Insights & Advice

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Look for More Upside until Inauguration Day

I’m not sure which will come first: the 1000 level on the S&P 500 Index or Inauguration Day. Either way, we still have a chance to move higher in the days ahead. Not that I have changed my bearish stance. I have not.
It simply means that the bear market bounce I identified before Thanksgiving is still in tact with another 11 % or more upside. That would make a 35% move on the S&P 500 from the November lows. If enough investors jump in, I could be underestimating how high the markets could go.

“Why in the world should the stock market move higher,” demanded one of my clients last month.

It’s a good question especially when the economic news is so dismal and getting worse by the day. The answer is that sometimes the stock markets disengage from daily events and focus instead on the future. Since November I believe investors are betting that our new president, Barak Obama and his new team of advisors will get us out of this mess. At the same time, when the markets hear numbers like a trillion dollars and words like tax cuts, well, that triggers a whole lot of “what if” scenarios. Wall Street spin doctors start crunching numbers, giving estimates, making brighter forecasts and suddenly everyone is rushing to identify stocks that will be “winners” under the Obama plan.

It is a game the investment community plays all the time. It does not matter that most of the time the tons of data and statistics that back up their recommendations are worthless and their what if scenarios rarely if ever play out. As long as it sounds and reads plausible a number of investors will buy into their recommendations. So right now the Street is touting the benefits of the Obama Plan, while proclaiming for the fifth or sixth time in a year that “the market has bottomed “ Stocks are cheap, happy days are right around the corner and you better get in before it’s too late.

Given that there is over $2 trillion on the sidelines in cash and government bonds, the possibility that once the market reaches a certain magic level (maybe 1,000 on the S& P, for example) some of that investment money rushes back into stocks. That would goose the markets higher. The media and the spin doctors would be hailed far and wide for their ability to forecast the markets. And if the history of bear market bounces is any guide, once the last dollar is invested by the last reluctant investor, the markets turn down and re-test the lows or break them without warning.

Any number of excuses would be given for the fall. The Obama Plan might take more time than the markets anticipated or maybe Congress delays the implementation of the proposed plan or the economy takes a turn for the worse. Don’t worry, if this rally is a bear market trap there will be plenty of reasons for the markets to swoon. Unfortunately for those who took the bait and bought in it will be a bit too late.

Posted in A Few Dollars More, At the Market