July 2009

Just because there are a dozen great reasons to hate stocks right now doesn't necessarily mean they can't go much higher. Not only that, the bear rally could continue for quite a while - till 2011 and beyond, even - without distorting the bearish look of the long-term charts one bit. Take a look at the monthly chart below, which shows ten years' worth of price action in the S&P 500 futures. Nine of those years have seen a bear market brought on by the collapse of tech stocks in 2000. But notice how, when the major bear phase ended two-and-a-half years later, the S&Ps embarked on a rally that lasted five years and which recouped 80 percent of the losses. It is categorized as a bear rally nonetheless, rather than as a bull market, simply because it failed to exceed the all-time high recorded in 2000.  If a similar rally is under way now in the S&P 500, it would imply that the S&P futures, currently trading around 934, will hit 1407 by mid-2014. Our speculative price bars (in red) show how the rally would look if it reached 1407 somewhat sooner, in early 2012. We think this is extremely unlikely, given the disastrous state of the economy. Where some optimists purport to see green shoots of recovery, we see the early stages of a collapse that eventually will be recognized as a full-blown depression. Under the circumstances, it's more likely that, come 2014, the S&Ps will be trading closer to 400 than to 1400. Even so, we cannot rule out the possibility that the irrational surge begun in March will go significantly higher than anyone believes it "should" before sputtering out and reversing with a vengeance. The rally presumably would occur even as state and local governments slip deeper

Perhaps I've been beating the bullish drum a bit hard lately?  I do it to remind myself -- and all of you -- that stocks can and will continue to move higher as long as most of us continue to be outraged by the very audaciousness of it. We know the rally cannot be anticipating "recovery," since even blithering-idiot bulls can see that no recovery is even remotely possibly over the next two or three years for state and local governments. But what does that matter when you have short-covering panics capable of turning bearish head-and-shoulder patterns like the one shown in the chart into launching pads almost overnight?  The rally looks hellbent on challenging June's highs, and I wouldn't bet too heavily on a failure at this point. In any case, shorting just below these highs looks like Russian roulette to me -- with three bullets chambered.

An hour or so before yesterday's close, a hawk-eyed pivoteer found the 1521.25 target show in the chart. Alas, the futures titillated with a last-minute push to 1520.25, leaving too little time to initiate a trade with any hope of exiting comfortably before the close with a gain. Even so, the analytical usefulness of the target remains, since, if it fails to contain short-covering this morning, we should brace for panic buying that could push the futures as high as _____ over the near term.  In case you're interested, that target comes from the hourly chart, where A=1346.00 (May 26).

The superb article by Van Hoisington and Lacy Hunt about deflation seems to be getting the wide circulation it deserves, but in case you missed it, here's the link: http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/07/13/debt-and-deflation.aspx

The Dow Industrials lurched 256 points higher yesterday, but a trader looking for action might have found himself bored to tears nonetheless. Indeed, anyone who failed to go home long the day before would have been left twiddling his thumbs Wednesday morning, since stocks bolted for the wild blue yonder on the opening bell. Like nearly all powerful rallies, the move began with a short-covering panic. However, this one was quite unusual in that it had begun on a gap at the start of after-hours trading the evening before. We can't remember the last time this sequence of events occurred, but the effect was to put bears under serious pressure when Wednesday's session began.   The catalyst for the short-squeeze was an upbeat earnings forecast from Intel. The company actually lost money in the second quarter, but the red ink apparently wasn't as bad as the usual dolts, pinheads and Civil Service rejects on The Street supposedly were expecting. The news from Intel followed strong earnings from the invincible Goldman Sachs. Some readers may recall our prediction that Goldman shares, then trading for around $45, eventually would fall to $29 or lower. So certain were we of this this that we promised to don a grass skirt and dance the hula in Times Square in the middle of winter if we were wrong. Well, it looks like we were wrong. And although we still think Goldman's financial empire will end up a smoldering ruin by the time the Second Great Depression has run its course, we'd have to concede at this point that it could take a while longer than we'd anticipated. Barring Armageddon... Quite a while, actually. Goldman shares are up nearly 20 percent in the last week alone, to $155, and they look like a good bet to hit

A Hidden Pivot at 13.395 was as high as we could have projected for yesterday, and although the futures stalled a hair shy of it, any progress above that number today would portend additional upside to at least 13.725 over the very near term.

Yesterday's rally created an impulse leg on the daily chart, so we don't want to be too quick to write  it off as just another gratuitous ejaculation. Instead, we'll treat it as the possible resumption of the bear rally begun in early March, with upside potential to as high as _____. That would be equivalent to a thousand-point move in the Dow, so there is ample reason for us to get in bullish gear now rather than spectate with disdain and vitriol in our hearts.

The last two thrusts have been impulsive on the hourly chart, implying the rally is likely to continue. If so, we can use a Hidden Pivot at 62.98 as our minimum upside objective.  Its associative midpoint is 62.13, and so a decisive breach of that number would be telegraphing a likely continuation to at least 62.98.

I've let my imagination run wild in today's forecast for the E-Mini S&P, since we surely don't want to be dissing a rally that has the potential to push the Dow Industrials a thousand points between now and late August. Like you, I can think of a dozen good reasons why such a thing should not happen; however, none of them carries as much weight at the moment as the effortless impulse legs the S&P seems capable of notching on its hourly chart.