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Archive for September, 2009

This should be an interesting week in the markets.  We have the end of the quarter which typically produces some volatility for the market.  We also have the very important unemployment report that will be due out on Friday.  The unemployment indicator has become one of most important monthly indicators.  Although employment is considered a lagging indicator (an indicator that is one of the last to recover), its continued weakness might be signaling a bigger problem.  In his weekly newsletter John Mauldin wrote about the unemployment situation from another perspective.  To sign up for John’s free newsletter go to www.frontlinethoughts.com

He wrote that it takes the creation of 15 million jobs just to get us back to normal employment around 5%.  He makes that estimate by assuming the monthly job destruction will soon becoming to an end.  I think that he estimates another 500,000 jobs will be lost.  He writes, “that means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month.  As an Average!!”   

Then he states these statistics:

“If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.”

I equate the destruction in employment much like a perfect storm.  The damage has been so great that it will take a long time to recover.  Both the Bush and the Obama Administrations allowed the unemployment situation to get this bad without doing anything about it.  In fact, I still don’t see anything in the works to fix this problem.  The stimulus bill will create mostly government based jobs.  However, I don’t think it will create enough to even put a dent in these numbers.

So, do you think that the market already expects the unemployment situation to remain this ugly?  Of course, there is the notion of a job-less recovery (which that has never made sense).  However, I think that this situation goes well beyond a typical unemployment problem.  Can the market continue to remain positive in the midst of so many people being affected by lack of employment?  I personally think that we see this problem manifest slowly and at some point the markets feel the impact. 

I know that this is far from positive but it is important to see all sides so that you can make prudent decisions with retirement dollars.

Levels to Watch on the S&P 500

From time to time, I like to point out important price levels on the S&P 500. 

Above 1080 – Positive

Between 1080 and 1043 – Neutral

Below 1041-Negative

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There all types of indicators that you can look at in the stock market that can give you an idea of what might lie ahead.  Many of the indicators that I follow would suggest that we are nearing the end of this stock market rally which began March of this year.  One of the areas of focus concerns optimism.  Typically, over the top optimism has been historically associated with tops in the stock markets.  In other words, it has been historically negative for stocks when everyone is so optimistic.   

One indicator of optimism worth following is the percentage of cash that mutual funds hold.  Generally speaking, mutual fund managers hold 5% on average of their assets in cash.  It is considered bullish for the market if cash holdings are between 5% and 8%.  If cash holdings are above 10%, that would indicate that mutual fund managers are generally negative. However, when you take these percentages to the extreme it can mean that things are about to change.  Extreme would be above or below that range.     

Consider these statistics that date back to 1961. Throughout the 60’s mutual funds held on average 5 to 6% of their portfolios in cash. In some instances, it was as high as 9% to 10%. Cash levels of 4% or lower was a precursor to a market decline. In other words, when mutual fund managers held around 4% of cash, it was a signal that the stock market was about to go into a bear market or at least go through some type of a decline. For example, in 1972 these cash levels went as low as 3.9% and a -42% decline followed.   In March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.  In July 2007 (right before the worst bear market since the Great Depression), we saw cash levels at a record low of 3.5%. 

Today the latest reading shows cash levels at 4.2% and heading lower.  Could that be telling us something?  Only time will tell.  It is just another indicator telling us that risk to being invested in stocks continues to increase. 

As far as levels on the S&P 500 to watch?  The price level of 1062 is still key.  Falling back below that level would be a key indicator that we are going back into a decline of some type.

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A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession.  A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again.  Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about.  Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles.  The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression.  I do think that in the least a double dip recession is a high probability. 

People are distrustful regardless of the rise in the stock market.  There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt.  That is not even considering a Congress that is trying to ruin this country through socialistic policies. 

To get a good comparison, you can’t look at post WWII recessions.  It would be a lot like comparing apples to oranges.  This is what makes this situation so dangerous.  Yes, people are distrustful.  At the same time, people are also hopeful.  They are hopeful that the worst is behind us.  If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face.  Today, at least confidence is on life support after a grueling 2008. 

Levels in the Market

I haven’t covered significant levels in the stock market in a long time.  (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us.  It is a range of levels between 1042 and 1062.  The ability for the stock market to get above 1062 and stay there would be a very bullish event. 

Isn’t a rise of 55% in the stock market a bullish event in itself?  Only if the bear market is over.  Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred.  It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

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Back in March of this year when the stock market found a bottom, I posed a question that I felt would be “the” question for investors. Is this a bear market rally or is this the beginning of a bull market?

I have felt all along that this is nothing more than a bear market rally. A bear market rally is a pause in the bear market where the stock market goes up for a period of time.  Think of it as the bear resting and gathering energy for the next big decline. 

Of course, if it is a new bull market, then the March low of this year was the worst that it will get. 

I believe that we might be getting close to finding out.  Many of the indicators are stating that the moment of truth is here.  If this were a healthy normal market, we would at least see some type of market decline in the course of a new bull market.   I think that we might have already started that process.  If this is a bear market rally, then this decline will morph into something serious.  This should be a big test. 

For this stock market to change from a bear to a bull, the important level for the S&P 500 to reach would be 1121.  The S&P 500 would have to surpass that level and stay above that level.  If that were to occur, the evidence would support a major change for the stock market trend.

The unemployment numbers came out again this past Friday and showed more disturbing news for the economy.  Remember, if they cannot fix unemployment, this economy is going to have a tough time getting going again.  Unfortunately, Obama’s answer to more jobs is Government jobs through the stimulus program.  That is not the type of solution that will solve this problem.   

According to the Government’s “version” of the unemployment report, we lost 216,000 jobs. Of course, that was after they “added” back in 118,000 jobs that they created out of thin air.  As a review, each month the Government “estimates” the number of jobs created each month that they “feel” the Department of Labor misses.  It is such a farce. 

The number of those jobless as well as the overall unemployment rate is much higher than reported.  It is an absolute joke that they continue to report this garbage. 

I wanted to give you a link to an article about Robert Prechter.  He is a well regarded market analyst that has called major tops and bottoms of the market.  He uses a discipline called the Elliot Wave Theory. According to Elliot Wave, we have again hit a major top and it is about to get ugly.  Who knows if this is right or not?  I do know that he has a very strong track record and warrants some attention. 

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