March 2009 redux?

Time for some perspective – in equity markets around the world, the bulls are popping champagne and hysterically bidding up anything and everything (including iron ore stocks whilst iron ore is crashing), whilst the bears have gone back into hibernation, with sore bottoms and damaged pride.

The realists observe that this volatility and switch between despair and exuberance is just the normality of human controlled markets – and in particular, bear markets are renowned for such mania.

But an observation by the ebullient bulls has this analyst scratching his head: they contend that the recent correction was the pre-cursor to a March 2009 type low, and from that observation we stand at the threshold of a new bull market (or new bear market rally).

First, the all-important US S&P500 (sorry folks, but decoupling is not over – you need to study US markets first) which is now almost 90% above its March 2009 low.

From Doug Short:


From the October 2007 high the S&P500 fell 56.8% (which included two “normal” corrections of approx. 20%) and its recent correction – completely normal in a bear or bull market rally – was only 17.9%.

I’ve compiled a similar chart using the ASX/S&P200 which I analyse daily on my Trading Day posts:

click to enlarge full size


From a high in November 2007 to the low in March 2009, the Aussie market fell 54%, similar to the S&P500. From the high in April 2011 to the low in late September, the market fell 22% – slightly more, but a similar magnitude and a typical market correction during a bear market (bull market corrections are usually half this size).

But the market at its lowest point in September was still 22% above the March 2009 low and is now almost 40% above this level.

Putting aside the very weak numerical magnitudes of these falls, if we compare the current position of the market and this rally to an analog to the March 2009-April 2010, the market would hit 6000 points by mid 2012.

Click to enlarge

As I showed in my recent study for a 8000 point target, there are some serious problems with this analogy, but most importantly, the macro outlook has not changed.

The Greek haircut (or as I like to put it – an eyebrow wax, as that will be the impact) will ensure austerity measures not just for the public sector, but the private sector. European banks, by composition within the European bourses, are much larger than the US (and similar to our engorged oligopoly) and will now have their Return on Equity (ROE) permanently reduced. This is the same effect that occurred to Australian industrial stocks during the dilutive equity raisings of mid-2009.

That means reduced valuations and reduced PE ratios across the board as Europe heads into a long stagnation.

www.twitter.com/ThePrinceMB

Comments

  1. The BurbWatcherMEMBER

    Good article, good perspective, thanks.

    Agreed re: stagnation.

    With CB/govt funny money and mega-intervention, the markets will deflate themselves.

    But the govts/CB are adverse to deflation, and, so will always intervene; but “too much” inflation makes it too obvious to the plebs that the system is geared towards wealth-transfer to the vested interests, and entrenched powers.

    Hence, a little – but not too much! – NET inflation is the way to go for the CBs/govts…

    …even if ~0 NET inflation means that the “needs” are inflating but the “discretionaries” are deflating, such that the cost of living for the average pleb still increases despite a near-zero CPI figure! the poor pleb doesn’t know what is going on! wonderful wealth transfer!

    Hence, stagnation is the way to go: govts/CBs intervene when “evil” deflation rears its “ugly” head, and back off when their CPI figure looks like it could get “too high”.

    Stagflation/Stagnation is the way forward, IMHO (with inflation featuring in the “essentials”).

    My 2c

    • The BurbWatcherMEMBER

      Gah…

      I wrote “With CB/govt funny money and mega-intervention, the markets will deflate themselves.”

      but “with” should read “without”

      not having a good day today (need Edit button ;))

  2. Diogenes the CynicMEMBER

    Prince this sort of analysis is good for short to near term scenarios but for longer term 5 to 10 years I think we need to look at history from other periods of financial crises such as the 1930s or 1890s etc. Those provide a more sobering perspective for stockmarket returns long term.

    • I actually haven’t seen The Party, just Youtube funny bits, but I’m a big Peter Sellers fan – Shot in the Dark being comedic gold and better than The Pink Panther series.

      Well spotted Frequently Changing Avatar.

      And for Dog’s sake, pick an avatar and stick with it!!!!!

      I have Kelsey Grammer’s voice stuck in my head…

  3. I think now is more like 2Q 2008 than March 2009.

    ASX 200 looks to have turned down at the top of a corrective range, implying new lows lie ahead.

    http://www.avidchartist.com/2011/10/asx-200-turns-down-from-top-of.html

    That said, the S&P 500 is testing the Head and Shoulders neckline. Would be a perfect point to turn down and head to new lows BUT if it closes over last night’s highs, I’ll have to question any bearish potential for the ASX 200. Will be a key night and few days ahead, even more interesting than usual.

    http://www.avidchartist.com/2011/10/s-500-tests-trend-line_2697.html

    • Good chart on the ASX200 Avid.

      I don’t normally like using hi/lo points for drawing trendlines, but that channel pattern looks like a bearish flag.

      The post May 2010 correction pattern is a triple bottom, as the expectation of milky wilky was pricing in (QE2).

      The 2Q 2008 bear market 20% rally (March to May) was a classic bear flag pattern that was completed with a bull trap above the long term moving average (and a one day “peekaboo” above resistance).

      Am I implying another GFC? No – what is little considered was that if Lehman’s had not failed later in the year, it is more likely that the 2008-2009 crash would have been another bear market, with a probable bottom of 900-1000 on the SP500, not 660…

  4. The 1987 to 1992 period is worth a look also as 1987 was also a 50% fall like 2007/8/9.

    The 1987 recovery had dropped back to only 5% above the bottom by Jan 1991 after being as high as 41% above the bottom.

    See my chart and article at:
    http://thortsoninvesting.blogspot.com/

    While we may well be on an uptick up to the 5000 resistance or beyond we would be sensible to acknowledge the 1987/91 possibility and have a strategy in place to deal with it.