29 JUL 2009, Wednesday

1. Above is a chart of inflation adjusted SP500 earnings since 1935. Investors typically buy stocks when a company is showing good earnings or has some new innovation which will improve earnings over time. Well, I guess you could always say "It can't get much worse."
2. It's information like this that has me rubbing my eyes and looking at this recent rally and saying, "Huh?" But then again, that's economic fundamentals information and the stock market doesn't always reflect it. When Ms. Market wants to party, she will! And if she parties too hard and gets a hangover, you don't want to be anywhere near her.
3. Soooo, I just take a step back and look at the bigger picture for perspective. FACT: It took 2 years for the SP500 to lose 57%. FACT: It's taken a mere 5 months to gain 47%. FACT: The inital down move in 1929 was 49% followed by an approximate 6 month rally of 52%. (Click the link to see a price chart from that period.) Then, more downside followed. FACT: Huge rallies often follow huge drops. OPINION: I do not think this is a new bull market. Instead, it's been one of those huge "bounce" rallies. The earnings picture, unemployment situation, excess credit/debt overhang and prospects of big tax hikes to cover enormous federal deficits don't provide the underpinnings for a solid recovery, yet.
4. That 1929-1932 chart gives me a very healthy respect for Ms. Market. She is not one to toy with. My personal opinion is that our 1929-1932 crash may have been the 75% Tech Crash 2000-2002....Perhaps, we're more in a situation like this 1937-1942 chart. In the 1937-38 period, the Dow experienced a drop of 51% followed by a 7 month rally of 59%. If we're in a period similar to this, I still respect that we may be moving in to that 1938 peak with this recent straight up move. Then, more downside followed.
5. In both instances, you'll notice the similarities of the moves: ~50% down followed by a half year rally of ~50%. Hmmm...where are we now? Similar spot...down 57% and now up 47% in 5 months. Not saying it'll go that way, but I really really do not trust this market and I'm watching it very closely.
6. The booming markets of 1982-2000 are over. You can no longer just "set it and forget it". Instead, you have to be a little more thoughtful and active. Throughout history, the stock market has demonstrated two types of environments: 1) slow steady upsloping prices and 2) basically flat action but huge up/down swings contained in the wide "flat". As you can see in the picture at the bottom, these environments tend to last approximately 18 years and they alternate. You'll notice the type of environment we are in now.


7. The current rally is a gift to those that rode the market all the way down. It affords an opportunity to take a smaller loss and to raise some cash by exiting completely or even 50%. That way, you'll have cash to redeploy at a future opportunity. These are very personal questions which everyone has to ask and answer for themselves occassionally. Some will choose to "just ride it out." I merely hope to provide some "background history" so that you can make more informed decisions.
8. Finally, I never, ever, ever chase a move. Those that get to the table late don't get to eat and just end up doing the dishes.