Tuesday, November 4, 2008

We Have Hit The Bottom Right?

A wise man once said "If I knew where the stock market was going to be in a year from now, I certainly wouldn't be wasting time talking to you".

While I'm not sure that this truly represents wisdom (I have used this phrase many times myself), it does ask one important question. Are we done yet? The recent improvements in credit markets and rise in global stock markets seems to indicate so. The US election today (looking like an Obama victory) will also lead to some changes. But some experts are hesitant to say we are on the way up just yet. In his
Globe and Mail column, John Heintzl points out some interesting facts about past market "corrections" (perhaps the better word is collapses).

David Rosenberg, North American economist at Merrill Lynch, studied the 12 major troughs in the S&P 500 since 1932. What he found was that the market retested its lows “without fail” in every case. On average, it took 35 days from the initial trough to an interim peak, and another 35 days to retest the lows before stocks moved higher for good.

With the U.S. economy unravelling faster than most people could have imagined, this would be a strange time indeed for the stock market to ignore history, not to mention reality.

What does that mean to the average investor? It would seem to mean we can likely expect another sharp drop in the markets sometime in about one month. The when seems to be obvious, it's the amount that needs to be determined. The critical thing in this study was that it was after the second "trough" that stocks moved higher for good.

North American markets bottomed out around the 27th of October. Based on history, can we expect a second trough around December 1st? That would last until early January at which point markets would be expected to rally. However, the confluence of forces we have seen over the past four months are unlike most things in history. Previously on my blog, I showed that over the past 22 years, the TSX (and for that matter the S&P 500) had experienced their best growth during the month of December by a wide margin. With a 2.6% average annual increase, are we now headed back to the important psychological 10,000 mark on the TSX, or are we likely to take another step back before pushing ahead.

Let's put the December 1st date on our calendars, and see where things are headed.

One last point - as you may be aware I will be away from the 12th to the 24th of November on vacation. Needing to buy some US$, and with the dramatic fall of the loonie, I recently recommended to someone that she wait until it hit 85 cents to buy her US$. At the time the loonie had dropped to 75 cents and had experienced the greatest monthly drop in history. While my recommendation seemed like madness at the time, as you can see it was not only deemed likely, but has now happened. At market open today, the loonie had risen to 86 cents.

Based on my recent history of guessing, here are my future bets:
  • The Maple Lea(ves)fs will not make the playoffs but the Raptors will get into the second round and MLSE will get a little richer
  • Obama will win the election and more importantly 60 seats in the senate (preventing filibusters)
  • Stock markets will rise and fall and rise and fall.....
  • Canadians will eventually stop complaining about the stock markets and go back to griping about the weather and the price of gas

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