Here is an e-mail I just sent to my Dad and some friends of mine interested in the stock market:
Volume is picking up a bit in the last hour here as the major indexes hit new lows (Dow: -250, S&P: -31).
Overall now the S&P is down 85 points (7.4%) to 1065 from its closing high of 1150 on Tuesday January 19 (12 trading days). The Nasdaq is down 191 points (8.2%) over that period.
But I don’t think this is the beginning of a new bear market. Frankly, the earnings news has been too good and is suggestive of a short/intermediate term bottom in the economy (see “Paroadoxically, Big Tech Earnings Suggest Recovery”). Yes, I said the economy not the stock market. That should support the stock market to some extent.
The government’s emergency measures, all the bailouts and stimulus, have done their job in stabilizing the economy and providing an injection of adrenaline fueled growth. But the after effects of these actions might not be felt for some time. I don’t expect them to make their full impression on the market in 2010.
The top is in with some distance being put between the current levels and the tops on heavy volume. I don’t think we can move above 1150 in the S&P 500 in the next 6 months and not much higher than it during the next 12.
That said, I covered all of my shorts in emerging markets (EEM, ADRE, EEV, EWZ), financials (GS, XLF, SKF) and commodities (FCX) during the final hour of trading today. I also covered half of my overall market shorts (SDS, QID) but am keeping the remaining half as a hedge to my longs. This is a very small position of 2-3% the overall portfolio though it is 2x leveraged. I am also keeping my US consumer discretionary shorts (JWN, TGT, BBY) which have not been hit hard in this correction and are still overvalued.
Nevertheless this is an IMPORTANT development. It marks THE END OF THE BULLSHIT RALLY.
I have been waiting for this thing to die for months now and finally it is over and I can stop listening to all the assholes talking about an economic recovery and new bull market. And I can stop listening to my Dad tell me about all his trading profits in Alcoa, Citigroup, Bank of America and the other garbage he’s been speculating in.
What comes next?
I think we enter a more rational, stagnant, range bound, bloated market environment.
The hedgies and investment banks (GS) are unloading their longs now and over the last three weeks and are no longer committed to a higher stock market to profit from for their own books.
Now we can just work through all the stimulus and bailouts that are jacking up the economy and stock market and try to let markets and the economy sort it all out and reach some kind of equilibrium. My guess is we trade between 900 and 1100 for the next year.
At some point, there will be another big leg down. It will be comparable to the drop off the cliff in the Fall of 2008 and take the S&P to new lows (below 666). But I can’t see that until at least 2011 and it might be 2012 or later depending on how successful all the government manipulations that are sure to come in an attempt to avert such a scenario are.
For now, it’s back to farting and watching meaningless analysis on CNBC by a barrage of experts for me…..