Thursday, February 11, 2010

BAGAKOAA February 11, 2010 Greece is the word. . .

BAGAKOAA February 11, 2010 Greece is the word. . .

Way back on December 3rd 2009, this blog posted:

“So in 2010 the index to watch will be the S & P 500. Since my Feb 2009 prognostication the DOW went up 33% and the S & P 500 went up 26%. There are 500 stocks in the S & P 500 and many have revenue growth as well as cost cutting strategies. The S & P 500’s forward looking PE ratio is about 16. With the year end close of 1113, I am looking for a year end S & P 500 of 1335, almost a 20% increase. This will take two critical elements that must happen. Consumers need to start spending be it frivolous or value purchases. and we need to see a bottom in real estate. If both happen by mid year, the 19 % improvement in the S & P 500 is real. If not it will be difficult if not impossible. You could extrapolate a DOW around 12, 500 based upon that guess, but I wouldn’t bet me life on it.”

I only bring this to light as we have seen, over the last 4 weeks, a 9% correction in the S & P 500. This blog started talking about a correction since mid October but suggested it would happen by last year’s end. The increase in the dollar, anticipated but not stellar earnings improvements, US debt concerns, an intentional “tapping of the brakes” in China and the concern of a European domino failure collapse have all contributed to the long over due correction. I still think there is another 5% to go, then as mentioned in the Dec 3rd, if we see an improvement in consumer spending (Note XLY and XLP mentioned shortly) and a bottom in real estate, we could still hit the 1335 S & P and a 12,500 Dow.

There is a great book recently published by Bloomberg Press called Market Indicators by Richard Sipley. It is 220 pages of different market indicators, where to find them and how to use them. In it he explains how to use consumer discretionary ETFs and consumer staple ETFs to look for tells about the general market. If you look at a three month charts of the ETFs XLY and XLP you’ll see mostly sideways and maybe a slightly downward trend. Nothing as drastic as what the S & P 500 might be indicating with the 9 % drop. So that indicates to me that this is a correction and not a breakdown in fundamentals in the regional or global economy.

Today, we are seeing a move upward because leading countries in the EU have given assurances to help Greece through its debt default crisis. Some might ask why, and the prevailing wisdom is they would rather collectively help Greece than independently help the dozen or so banks left holding the bag at the end of the day.

The improvement today is causing a bit of a drop in the VIX index driving the holding of VXX down, but I am guessing more volatility ahead. Let’s see what tomorrow brings.

Nobody took a guess at the last trivia questions so it still stands.

Salve Lucrum


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