Stock Market Rebound? Or... Just Bouncing?

By: Paul_J_Nolte

This week has been a head scratcher. The government is dictating who should be running General Motors and gave Chrysler an ultimatum – merge or die. Home prices continue to fall, and do so at a faster rate over the past three months than over the past year (not getting “less worse”!). Unemployment (a lagging indicator) continues to deteriorate, as do the weekly jobless claims.

Finally the accounting standards board has decided that banks can go back to marking their bonds to model vs. market – especially those hard to price, illiquid bonds that have been giving them so much trouble for the past six months. We have been looking for things to get “less bad” – however our reading of the recent data does not yet support that view, although stock investors have taken it to heart that the bottom is now in and the only decision left is not to buy, but how much. The markets will get another test this week, as expectedly poor earnings will be reported – maybe they'll be “less bad” too!

Another week or two like the last few should finally provide us a positive signal that at least a short-term bottom is in. As of yet, the markets, even with a huge rally, have not made it above any recent peak in prices or in many of our indicators. While we may allow for a short-term bottom, it is nowhere near certain that a long-term bottom is in place. Looking back over the history of various indexes, the first bottom is not “the” bottom, as the markets usually come back to visit those lows at least one more time before taking off.

We saw this clearly in the bottom of '02/'03, when the first bottom was hit in July '02 and then again in October and again in March '03. Two 15-20% gains occurred in between those retests over the nine-month period. The bottom of '73-'74 took a few years to unfold, but the same patterns emerged. After hitting “the” bottom in Oct '74, the markets retested again in December and then rose 50% before falling back in early '78 by nearly 20% before finally taking off. It could be argued that the initial low in 1970 (and then 50% rise) was the initial low and the '74 low was the “wash-out”. Either way, we believe it is too early and likely wrong to say with any authority that the bottom is in.

As suspected, the model flipped back to negative territory – indicating that the most likely direction for interest rates over the short-term is higher. Commodity prices have rebounded while long-term bonds have gone down in price (higher in yield). Even with the poor economic news rates still rose as fears of still huge Treasury issuance is likely to keep rates up to entice enough buyers to absorb the auctions. If gold is the inflation indicator, then there remains little around, as prices have fallen below $900/oz, down 10% from the recent peaks. However other commodity prices are rising, including copper – a forerunner to better economic times. Could copper be predicting an economic rebound or is it just bouncing…

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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