Saturday, November 15, 2008

Is it over yet?

In last month’s commentary I wrote: “Nobody knows where the bottom is exactly, but this decline (in early to mid October) is now exhibiting the normal historical pattern of maximum fear. It is probably near the ultimate CAPITULATION point.” I warned however that the amount and duration of large hedge fund liquidations could change the normal pattern.

History teaches us that bear market bottoms are typically “retested” at some point. Usually this is 30-40 trading days after the first potential bottom. This 30-40 trading day period is not yet complete, but will be soon. I believe there are two major factors that may also affect the “normal” bear market behavior. The first is the change of government administration. The second is the almost unprecedented bad economic news coupled with unprecedented pessimism in near term future economic outlooks.

Bear markets do not end until investor psychology changes in regards to the future. They do end when investors believe that all aspects of the economic future are “priced in” and that even though bad economic news may continue—it is expected. And, most importantly, bear markets end when there is HOPE and expectation that the future will be better in the foreseeable future. Always remember that the price of a stock is the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future.

A study of historical stock market (S&P500) returns in the 1930’s disclose some very interesting facts. After a terrible three year decline from October, 1929 to the 1932 election, with a “transformational” Democrat replacing an unpopular Republican, the market declined 5% in November immediately after the election. But, from October 1932 through October 1933 it rose almost 34%. In the four years from October 1932 to October 1936, the market rose nearly 270%. Yes, it went UP 2.7 times over four years! This was in the midst of the Great Depression! (In that 1933 period when the market rose 34%, unemployment reached 25%. Although the U.S. economy began to recover in the second quarter of 1933, the recovery largely stalled for most of 1934 and 1935.) The point is that markets often rise, even when the present economic news is not very positive. Markets tend to ANTICIPATE the future.

In the short run markets are mostly affected by psychology. Maximum fear is almost always the bottom. Can fear get worse? It depends on whether economic news is worse or better than previously feared. (We have probably already seen the market's reaction to fears regarding possible tax policy changes by the new administration.) When fear is replaced with hope, markets change direction. Sooner than later investors determine that no matter how bad things may become in the near future—things will get better and good times will return!

No, it is not yet over. We will most likely see continued volatility. But, for your long term investments, it is probably not a good time to exit. And it may be an excellent time to add to positions in high quality equities and mutual funds.

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.

See for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.