A recent WSJ article points out that the Dow Jones Industrial Average is up 82% since the last bull market began on October 9, 2002. It feels like a lifetime ago, but U.S. stocks hit record highs just three weeks ago. Given the strong run the bull market has had, there are still more bulls than bears out there, so brace yourself for more downside as bulls cash in.
The current market turmoil has not fully run its course. And given the close correlation between divorce and market volatility, marriages could follow the stock market down the tubes.
Photo:truebluetitan, Creative Commons, Flickr
Whether you believe in the hocus pocus of technical analysis or not, it might be useful to set some targets for this discussion. Bruce Bittles, a technical analyst at Baird, told clients that the S&P would have to close above 1490 in order to signal an end to the "correction." He adds that this move needs to be accompanied by unusually strong breadth, with advancing volume exceeding declining volume by a ratio of 10:1. What are the chances of such a move?
At the time of writing this, the S&P September contract is trading around 1450, and a 2.8% gain (to get us to our target of 1490) doesn't look that far away if you listen to the "fundamentals still look strong" crowd. The dirty little secret about the latest earnings season: corporate profits are up but margins are down, and if margins continue to fall the stock market can go down a lot more.
When will we reach a turning point for stocks? I believe the turning point will come when bond investors regain confidence in mortgage-backed securities, but that won't happen until housing bottoms. That might just be a pipe dream, especially with Fed chairman Bernanke willing to let financial stress play out to ensure investors don't feel emboldened in the future and take on more risk. The Fed is walking a fine line between acknowledging a problem and discussing relief possibilities, without saying anything that might further spook investors.
How long will this tug of war between bulls and bears last? Round 1 starts on August 15, the last day of the 45-day notice period required for investors to withdraw money from many hedge funds across the world during the current quarter. We could see nervous investors lining up to cash in their profits and withdrawing more liquidity from a market where liquidity is partly dependent on central bank activity.
Divorce lawyers might have to cancel their holiday plans.
Disclosure: I do not have any exposure to the current market turbulence. I am not married.
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