projecting the same type of time frame forward for a more important low this year would yield the proximity of a major low at or near Christmas. Any guarantees things will pan out this way? Of course not. This is just one of many potential outcomes that could lie ahead.
Above: THEN and NOW, the Panic low of July 2002 aligned with the Panic Low of October 2008, we will see if a wide range follows.
To be sure there are still likely many episodes of ‘bad news’ that need to be worked through more completely before a more important stock market low can be discerned. At the moment, the much larger downtrend remains in full control and if you want some quick proof, look no further than the daily chart of the S&P 500 with its 50 day moving average and 200 day moving average.
Above: S&P 500 with 50 day and 200 day moving averages.
For the S&P, the 50 day average closed Monday at 1098.86, with the 200 day moving average at 1275.37. At present, the 50 day average is dropping 5.20 S&P index points per day, while the 200 day average is dropping approximately 1.50 S&P index points per day. At this rate, it will be at least mid December before the 50 day average is down into the mid 900 zone, and it will be May of next year before the 200 day average reaches the 1,000 mark. Put another way, we see no way that these two moving averages can re-cross one another to the upside before June 2009 at the earliest. As a result, readers should be prepared for a very see-saw market climate for some time to come, and again, that is the best case outcome, and it assumes a ‘recession’ not ‘depression’ scenario for the broad economy. Before getting truly bullish on the stock market, as in, here comes a new bull market bullish, a lot of water needs to flow under this particular bridge, and among the most important elements will be time. The market will need time in a base, time-spent draining downside momentum, and time to allow the price structure to rebuild a launch pad for a renewed and sustainable advance.
Above: GST Bank Index with Cumulative Volume
Of course, within the stock market, one of the key sectors to continue to monitor will be the financials where our GST Bank Index has plunged from a high of 667.15 on May 23, 2007 to a recent low of 227.53 on October 9, 2008, a decline of 66% in 17 months. On the daily chart, cumulative volume seems to be putting in a double bottom low, as does the daily advance-decline line. In both cases, a lot more work will need to be done in the coming weeks to begin a more compelling argument that some really material improvement could lie ahead. Still, recent developments have been a very important first step in the right direction and with other central banks poised to continue cutting rates later this week, it is possible that the combined power of global central banks may be starting to get the contraction under control.
Above: GST Banking Index (30 stocks) with Daily A-D Line.
At the close, stock prices surged with the DJIA gaining 305.45 index points to close at 9625.28, a gain of 3.28%. Other indices performed strong as well with the S&P 500 closing higher by 39.40 index points to close at 1005.70, a gain of 4.08%, while the NASDAQ Composite closed higher by 52.69 index points at 1779.02, a gain of 3.05%. December Comex Gold gained 34.10 to close at $760.90, while the 10 Year Treasury Bond fell by .13 to end with a yield of 3.77%. That’s all for now,
© 2008 Frank Barbera