BEING STREET SMART

by Sy Harding

LOOKING STILL FURTHER AHEAD! October 3, 2008.

For the most part I have been on the right side of the market again this year, in for the rally off the March low, in short-sale positions for the subsequent next leg down to the July low, currently primarily in cash with only a couple of downside positions.  So I’m up some for the year, while the S&P 500 is down 24%, and foreign markets have lost even more.

All year long I have also been predicting that beyond the rallies and pullbacks, the market would not see its low for the year until “sometime in the October/November timeframe”. And here we are in October.

So, although still on a sell signal and positioned in cash and downside positions, I am alert to the possibility that the market may be near its low for the year, while still recognizing that it may take place later “in the October/November timeframe”.

As I have also been saying all year, when the market does bottom, I expect a significant market rally to year-end, a rally that will have Wall Street telling us the bear market is over, that the next bull market has begun. That kind of optimism should provide the fuel to keep the rally going into a significant move.

The re-entry signal for our Seasonal Timing Strategy when it comes, is likely to be the definitive sign that the bottom is in. It has had a remarkable record of out-performing the market over the last nine years (since it was introduced in my 1999 book Riding the Bear – How to Prosper in the Coming Bear Market), primarily by being out of the market for its serious declines, and then re-entering in a timely manner for the favorable season rallies.

But I believe we are still in a secular bear market that will last some years, during which even periodic cyclical bull markets will not manage to take the market back up to new highs, or even to its previous highs, before the next bear market decline drives it back down.

At the present time, the S&P 500 is down 24% for the year. Even if we were already at the bottom, it would take a 32% rally to get it back to break even for the year.

I expect a significant ‘favorable season’ rally, but not that significant.

Unfortunately, away from the stock market, I don’t expect conditions in the economy to improve hardly at all in the winter months, even though a rising stock market will be fueled by hope for that outcome.

And for that reason, looking beyond my previous forecasts, the significant rally I expect in the market’s ‘favorable season’ will probably be temporary, with the bear market resuming in the market’s next unfavorable season (due to begin sometime next spring).

Another reason to expect the bear market will be with us next year also, is that the economic numbers say we have the worst surrounding conditions since the Great Depression. That is even admitted now, although belatedly, by Wall Street and the Fed. So, it isn’t a great leap to expect we will also see one of the more serious recessions and bear markets in decades, and serious bear markets tend to last for two or three years. Think back to the 1929-32 bear, the 1973-74 bear, the 2000-2002 bear.

That expectation of an ongoing bear market next year, based on the economic fundamentals, is supported by several very consistent historical market patterns.

For instance, the Four-Year Presidential Cycle shows that since at least 1918 the first or second years of a new presidential term, sometimes both, almost always see problems in the economy, and corrections in the stock market. (The pattern is not as consistent in the first two years of a re-elected president’s second term).

There is also a remarkably consistent pattern of the 10^th year of each decade tending to be a down year for the stock market, which by coincidence, would also be the 2^nd year of the next presidential term.

So there you have it. All year you’ve been hearing my prediction that the market would see its low for the year in the October/November time frame, and then a significant rally to year-end and into next year. Now I’m stepping out further with a forecast for next year.

Near term the problem is with the extreme volatility, which is repeatedly whipsawing those who have been premature with expectations that the bottom was in. Even that two-day rally of 778 points on the Dow, 7%, a couple of weeks ago, which could well have marked the beginning of the winter rally, was a false move, with the Dow back down 777 points in just one day on Monday of this week, and at a lower low.

I will just wait for the next buy signal on my technical indicators, which have been serving us well.

Sy Harding publishes the financial website Street Smart Report Online, and a free morning blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way - Surprising Seasonal Strategies that Double the Market's Performance.

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These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.

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