January 30, 2010.
Where do we go from here?
As January goes, so goes the market. Of course, if investing was that simple, we could all go home. If you believe in sayings, then you have to consider that the first five days of January if up, then the market should be up for the rest of the year. In fact, the first five days have been a precursor of that trend 31 of 36 times. So if you must believe in sayings then consider this one. The market was up for the first 5 days.
I have reviewed both market history and current fundamental analysis of the market. I’m sure we can all agree that this bear market has been one of the worst we've seen in a century.
In 1886 we began recording daily market averages. The seven greatest bear markets since 1886, all resulted in aggressive market advances comparable to our recent advance... The respective prior bear markets had plummeted 86%, 54%, 49%, 48%, 48%, 47% and 46%. Between October 11, 2007 and March 6, 2009. The S&P 500 lost 58%. What followed all of these bear markets were aggressive first and second leg moves up in the periods that followed.
The S&P 500 has already exceeded the percentage climbs of all other two legged rallies following the 2nd worst bear market of all time. In other words, stocks became extremely overbought, hence why we are in a correction. This is both needed and healthy for the markets to continue rising. With the exception of the 1938 high at this stage of the closest fit precedents which led to an actual bear market. The other six historical moves resulted in only modest corrections, ranging from 10% to 14%.
I fully expect our current correction to be shallow in nature, and similar to the modest corrections of previous bull markets. Based on the velocity and trajectory, we should see a final low in the first week of March 2010. I expect the S&P 500 and the Dow Jones Industrial Average will reach the 2000 and 2007 highs, before we re-test the lows of March 2009. It is also important to note, that we have also experienced a significant deflationary period, that matches some of the greatest deflationary cycles for asset prices. It is likely we are at a technical low for commodity prices.
The coming bull market in commodities could be one of the greatest opportunities to accumulate significant wealth in a generation. Of the 29 bull markets in stocks since 1886 from 1921 -- 1929 and 1949 -- 1956 advances ranked first and second in percentage terms, gaining 504% and 349%, respectively. This observation may support the prospect of a secular long-term bull market that could last for several years. The implication is that stocks and commodities should move up in tandem. If our economy can gain a more solid footing. A sea change might be in the works given the results of the Massachusetts election.
The fundamental arguments for a significant commodity move starting soon and continuing for many years, is the tremendous emergence of the Asian economies in the past decade. China and India with a population of 1.4 billion each, have added some 500 million to the world’s middle class in the past decade alone. We have also witnessed the emergence of South America as a new and powerful economic force, with a growing and vibrant middle class hungry for a life style similar to their neighbors to the north... All these economies have one thing in common, the need for commodities to maintain there growth.
It is time to invest in the growth of the emerging new middle class. This is a freight train going down hill for some time to come.
What do you think?
Eduard Hamamjian
GeaSphere LLC
