New high for the year, what’s next?
Posted by Frugal on July 24th, 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).
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July 24th, 2009 at 1:53 pm
I like your analysis. How did you come up with all that? Any books or readings you suggest?
Is it better to sell around Mid August then buy again around end of October? then Mid-March?
July 25th, 2009 at 10:26 am
Hi There,
Just wondering, are you a trader in your full time profession, or do you just really like stocks? If you are not a trader or in finance, do you feel you could be making more money in the stock market, or in your job? This a question I struggle with, and my answer for myself is that I can make way more money just working hard and doing well at my job.
BTW, I’m like you and hit the $1million network mark very early, and I’m still learning.
Rgds,
RB
Rich By 30, Retire By 40
July 25th, 2009 at 10:43 pm
Why don’t you accept you suck at timing the market and stop giving us all the baloney about which week the market will go up and down. What a waste of time.
July 26th, 2009 at 12:28 am
Frugal,
I thought you weren’t counting in-the-money but unvested stock options in your net worth…
-Mike
July 26th, 2009 at 10:20 am
I think that what you sais can make sense but there are so many factors than can influence the market that there is a extremely low probability of that excenario hapenning, may some of the points maybe none.
Time will tell… It seems to me too difficult to forecast so many things and for such a long time.
Cheers,
Daniel
July 26th, 2009 at 3:50 pm
I think you are right in the market will make lower lows offset by short term rises, but it is darn near impossible to pick exact dates. If you look back at the Depression from 29-34, there were several rallies of 30% plus, but they all faced massive drops thereafter. The rises were from 30 days to 6 months so it can be difficult to measure the moves. I usually don’t act until the markets have dropped or gained more than 8% from the top or bottom, and I watch metrics like the 50 and 200 day moving average. You need a system that can help you bail or jump in rather than trying to guess the right time. Guessing is impossible on a consistent basis.
July 29th, 2009 at 3:44 am
Kirk,
Does that mean you are now going short? Markets have really been rallying for a few weeks.
-Mike
August 1st, 2009 at 3:32 pm
I just landed here so some quick comments….
- We are at a technical Fibonacci top. It is forming a megaphone topping pattern. Temporary or permanent, time will tell. I’m about a $1.50 from shorting this market.
- Calf will undergo a huge real estate crash and unemployment disaster during the next two years. I might just buy a beach front home from a Hollyweird actor for pennies on the dollar.
- The market will tank and recover in 2012. I hope? Ever wonder why the Mayan calendar ends in 2012 and a large comet is to approach the earth’s orbit the same year???
- Does making a t least a 50% return on your money every week using stock options sound better than your current salary???
August 2nd, 2009 at 12:34 pm
I really am curious as to what the latest stock market call is going to be from Frugal. July was the best July in 20 years, and if you’ve been short, that was horrendous.
Frugal, in your networth calculation, you mention you have around 340K in cash. Is that cash in the bank, or cash in liquid instruments like the stock market? I’ve got about 500K in cash just earning a 4.2-5%/annum return in a 5 yr CD, and don’t plan mobilize it. If I save nothing else, that 500K would turn into $1million in 14 years due to compounding. How are you investing your cash?
Thnx man. Looking forward to an update.
Rgds,
RB
Rich By 30 Retire By 40
August 7th, 2009 at 4:31 pm
Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” ~ Lau Tzu