Above is a long term monthly chart of the S&P 500 Index going back to 1995 to present, which was first posted back in April of this year. The chart is helpful because it is a big picture view of the market. (Click on image for larger view)
As a refresher, notice the red and blue price lines right below the monthly chart of the S&P 500. These lines basically measure average prices over a rolling period of time, in this case monthly. The red line measures a shorter term average price and the blue line a longer term average price. The newest monthly pricing data is added and the oldest monthly pricing data is dropped from each average each month. These lines essentially show us if prices are moving higher on average or lower on average over a longer period of time. When the red line (shorter term average) crosses the blue line (longer term average) to the downside, prices are moving lower on average and vice versa when the red line crosses up through the blue line.
Back in April, both the red and blue lines of this chart were moving lower, despite the recent 20% rally in the index. We also stated that based on the current readings, it would likely take several months of stable prices or base building in the index before the red and blue lines begin to stop moving down and then begin to curl upward as they did in 2003.
Well, here we are several months later and, as of August 31st, the short-term moving average just slightly crossed the longer term moving average indicating a change in trend in the average price of the index. Instead of moving lower on average, prices are now moving higher on average, given this particular indicator. Although the fundamental backdrop of the economy may still be suspect, the market believes a recovery is on the way. While there is no guarantee a change in trend is here to stay; in the past this moving average "crossover" has represented a long-term favorable trend change for stocks. With this trend change typically comes a change in psychology. Instead of selling every time the market moves higher in anticipation of lower prices, market participants are now buying every time the market moves lower in anticipation of higher prices. Institutions have also shown modest accumulation in recent weeks.
We believe we have returned to more normal market conditions; barring any major crisis. Corrections in the markets should be viewed as a chance to opportunistically rebuild allocations for long-term appreciation. Of course, if market conditions change drastically or the environment becomes more volatile, it may be appropriate to revisit our outlook.
We have experienced volatility surpassing anything in history followed by one of the fastest and most powerful rallies in the markets on record; which in and of itself is absolutely astonishing. Our view as to why the markets have shifted so quickly is the possibility that market participants are now ignoring any bad news and possible unknowns based on a collective belief the US Government will continue to backstop the markets and economy. While this is a move toward a more socialistic society, it adds a backstop to the markets. The perception is that they (the Government) will do whatever it takes to move the country back on a path to economic growth; in addition to protecting capital markets from any future crisis which may develop.
In addition to a Government backstop, company's earnings comparisons for the next several months should be relatively easy given the awful earnings posted in the second half of 2008 and cost cutting measures most have taken over the past year. It is very likely a majority of companies will have much better than expected earnings results in both the 3rd and 4th quarters of this year.
Finally, on the political front, there is a feeling that many democratic, hot button political issues, such as health care reform, could be dead. Many believe that Obama's honeymoon is over and he is going to have to move toward the middle or risk losing the upcoming election in 2010 and control of Congress. This is also helping markets and investor psychology as there is a sense it will be difficult for any major legislation to pass.
There is a wildcard to throw into the mix - the consumer. It is hard to know to what level the consumer will spend heading into the holidays and into 2010. Some economists believe spending will return to a modest level in the coming year and others believe it will take an improved housing and job market for consumers to feel more confident. It is difficult to predict how this recovery cycle will play out as US consumers lost trillions in wealth over the past few years. The next few months of economic data should give us some clues into the recovery cycle.
Enjoy your Labor Day weekend!
There is a wildcard to throw into the mix - the consumer. It is hard to know to what level the consumer will spend heading into the holidays and into 2010. Some economists believe spending will return to a modest level in the coming year and others believe it will take an improved housing and job market for consumers to feel more confident. It is difficult to predict how this recovery cycle will play out as US consumers lost trillions in wealth over the past few years. The next few months of economic data should give us some clues into the recovery cycle.
Enjoy your Labor Day weekend!
