Friday, July 9, 2010

Are We Setting Up for a Repeat of Summer 2009?

There are some interesting similarities forming on the charts in summer 2010 and summer 2009.  Let's ignore the macro news items which are quite different (remember back then, if companies announced they had no plans to go out of business we were thankful).

Excluding the extreme snap back rally in March, in 2009 the market rallied tremendously in spring and early summer (April-mid June) tacking on some 200 S&P points (750 to 950 areas) [27%] before running into a brick wall called the 200 day moving average. After such a huge move from March, many (hands raised) thought this was the end of the rally.  In fact when I began buying late February 2009 I thought the eventual upside would be 900-950 but I thought it would take quarters for that to fulfill... not 3 months.

The 50 day moving average had never crossed back over the 200 day since we had suffered such massive losses in the market in late 2008 and early 2009, so once the S&P 500 was rejected at the 200 day... it easily fell below the 50 day as well.  By the 2nd week in July the market had given back some 80 S&P points or a drop just under 9%.  The market was in no man's land as there was no major support anywhere below.... we were at the cusp of a head and shoulders formation.  Then we came into earnings season and in back to back session Intel (INTC) and Goldman Sachs (GS) blew the doors off earnings (and Meredith Whitney went short term bullish on banks).  From there we effectively rallied for the rest of 2009!

Fast forward a year, the market again rallied tremendously in late winter and spring (Feb-April) tacking on some 170 S&P points (1050 to 1220) [16%] before running into a brick wall called the 200 week moving average.  Unlike in 2009 the 50 day was well above the 200 but has since crossed below... which is the now infamous 'death cross' formation that is on every financial website.  The selloff has been much sharper in 2010 then it was in 2009... about 16% versus 9%.  But again we are on the cusp of a head and shoulder formation (the neckline needs / needed to be broken in both cases).  And we now come into earnings season.

As I've written the past 3 weeks I still believe U.S. multinationals are going to do very well - rich in cash, rich in global labor arbitrage, light on workers after massive slashing, and drunk on government spending and central bank stimulus so their consumers benefit - they remain the masters of the universe.  So Q2 2010 earnings should be quite good... another quarter of countless "beats estimates" I am sure.  But guidance is going to be more tricky this time around.  In the past two weeks a bevy of smaller (not multinational) names have reported very good earnings but soggy guidance and been punished.   So it should be interesting on how this turns out.  Our biggest boys report in the first 3 weeks of the earnings period i.e. next week through end of July, and then the focus is mostly on smaller and foreign stocks.  

In fact, Intel (INTC) is right around the corner on the 13th.  Let's see if the market can pull off yet another miracle in 2010, or we behave in a more traditional manner.  One key difference other than a difference expectations year over year, is a tsunami of global government spending (especially that of a U.S. and Chinese kind) were flooding the world with fiat currency; whereas most of those bullets have now been shot.  All that is left is a world full of desperate central bankers shoving easy money down every crevice.

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