Bullishness is pervasive. For the first time in months, longer term sentiment is not extremely negative, thanks to the most powerful rally in at least 6 decades. Shorter term sentiment is downright giddy and the bulls are coming out of the woodworks.
Mark to Market and Uptick Rule give the bulls further fuel for enthusiasm. Bulls are counting on a further rocket launch if mark to market gets approved April 2nd and mark to fantasy becomes the order of the day.
Here’s why we think the rally could be history.
Technicals have created a huge amount of resistance at higher levels above 828. This explains why the market’s had trouble piercing the 830 barrier despite three failed attempts. Further significant support exists in the 842 to 858 region and every step beyond. Further upside is going to be a fight for the bulls.
Earnings season is upon us. Granted the market is more than willing to look past terrible earnings. However, this rally has been driven by the following:
- an internal citibank memo that stated the bank was profitable on an operating basis.
- an uptick in housing & durable goods
- Obama’s stimulus package
- Geithner’s bank plan
Valuation. S&P EPS using the operating earnings metric were a negative 11c in the first quarter. Run rate earnings are at $52 but the consensus is now floating around $45. Either way, a 10x multiple on generous operating earnings estimates yields a long term target of $450 – 520.
Economy
The real news this week was the Fed’s open announcement that the era of quantitative easing had begun and the Fed essentially announced that they would openly print money.
We learnt a long time ago that you cannot invest based on the headlines that are submitted by CNBC and the media outlets. Savvy economists will support our view that the uptick in housing was a seasonality uptick. The actual number was terrible, down over 40% year over year.
Ditto with Citibank’s vaporware annoucement that had us reminiscing of the halcyon Internet bubble days of earnings vaporware.
7 states are now above 10% unemployment, based on the official employment numbers, which include fluff and fantasy such as the birth and death assumption. Unemployment is accelerating, and while it’s certainly a lagging indicator, we believe that the economy does not currently reflect the knock on effects of accelerating layoffs. Furthermore, the spread between U6 and U3 has widened significantly over the past year, again indicating that the true employment figures are actually much worse than what’s being reported.
Given the games on prior month revisions and the manipulation, we rely more on the numbers coming out of the Asian economies. Japan recently reported a 50% decline in exports. Similar terrible numbers are coming out of other tiger economies.
What concerns us however is the approach that this and the prior administration have taken to fix this crisis. We have yet to see any significant stimulus make it’s way to the heart of global economic problem, the consumer. The obsessive view of the Treasury and Fed that “fixing the financial system” will create economic recovery is woefully off the mark, just as the Fed’s statement last year that “subprime is contained” was shockingly wrong.
Oh a heads up… we’re hearing rumblings that Q1 GDP could be another doozy, in the vicinity of down 6-7%.
Price & Pattern
The spring equinox yet again brought about a significant turn in the markets, as it has for at least 8 of the last 9 years.
The markets had a five wave impulsive run-up from the bottom in early March. We believe we are in Primary 2 and expect a strong market for at least 3 to 4 months before reality sets in and we begin a new leg lower. That would put us in the July – August time-frame for when a new leg down begins.
We expect Primary 2 to be an ABC or complex up move. Either way, we’re reaching the apex of the initial A move and expect a topping out in the 830 to 850 area. The B move down will be a short lived affair lasting about a couple weeks before we begin an extended and complex move higher.
Forecast
We initiated a short position in the S&P 500 830 area on Thursday and will be aggressively adding to our position at market at levels of 830 and higher. We’re focused particularly on the Commercial Real Estate and Financials. Secondly, we’re looking to take the other side of investors that still believe in inflation and are invested in oil related investments.
We’ll look to close out these positions fairly conservatively and start building long positions for the final ramp up.
