The Week Ahead in Stocks: Ugh!

This equity market has been the most violent of any type I have ever seen. The S&P 500 on Friday had a destiny with the big 925 level and all of a sudden, it reversed course and dropped 55 points to finish at 860. This was the ultimate kick in the stomach to the bulls, like myself, who thought we put in a short term low around the 820 level the day before. The selling was swift and most buyers just stood out of the way (as shown by the 90% down volume in the NDX at last read). It once again turned my stomach upside down and removed a little hope that I had for stocks in marching back to the 1000 level. I was truly left with hopelessness all weekend thinking that once the markets reopen, they would continue to drop hard making Monday a terrible day to remember.

Interestingly, I have had these gut feelings for the better part of the past few months. For the most part, I have been making money on the S&P but the times I have traded against the trend, that being a downtrend, I have felt like I am sitting in the middle of a highway waiting for car to come at me at 100 mph and there is nothing I can do about it. The government is to blame with their constant changing of the rules; wall street is to blame for taking the credit bubble to far; and main street is to blame for being sucked into the euphoria that took the S&P to 1559 not too long ago. All of this has created an environment where memories are as long as the next trade and conditions are the most treacherous I have ever seen.

This is not to say that things cannot improve. However, the decline in the economy has been so swift and efficient that one cannot help but wonder what earnings are going to look like for the likes of IBM, Mr. Softee and King Google. One wonders if fast food giant McDonalds can constantly keep up the earning pace. Will Lowes and HD have issues? And can GE survive when the corporate world is frozen? Essentially, we have been given the ultimate of unknowns and very few are sure what is next. When uncertainty is high, most people sell. Generally speaking that is the time I buy and I did just that the other day on the reversal. I added to my positions on the dip Friday only to be punched once again and left wondering - when will the next dive occur?

Now I sound very pessimistic but to be honest, it is hard to be an optimist these days. While credit conditions continue to thaw and a credit demand level continues to rise, the banks refuse to lend - to individuals and to each other. This lack of lending combined with the fear of job loss has lead to a freeze on both the corporate and retail sides of the economy - 100% of GDP. What does that mean? What will the effect to GDP over the short term? I am reminded that from 1932 thru 1937, the US Economy following three years of problems, averaged growth of about 6% or so. The 1929 thru 1932 period was depressionary with negative growth for 8 straight quarters at one point. I have to wonder are we up for the same fate? Are we at the point where growth does not occur and stocks essentially move back to book value plus cash for valuation - ie liquidation value? The longer this freeze persists, the more likely this occurs.

So you could say that this technician has panicked though my returns are not to blame on that end (I am in the green for the year thankfully). That is truly possible. My charts look horrible across the spectrum. I cannot make a bullish case for the broad indexes using weekly and long term charts. I can tell you that the low we saw Thursday was very interesting on many levels - it essentially was a bottom in stocks and a top in the dollar, simultaneously. Since the dollar has represented fear of late and stocks have been a beneficiary if you will of that fear, it was a major turn. I still believe that is the case. However, the dive late on Thursday means that the road traveled going forward will require a seat belt!

The Short to Long of it
The markets remain dislocated but as I mentioned, I believe we put in a significant turn on Thursday. Thus I have moved to a much longer position for my money in quite sometime. I got bearish on things back in late 2007 when the VIX became too complacent and my bull bear model turned down. Now, with my bull bear model extreme, financial conditions improving (need that corporate bond index to follow) and the turn from the lows this week, I believe we are moving upward and now setting a date with the 1000 level sometime in the next few months. Of course, I am going to put out there a quick caveat; If the 817 level does not hold, all bets are off and there is a very good chance I will be liquidating as I believe the 650 level in the S&P will be next. This will also tell me that things in the economy are getting far worse than I believe.

In terms of the medium and long term, the bears continue to control things. The bull bear model is pretty extreme at the moment which argues for some moderation but over the longer term, the bears still control things. As the short term indicates, I am looking for the stock markets to bounce higher, even in the face of a very weak retail environment (though in looking at Target today, I did not get the feeling that people have completely retrenched - just switched to a cheaper store).