The bounce I was looking for in last week’s column arrived on Tuesday and continued for four solid days. As bear market rallies go, this one has been pretty good so far. All three indexes—the Dow, NASDAQ, and the S&P500 are up about 10% for the week giving investors their first sign of relief all year. But that’s old news. The question on everyone’s lips is what happens next.
So far this has been an almost text book technical rally. On the S&P500 the first real resistance was at 750 and lo and behold the market paused at exactly that level on Thursday. It then eked out an additional .25% on Friday. Historical experience indicates that the markets should consolidate at these levels over the next day or two.
The market was no sooner closed on Thursday afternoon with an additional 4% gain when my phone started ringing.
“Should I be buying Citibank or Bank of America here?” one retired client from Cheshire, Ma. wanted to know, “both stocks are dirt cheap, right?”
Well yes and no, depending upon your point of view. Over the last week both company’s stock prices have had double -digit gains and have outpaced the market averages substantially. They are cheap however, if you consider where their stock prices were at the peak of the market in 2007. The question to ask is whether or not their peak stock prices were justified given that a huge part of their earnings over the past several years were fueled by paper profits that we now know were fictional. Both banks have taken tremendous losses and there are more losses waiting to be booked.
“But Citibank was profitable in January and February,” argued my client.
He was referring to a leaked internal e-mail from Vikram Pandit, the CEO of Citibank that was sent to employees at Citibank on Monday evening. It was this memo that supposedly sparked the relief rally. No one actually knows if Citibank will have an up quarter (after losing money in the last five). But even if it does, the company still has a long way to go before it can be restored to its former glory, if it ever will. I have a feeling that rather than continue to look at old names like Citi, Wells Fargo or Bank of America, investors might look at up and coming independent banks that could take market share from these battered giants.
In the end, I advised him and advise you, my reader, that if you want to jump in to this market and chase stocks do so at your own peril. That’s not to say the markets won’t continue to move higher. There’s a good chance that they will (although there might be a 2-3% bout of profit-taking first). The next target in my crystal ball would be S&P 800. For some reason, investors and the media alike attach importance to round numbers (Dow 7,000 for example). How far do I think we can take this bear trap before the jaws snap shut? My guesstimate is S&P 840-850.
As for gold and silver, they too have had a pretty good week. Both have rebounded nicely off the bottom of my range. I expect they will continue to fluctuate for a time before climbing toward new highs.