"Split the Difference" Bull Market of 2009 Gains Steam
On Friday I laid out my very unscientific idea that the current market rally could be as simple as stocks getting pushed back to the midway point from the lows to about half way from the highs. From the article:
There is some reason behind the buying. I think the theorem goes something like this;
-When all stocks were going to zero, the DOW was at 6600 and the S&P was at 666
-When the credit boom was at full throttle the DOW was at 14,000 and S&P was at 1500
-If you split the difference right down the middle you arrive at DOW 10,300 and S&P 1083
-This seems like a fair compromise
I know, very scientific. This would be my guess and so those would be my upside targets.
Going through my daily reading I came across these two nuggets that show I am not the only one thinking this way. The first article is from Minyanville contributor James Kostohryz who is about as bullish as you can get:
In my article Your S&P Roadmap, I laid out a framework that demonstrated that equity prices had massively overshot to the downside and were extremely undervalued. Valuations had reached a point that reflected “irrational despondence,” and will only begin to enter into a “normal range when the S&P 500 crosses above 950." The midpoint of the “normal” valuation range is 1,100.
My target for the countertrend rally has been for the S&P to reach between 950 and 1,100. I now believe that the 1,100 is most likely. However, under certain circumstances, I believe it is possible for the S&P 500 to reach the upper end of its normal valuation range - which would place it at 1,350.
Another "midpoint" proponent.
The second item was a comment left on this article on Clusterstock that caught my attention:
Ken G said:
Let's take stock (pun not intended).
The S&P's alltime high was 1,576 in October 2007. The bear market low was 666 on March 6, 2009. From peak to trough we dropped 57.7%. Now, we have recovered all the way to 948 intraday (rounded), a 42% recovery from the low but still 40% below the alltime high.
Ok, so the glass is half-filled with water now. Or is it half empty? Well, the numerical average of 1,576 and 666 is actually 1,121, so we are still in the lower half of the 10/07 - 2/09 range. We can even go higher, I suppose, until we get to the midway point of 1,100 (plus or minus), but will that mean our problems are solved? Depends on when you bought, or when you sold, I suppose.
Amazingly another "split the difference" call!
I think the name should catch on soon enough.
I have opened some market positions this evening and I thought I would share my foray into the markets with the readers. As always, none of the following is INVESTMENT ADVICE!. I am sure you can lose money easy enough all on your own and do not need to copy my dumb ideas. I thought I would show what lines I am thinking along.
Silver has broken above the area that I was watching (15$) and I like how it looks right here. When viewed through the lens that the dollar MUST go down for stocks to go up silver is a good play on this dichotomy.
-SLV buy $15-$16. Upside target $20-$22. Stop set at $13.
-PAAS buy $22.50-$24. Upside target $30-$32. Stop set at $18.
Here I went with both the silver Ishares and a silver miner to capture the expected upside.
As much as I love gold, it does not look as appealing as silver does to me right here. Still, great basing has occurred and another run at $1000 looks likely.
-GLD buy $94-$97. Upside target $105-$115. Stop set at $87.
If indeed we are going to get back to the half way point, the S&P still has room to run. I believe in putting your money where your mouth is and thus I will take a position that jibes with my "split the difference" bull market call.
-SPY buy $93-$97. Upside target $110-$120. Stop set at $89.
I think that the two factors that make these positions attractive to me is that the dollar needs to continue it's way down for the stock market to go up. Minyanville calls this "dollar devaluation versus asset class inflation" and the dynamic has been very real for a long time. I also think that the midpoint theorem has legs and so there is still some room to capture some upside on the S&P.
Some factors going against these positions is the great run all the selections have had already may cap any more running room. Boom Boom Bernanke is set to speak on Wednesday and his comments on the rise in the Ten year notes could kill off the metals inside of an hour (or they could explode higher). Also, if the midpoint idea gets too ingrained then there may well be some shenanigans pulled to stay below that level to keep up the appearance that the markets are really "free". The last force against these buys is that I have taken these positions is usually reason enough for a sharp downside move as soon as my orders are filled at the high of the day.
Full Disclosure: Long positions in SLV, PAAS, GLD, SPY
Have a good night.