Recession, Gold, Oil, the Dollar... Jay Leno and the Spitzer Rally

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Steve Ause
Special to the Bonanza
March 21, 2008

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Every morning as I exercise, I listen to economists and analysts on our morning call. Often they are answering questions I posed. I have never paid this much attention to the market on a daily basis.

It is a mess, isn't it? The sub-prime mortgage crisis, the falling dollar, sky rocketing commodities and precious metals. It is said Wall Street Climbs a "wall of worry." It has had plenty of reason to climb.

Our industry says "stay invested, it will come back... be a long term investor." Yet, how long is long? The S&P is not even back to the high it fell from in 2000. And wasn't the idea to have made money in the last eight years, not be "even"? As the economist Keynes said, "in the long term, we are dead." I am not the kind to bury my head in the sand and pretend it is not happening, nor to over-react and respond too quickly.

Of course, one question often asked now is "are we entering or already in a recession?" The folks that officially pronounce this are at the National Bureau of Economic Research. But their declaration is historical and not predictive. And they make their call, as their Web site says, often 6 to 18 months after the fact. More and more economists say we've arrived.

Warren Buffet, now top of the Forbes richest list, said we are by a "common sense definition," now in a recession. But maybe Jay Leno has the best take when he said recently that the average American "can't afford to drive to the job he is about to lose to pay for the house he can't afford to live in - the Recession Trifecta."

What we call what we are in isn't as important, to me, as what is happening to investors. I believe the market is forward looking and usually goes down anticipating a recession (like in '98 predicting a recession that never happened) and usually has already begun a recovery by the time it is official.

The recession clouds have been building for some time, but I prefer to wait until the market confirms the theory and actually heads down. Here is the S&P in the last year as of March 14:


A chart of the market, as represented by the S&P 500, is a bit like an EKG. It is a graphic representation of what is going on below the surface. On Jan. 16, we broke a "triple bottom" (the red circle). You see the market actually touched this imaginary line in August, November and January. That usually means that it is a solid floor that the market can find support at and a base from which to move up. But if/when it does break, it is often bad news. I moved clients to the side lines and the next day, the market was down 3 percent and slid until it made a new low on Jan. 24 that set a level for a new floor. The feds then announced a big rate cut and the market moved up, but returned to this floor to form another triple bottom over the next month and a half. It broke through, and then the Fed made the announcement about its $200b lending program to the credit markets and the market moved up almost 4 percent in one day. I jokingly call it the "Spitzer" rally, as Wall Street insiders were cheerful that day over other news.

The blue line, which was once a floor, now becomes a ceiling and as of this writing, we have not yet broken above it. In my opinion, we must go up through this or some new lower ceiling before I would reenter the market. The olive-colored line is a 200 day moving average, which is a non emotional way to see a longer trend. It turned in January for the first time since 2000. I would like to wait until it turns up before re-entering the market, but it always means entering late if one waits that long, yet with perhaps a bit more confidence that a sustainable trend is in place.

Past performance is no indication of future results.

So, the market should move up soon when the Fed announces another expected interest rate cut on the 18, but it takes time for the economy to respond, so I wouldn't expect that will cause a line in the sand to be drawn and define a bottom, though a short term rally may likely occur.

For me, I am happy to be on the balcony in cash, watching the market play out this drama.

Steve Ause owns the Retirement Specialist in Incline Village and is a Registered Principal of LPL Financial. Securities are offered through LPL Financial, member NASD/FINRA. Phone is (775) 831-1963.