Doug Kass who correctly picked the Nouriel Roubini Bottom, says market is proceeding according to the script outlined in his original call. i.e. Now we are in the backing and filling phase for the next 60 days.
The 50% stock market drop over a five-month period in 1937-1938 holds a similarity to the market’s recent drop in that neither had a high-volume selling climax. The market’s 1938-1939 recovery had four legs and lasted about seven months; I expect the 2009 stock market to trace a noticeably similar pattern.
1. Leg one of the 1938-1939 rally was brief and intense; it lasted only about 12 trading days, and the indices rose by 19%, which is very similar to the recent intense rise.
2. Leg two was an approximate 60-day consolidation that corrected half of the initial gain; we may be entering that phase now.
3. Leg three was about a six-week rise of 30%.
4. Leg four consisted of another two-month consolidation and retracement followed by a 22% six-week rally, serving to mark a multiyear high in the averages. I continue to expect this final leg in mid to late summer 2009.
I am going to stay true to what brought me here — namely, my baseline expectation and forecast expressed in early March, which, again, parallels the slope of the stock market in 1937-1939 — and suggest that it is now an appropriate time to raise some cash.
Within the context of the greatest political circus ever televised, stocks have not improved because of the government; they are improving despite the government. And in the face of an unprecedented five up 90% days in March, the current rally is clearly different this time and more durable than others that preceded it.
Call this the “George Costanza market,” a market that does the opposite of what everyone thought it should have done three weeks ago and might now deviate from a growing view that the market will continue its rise in the weeks ahead.
That being said, there is no change in my economic expectations (from three weeks ago) nor in my intermediate view that the U.S. stock market will rise to levels higher than most anticipate.
My previously encouraging prediction for the spring-summer period remains unchanged:
By June, economic traction should begin to take hold from the accumulated fiscal and monetary stimulation coupled with the large drop in energy prices. While it will be too early to demonstrate a broad economic recovery, evidence of stabilization will be clearly manifested in improving retail sales, and stocks will take off for their final advancing phase. With fixed income under increasing pressure, large asset allocation programs at some of the largest and late-to-the party pension plans (out of bonds and into stocks) could trigger an explosive rally in the middle to late summer. This move by July or August could close the October 2008 gap in the SPDRs at around $107.