I’m not short financials, nor long gold or commodities.
Here’s a couple of things I know, however:
1. Stocks are volatile.
2. This market, specifically, has “no memory” – that is, what happened yesterday is irrelevant. It’s all about what’s happening today. That’s not healthy long term.
3. It’s hard to believe that either the January or Bear Stearns bottoms were the last bottoms in this cycle seeing as we never even actually entered bear market territory (20% down from the peak) and we’re in the midst of the biggest credit crisis since the Great Depression. The average bear market decline is 30% from the prior peak.
4. Market action implies clearly that participants are STILL more worried about “missing the rally” than about protecting capital during an economic downturn.
5. Earnings estimates are still way too high for 2008. As we get deeper into the recession they’ll be scaled back significantly. Non-financial earnings fall by an average of 15%-20% during recessions. 2008 estimates still reflect 10%+ growth over 2007 (and extraordinarily high profit margins, which generally mean revert during recessions). Possible? Yes. Likely? Hardly.
6. This is one of those moments when bad news is deemed company specific (GE, Fed Ex, UPS, Seagate, AMD) but good news (Intel, IBM, Google) is deemed good for the whole planet. This reflects extreme bullishness.
7. Most of the biggest up days (in percentage terms) in the history of the stock market have been in the midst of bear market rallies that later failed.
8. See 1 again: Stocks are volatile.
I don’t know how low we’ll go (1000-1100 perhaps on the S&P?), but I think we’ll blow through the prior lows sometime during 2008. The current rally notwithstanding.
