Posted by Frugal on 24th July 2009
The short term rise in the stock market have been bewildering to say the least. Yes, I was short into the fall, and I have burned up my money. Nevertheless, because my net worth overall is still net long (and very long because I can’t offset my stock option positions), my net worth rose to new high for the year also after the head & shoulder pattern gave the false break.
Recall from previous posts that I have been saying that I believe a stock market fall will come at about early July, or by August the latest. I also projected a brief temporary rise (but lower) towards the year end of 2009. With the current stock market just breaking new high thru panic short-covering yesterday, I must admit that I am probably wrong in the timing. Nevertheless, I am still not changing my view on the longer term picture.
I guess one of my biggest mistake is to assume that market will fall over cliff right away. Since I was projecting a longer term fall into mid-2011, and that is still 2 years away, the stock market can’t possibly fall via a straight line down there. Instead, it makes a lot more sense for a longer period of counter rally since March 2009 bottom, just for the stock market to “kill time”, especially after a dramatic indiscriminate sell-off from October of 2008. To adjust this recognition, I am altering my original projection as follows:
1. The general stock market will still trend up towards Aug/Sep timeframe. The high may either have been established yesterday, or between 3rd week of August to 2nd week of September.
2. There will be some 10% correction before the year end. I’m guessing that it would be closer to 13% correction on indexes. The correction may last until the end of October and probably until 3rd week of November.
3. From there stock market will rise again, making its second short-term high, right around Christmas, at about Dec 21 to January 8th. I believe that this high will be slightly lower than its last high, but there is probably some 25% chance that it will be higher.
4. After that, stock markets should enter the lower-high, lower-low pattern.
5. I read some pundits stating that the final low should be made after 31 months from the peak (at October 2007). I think if the second high around new year is some 6+% lower from the previous high, then I believe possibly a final low can quickly be made around April/May of 2010. Otherwise, I still lean towards a final bottom made in June of 2011. Based upon what I can observe, I think the latter case is more plausible. And the economic recovery after that may be more L-shape than anything else. Please note that the shape of the curve for stocks will certainly be different than the economic recovery.
All in all, going forward, I think the rest of 2009 will be where both shorts and longs can’t make much money out of it. The volatility will still grind when everyone is least expected of it. 2010/2011 will certainly be much more treacherous.
For emerging markets, I think it’s probably safe to say that they will out-perform US stock markets. You can probably add an increasing out-performing percentage along time axis to the above description, and that would be my projection. I believe coming out of 2011, emerging markets will lead both US & Euro markets in performance, finally proving that decoupling theory is correct. For now however, global stock markets are ever so synchronizing together. Decoupling is just a myth currently.
Please also note that the above projection applies to mainly S&P 500. I think high-tech sector may (continue to) out-perform slightly, and will recover faster after 2011, especially since tech is more tied to emerging market growth. Oil, natural gas, and precious metal sectors will not apply (although I don’t mean that they won’t necessarily act similarly).