This blog post originally appeared on RealMoney Silver on March 27 at 8:29 a.m. EDT.
," I outlined a variant view that the U.S. stock market was not only making a yearly low but, quite possibly, a generational low.
Today it might be difficult to remember the degree of pessimism that existed during those dreary early days of March as the
hit 666 on the very day of my
, which I openly
on "The Kudlow Report."
Also in "It Ain't Heavy, It's a Bottom," I coupled my investment rationale (the mosaic of fundamentals, valuation and sentiment) with what I saw as some solid parallels between 2008-2009 and the 1937-1939 interim interval. That led me to a specific forecast for the S&P, which was presented in the
With the S&P 500 making a low that week in early March, I wrote the following:
A poorly positioned hedge fund community, with an historically low net long exposure and rankled by negative investment returns and the fear of continued redemptions, should provide the initial thrust to the S&P's 50-day moving average of about 810. It is important to recognize that, historically, strong rallies that have durability (like in 1937-1938) typically, as previously written, don't let investors in during the first advancing leg. With such a clear burst of momentum, the fear of being out could drive the S&P 500 as much as 15 to 40 points above the 50-day moving average, paralleling the 20% third-quarter 1938 move and producing a short-term top and a temporarily overbought market.
Subsequently, the S&P 500, only three brief weeks from my bottom call and remarkably on cue, advanced like a rocket to the 50-day moving average, which by then had declined from about 810 to 803. Since then, my expectation that the market would move as much as 15 to 40 points above the moving average, as investors would move from being fearful of being in the market to fearful of being out of the market, has been realized as well, with a precision that even baffles this writer.
I went on to write, with a continued eye toward a precision of forecast, my view that we would see some backing and filling following the market's sharp initial thrust.
The spring should be characterized by a backing and filling as the sharp gains are digested, similar to the September-October 1938 interval. Sloppy second-quarter warnings will weigh on the market during the April-May period, but the markets could move sideways, bending but not breaking. Signs of market skepticism, sequential economic growth and evidence of a bottoming in the residential real estate and automobile markets (after a sustained period of under-production) could contain the market's downside, providing a range-bound market with a firm bid on dips. As well, the results from the bank stress tests and the release of a more coherent and detailed bank rescue package could provide further support to equities.
I continue to use the template of 1937-1939 as a parallel to the 2008-2009 economy and stock market.
The 1937-1938 period holds a number of economic similarities to the current period:
The stock market decline followed a four- to five-year rally, after a three-year decline of greater than 80%, which is similar to the Nasdaq experience.
Worldwide industrial production collapsed in 1937.
Commodities crashed in 1937.
The markets spent five years consolidating the declines.
Massive government spending pulled the U.S. out of The Great Depression. (Back then, it was preparing for WWII; this time, it will be government stimulus/infrastructure.)
The 50% stock market drop over a five-month period in 1937-1938 holds a similarity to the market's recent drop in that neither had a high-volume selling climax. The market's 1938-1939 recovery had four legs and lasted about seven months; I expect the 2009 stock market to trace a noticeably similar pattern.
Leg one of the 1938-1939 rally was brief and intense; it lasted only about 12 trading days, and the indices rose by 19%, which is very similar to the recent intense rise.
Leg two was an approximate 60-day consolidation that corrected half of the initial gain; we may be entering that phase now.
Leg three was about a six-week rise of 30%.
Leg four consisted of another two-month consolidation and retracement followed by a 22% six-week rally, serving to mark a multiyear high in the averages. I continue to expect this final leg in mid to late summer 2009.
I am going to stay true to what brought me here -- namely, my baseline expectation and forecast expressed in early March, which, again, parallels the slope of the stock market in 1937-1939 -- and suggest that it is now an appropriate time to raise some cash.
Within the context of the greatest political circus ever televised, stocks have not improved because of the government; they are improving despite the government. And in the face of an unprecedented five up 90% days in March, the current rally is clearly different this time and more durable than others that preceded it.
Even though market internals have been steadily improving, the "
" in and a
has likely been reached (and will not be breached), so the move now seems stretched as the fear of being out has been replaced the early March fear of being in.
The gloom and doom that permeated the investment scene in early March is now disappearing. My sense is that, not unexpectedly, investor optimism is now on the rise and that sentiment indicators will exhibit that heightened optimism as they are released in the days ahead. This coupled with overbought technical indicators lead me to a more cautious view now.
Call this the "George Costanza market," a market that does the opposite of what everyone thought it should have done three weeks ago and might now deviate from a growing view that the market will continue its rise in the weeks ahead.
That being said, there is no change in my economic expectations (from three weeks ago) nor in my intermediate view that the U.S. stock market will rise to levels higher than most anticipate.
My previously encouraging prediction for the spring-summer period remains unchanged:
By June, economic traction should begin to take hold from the accumulated fiscal and monetary stimulation coupled with the large drop in energy prices. While it will be too early to demonstrate a broad economic recovery, evidence of stabilization will be clearly manifested in improving retail sales, and stocks will take off for their final advancing phase. With fixed income under increasing pressure, large asset allocation programs at some of the largest and late-to-the party pension plans (out of bonds and into stocks) could trigger an explosive rally in the middle to late summer. This move by July or August could close the October 2008 gap in the SPDRs at around $107.
Doug Kass writes daily for
, a premium bundle service from TheStreet.com. For a free trial to
and exclusive access to Mr. Kass's daily trading diary, please click here.
Know What You Own: In midday trading on Friday, the most active stocks included Citigroup (C) - Get Report, Bank of America (BAC) - Get Report, American International Group (AIG) - Get Report, the Financial Bull 3X (FAS) - Get Report, Financial Select SPDR (XLF) - Get Report and PowerShares QQQ (QQQQ) . For more on the value of knowing what you own, visit
Investing A-to-Z section.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.