Double Dip, Recovery or Utter Madness?
This thing is really dragging itself out … and it would seem, to no end. It has been a long time since this market has been so clearly divided – on one side, we get the pessimists who insists that this market is due, not for a correction, but a sell-off of double dip proportions and on the other side, the optimists who believe the recovery is afoot, leaving these pessimists behind to groan missed opportunities.
The pessimists have a common bond. They are predominantly economists who tend to rely on data and statistics to form their analysis on the market. Often, these numbers are lagging. To make matters more complicated, we have analysts who project these numbers ahead of the actual headline to give us an inaccurate sentiment that often weighs on the market for a short time. I am talking about a market becoming overcooked because of better-than-expected or better-than-feared numbers as compared to these analysts’ expectations or worse-than-expected/feared numbers that tanks the market for a short, irrational period.
The frustration of not getting a sell-off is the result of the optimists buying in on every little dip that doesn’t smell of a rational, long term sentiment that would justify a bear market again. Many optimists believe that the worse is over and it could well be. The worse that can happen is that the market does the expected double dip and recovers on the sentiment the sell-off is done and dusted and that is now time to buy.
These optimists come in the form of technicians who feel that the market is in a confirmed uptrend or fundamentalists who accumulate “safe” stocks based on valuations. Naturally, in this sort of market, value stocks are lying around everywhere like roaches after swing-fogging. Thus the pickings are plenty. This is one of the reasons why the market has been running up.
So while the pessimists blame the bulls for not allowing the market its rightful place in the south, the optimists are scoffing at the bears for being losers at getting left behind when the train left the station six months ago.
Where am I in all this? I am an optimistic bear. (You knew that was coming, right?)
While I believe that the market should revisit its lows and that this rally is overdone, I am not denying the power of this rally and the opportunity to rake in some sweet easy bucks. The real easy money is well over but there is still some more to be made. Plus I am not going to be foolish and hope for a stinker-tanker when some of the recovery signs are so obvious.
I use models to make my trades. I trade sectors, seasons, cycles and trends. And I scalp. As a Scalper, I really don’t care which way the market goes and I don’t hold my heavily leveraged scalps overnight. Thus, this situation doesn’t bother me. But I do trade on swings and this is where caution is necessary. To limit my risk, I always buy lows and sell highs. And I use models and historical charts to aid my risk management.
In one of my models, the indication of bond yields, interest rates, manufacturing and consumer sentiment is showing me signs of an early recovery. With Israel and Australia raising rates and other nations about to follow suit, this last piece of the model is falling into place. The bad news is that this model is usually six to nine months ahead of the actual event. So if the model is as reliable as it has been for the last 5 recessions, then we might just be looking at a recovery by April/June 2010.
That also makes sense seeing that Q1 is always the most bullish quarter of any year. Such leadership from the market will surely spur the economy back to health … although it must be said that a longer systemic problem will still haunt us. This is not uncommon as we really didn’t recover fully from the AFC in 1997, RFC in 1998 and Dot.com recession (2002) before we got hit with the next one. Let’s not even mention how the whole thing snowballed on us since 1974 into 1987 till now.
A second model I have tells me that the bottom is indeed here. This model shows the market preceding the economy by 6 months. Thus, if the market is at the bottom, the economy is lagging its downtrend by six months. This model puts paid to the pessimistic economists’ view that this rally is not justified. The market has always led the economy and its has done so, for the most part, by 6 months. So here we are, possibly at a market bottom while the economy still tanks. Are we really there yet?
This second model reveals that as the economy is going down to the bottom, Financials usually lead the market, followed by leadership in Tech. Guess what …
SPX vs XLF vs XLK
But there are some conflicting events in this picture … what is Gold doing at $1,050 and why is Natural Gas still stuck below $5 and why hasn’t oil come down from $70 yet? And even more troubling is the dollar at a lower low than last year. Are these commodities about to buck a trend? I seriously think if any nation should raise interest rates, it is the U.S. Stop printing money, stop stimulating and just raise interest rates. It is about time Americans tasted their own bitter medicine, take the quick shock and get over it. Then get back to doing what they did best – innovating and producing.
And if there is one place the U.S. can get some respite, it is in their financial markets. Make it work and get it going properly. Let’s turn this distressed trend into a real bull rally already.
The economy is a mess, yes. But that has never stopped the market from doing what it does best – lead the economy.
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