Waiting for the Stock Market Buy Signal

By: Paul_J_Nolte

In what is getting be a nasty scratch in the record – the markets declined today…(skip) the markets declined today… What has been a nasty February is turning into a just as nasty March. While the employment report indicated hiring is not anywhere close to actually occurring, the revisions to the December and January data put the total “new” losses around 800k for the month. Outside of two other months over the past 80+ years, December, January and February are ranked in the top five for worst job losses.

Retail sales showed some life and consumer spending was actually higher for the first time in six months – so it wasn't all bad! However, Washington continues to fixate investors. The daily news briefing, the comments about the horrendous economy, floating the possibility of a new stimulus package (just after the second was signed) and little resolution to the banking crisis have kept investors from stepping into stocks with any confidence – in fact many are stepping away and vowing to never return. The super-sized economy and markets are looking more like mini-me!

Another week and another 5-7% shaved off the market averages – keep this up and another 10 weeks will result in a 50% loss for stocks! While we don't believe this to be the case, we remain nervous about the future stock returns with emotions so severely frayed. Our beginning of the year forecast was for a 5% return by yearend, however we allowed for a 20% up or down over the course of the year, and here we are with just over a 20% loss year to date. Even with that loss, we could see another 10% decline before “the bottom” is finally reached.

This will mean that the market will have dropped 62% from top to bottom, not only extraordinary in size but also in speed. We believe we are but a few weeks away from a buying opportunity that has been rarely seen. It is our contention that the money tossed at the economy and banks both here and around the world will finally begin to take hold and a violent rally could occur that would take stocks, by yearend, to the unchanged level. Given the math, another 10% decline would mean that a 50% rally would have to occur to get back to an annual breakeven. With many non-financial companies selling for (or below) valuations that have not been seen since the ‘73-74 bear market that saw stocks rise 50% over the following 18-month period.

The spastic and depressed stock market is giving some lift to bonds, albeit from extremely low levels. Commodity prices were relatively well behaved on the week, however energy prices are bumping up toward $45/bbl that has previously acted as a ceiling for prices. If oil (based upon a stronger China) does get above $45, we could easily see another 10% in energy prices that would once again put pressure on the bond market – forcing prices lower and yields higher. Energy is not the only worry for bond investors, especially Treasury holders, who should see huge issuance to cover the various financial handout programs already in place or in the process of being approved. We are buying maturities out to 5 years and are looking at inflation-protected notes as an alternative to “regular” bonds.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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