This blog post originally appeared on RealMoney Silver on March 27 at 8:29 a.m. EDT.
In " It Ain't Heavy, It's a Bottom," 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 S&P 500 hit 666 on the very day of my bottom forecast, which I openly declared 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 SPDRs ( SPY) chart below.
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.