The Contour of the Markets: A Prognosis

An outline of what is in store for the next 6-8 months is starting to take shape.  The major issues are the US presidential election, the end game in the Iranian crisis and what the ultimate harvested crop sizes will be.  For stocks, it seems clear that we are in a bear market.  No not as some say because we are down x% from the highs made last autumn, but because we are tracing out lower highs and lower lows (a bear market is not defined as a point like the 1331 they keep blabbing about on CNBC, but is rather a process of moving lower).  Stock indexes are moving from the upper left to the lower right on the charts.  That is a bear market on the scales of days, weeks and months.  Interestingly, while the Dow 30 have made a new low in the latest down surge, the S&P 500 has not (nor has the NASDAQ 100 or Composite).  The March low was about 1257 while the low on Friday June 20th was 1272.  If it is going to make a new low, it would have to be this week.  There is plenty of data to take it there with the NAPM (ISM) purchasing surveys, Factory Orders and Employment data, which will be released on Thursday rather than its normal first friday time.

Regardless of whether the S&P500 makes a new low below 1257 in the very short term, I would guess that over the medium term, stocks will meander lower through this fall as we learn whether we will have an incredibly anti-business Great Society throwback president in Barack Obama, or a mercurial and irascible one in John McCain.  Any buildup in expectations of a conflict with Iran will also feed this lower dynamic.  To be sure, there will be at least one major rally (probably toward the front of the period), but ultimately, the S&P500 will likely head at least to 1150 and the Dow 30 to 10,500 before this bear period is over.   That would represent down moves of roughly between 25% and 30% (between 50% and 62% of the bull market moves from March 2003 to October 2007).  The down moves for the Dow 30 and S&P500 in the 2000-2003 bear market were 38.7% and 50.5% respectively.

The catalyst for the end of the current bear move may be a military strike in Iran or the swearing in of a non-Bush president or both.  That would still make this a relatively short bear market.  The 2000-2003 bear market lasted approximately 38 months.  If the current one ended in January 2009, that would be only a 15 month bear market, so it may be premature to call the end so soon.

In commodities, Oil will likely remain high until the Iranian crisis is resolved one way or the other (either by an attack on Iran, or a pronouncement that they have the Bomb).  Of course the Iranians may not stop with the pronouncement.  The Iranians are potentially crazy enough to use the damned thing, in which case all bets and prognostications are off.  By the presidential election this November, we will know how much corn and how many soybeans will be harvested.  Hopefully it will be enough to ease the fears about world ending stocks.

Finally a long term survey like this would not be complete without saying something about the Dollar.  The Fed likely will not raise rates prior to the November election which means the earliest they can take action, other than facilitating an intervention on behalf of Treasury or yakking about how they understand the importance of a strong dollar, would be at their December meeting.  They have Monetary Policy Committe meetings in August, September, October, December, January and March.  They may wait until the January or March meetings to allow the new President to be inaugurated, depending on the data.

27 June Dow
Click me (Dow 30)!

27 June Dow
Click me (S&P500)!

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