The Black Swan of 2009
Market Update: 2009-01-20
Happy New Year!
This is my first Market Update of 2009. You may have wondered why I haven’t posted anything since November 23, 2008. The reason is quite simple. Until today, nothing really material had changed since then. Everything that I expected to happen was happening. But today something changed!
On November 20, 2008, I proclaimed that this could happen: “If we get another rally, it could be big, say another 20-30%. But I doubt it will hold either. Now that we are below 800, I think we will have to test this level again after any rally that does occur to ensure that we made a bottom.”
Talk about timing! The S&P 500 made its 2008 low on that day, November 20. And as expected, the market had a big rally since then, another 20-30% (24.2% to be exact). And also as expected, the S&P 500’s rally did not hold and it is now once again approaching the November 20, 2008 closing low of 752.44 to test that level again, in the hopes of ensuring that that level was the bottom. Today the S&P 500 closed at 805.22. It has now given back most of its big winter rally!
So what has changed since November 23? Everything the past two months has played out exactly as I expected it would, except for one little detail. Banks changed. In the past week, and capped off by today’s 19.7% crash, the BKX banking index has unsuccessfully tested it November low of 32.96. As of today’s close it sits at only 25.34. Banks are in the tank…you might as well go ahead and flush them (or rapidly move to nationalize them, Mr. Obama).
If you recall, during the first half of last year I loved the contrarian play offered by the banking sector. But as of the early fall, I had done an about face and recommended that everyone sell some of their KBE because the problems and proposed government fixes were scaring me. In my 10/10/2008 Market Alert “Banks are in big trouble, but the communists are coming to the rescue!” I reiterated my stance on this when I proclaimed that I had unwound over 50% of my stake in KBE. Since then I did not buy anymore. In retrospect, I wish I would have sold more!
As of today, the banking sector is clearly not a place that my money should be. The BKX has broken it support and is falling to a new low. Where the BKX ends up is anyone’s guess now. The BKX has fallen back to where it was in 1993 when the index was created. Yep, it is now at the lowest level it has ever been. But the banks that make up the BKX were around before 1993, so today I looked back at some of their charts for some technical guidance. And it isn’t pretty! Basically, the BKX could lose 75% of its current value and I would not be surprised. Another 50% loss would be easy. Luckily, I don’t have too much of my portfolio dedicated to the banking sector now, so I am not going to worry too much about it. This just goes to show why diversity in one’s portfolio is so very important. For instance, many of my other picks are still well above their 2008 lows, including XES (oil and gas services), EWJ (Japan), FXI (China), and GDX (gold mining), etc. As a matter of fact, the XAU gold mining index is up 58% since the last time I told you I was buying more shares (of GDX) on October 22, 2008.
So the BKX is not acting as I had hoped, but it is acting according to one scenario I laid out. If you recall, I mentioned on November 19, 2008 that the BKX could fall to 30, and that there was support in the upper 20s to 30 area. Today we fell to that support, so if it doesn’t hold here, all bets are off. The reason I am writing this today is to state what could happen if banks break down from here: the S&P 500 may not hold support at 752. Yep, you heard me, the banks may be getting ready to drag the whole market down with them! And if the S&P 500 doesn’t hold support at 752, then things could get really, really nasty. The S&P 500 could easily fall to 400-600. Even if it stopped at 600, that would mean a whopping loss of 25% of today’s close of 805. Are you prepared to lose another 25%? And better yet, are you ready with cash to buy some stocks if the S&P 500 does fall to new lows?
I am not saying that the S&P 500 is going to fail this test of 2008’s low of 752; I am just saying that it may fail and that the odds of making a new low in this bear market are rising by the day. The banking sector is critical to what happens next. I hope President Obama can get a good night’s sleep tonight after all the balls and parties end, because when he wakes up tomorrow morning the problems that America created during the Bush years will be his to clean up. I wish him luck!
Speaking of which, I would congratulate President Obama today, but I already did that in my October 8, 2008 Market Update “Congratulations, President Obama.” I just hope that someone will forward him a copy of that Market Update and a link to my Sinocentury.com, because I want to make sure that he understands that America’s economic problem is not a mortgage problem, not a housing problem, and not a stock market problem. It is a debt problem!!! And the only fix to this problem is America spending the next 20 years or so paying off our existing debt. Throwing more money that we don’t have at the banks, housing, troubled assets or whatever else isn’t going to fix anything (but it may temporarily patch it). Quite the contrary, taking on more debt is only going to make the eventual economic adjustment harder for us to endure.
The S&P 500 falling to 600 or lower could be the Black Swan of 2009. We will know more later. Until then, if you don’t already own some, buy a little GDX; I expect gold will shine later on in this crisis. And, oh yeah, Happy Investing!
Gregory
Happy New Year!
This is my first Market Update of 2009. You may have wondered why I haven’t posted anything since November 23, 2008. The reason is quite simple. Until today, nothing really material had changed since then. Everything that I expected to happen was happening. But today something changed!
On November 20, 2008, I proclaimed that this could happen: “If we get another rally, it could be big, say another 20-30%. But I doubt it will hold either. Now that we are below 800, I think we will have to test this level again after any rally that does occur to ensure that we made a bottom.”
Talk about timing! The S&P 500 made its 2008 low on that day, November 20. And as expected, the market had a big rally since then, another 20-30% (24.2% to be exact). And also as expected, the S&P 500’s rally did not hold and it is now once again approaching the November 20, 2008 closing low of 752.44 to test that level again, in the hopes of ensuring that that level was the bottom. Today the S&P 500 closed at 805.22. It has now given back most of its big winter rally!
So what has changed since November 23? Everything the past two months has played out exactly as I expected it would, except for one little detail. Banks changed. In the past week, and capped off by today’s 19.7% crash, the BKX banking index has unsuccessfully tested it November low of 32.96. As of today’s close it sits at only 25.34. Banks are in the tank…you might as well go ahead and flush them (or rapidly move to nationalize them, Mr. Obama).
If you recall, during the first half of last year I loved the contrarian play offered by the banking sector. But as of the early fall, I had done an about face and recommended that everyone sell some of their KBE because the problems and proposed government fixes were scaring me. In my 10/10/2008 Market Alert “Banks are in big trouble, but the communists are coming to the rescue!” I reiterated my stance on this when I proclaimed that I had unwound over 50% of my stake in KBE. Since then I did not buy anymore. In retrospect, I wish I would have sold more!
As of today, the banking sector is clearly not a place that my money should be. The BKX has broken it support and is falling to a new low. Where the BKX ends up is anyone’s guess now. The BKX has fallen back to where it was in 1993 when the index was created. Yep, it is now at the lowest level it has ever been. But the banks that make up the BKX were around before 1993, so today I looked back at some of their charts for some technical guidance. And it isn’t pretty! Basically, the BKX could lose 75% of its current value and I would not be surprised. Another 50% loss would be easy. Luckily, I don’t have too much of my portfolio dedicated to the banking sector now, so I am not going to worry too much about it. This just goes to show why diversity in one’s portfolio is so very important. For instance, many of my other picks are still well above their 2008 lows, including XES (oil and gas services), EWJ (Japan), FXI (China), and GDX (gold mining), etc. As a matter of fact, the XAU gold mining index is up 58% since the last time I told you I was buying more shares (of GDX) on October 22, 2008.
So the BKX is not acting as I had hoped, but it is acting according to one scenario I laid out. If you recall, I mentioned on November 19, 2008 that the BKX could fall to 30, and that there was support in the upper 20s to 30 area. Today we fell to that support, so if it doesn’t hold here, all bets are off. The reason I am writing this today is to state what could happen if banks break down from here: the S&P 500 may not hold support at 752. Yep, you heard me, the banks may be getting ready to drag the whole market down with them! And if the S&P 500 doesn’t hold support at 752, then things could get really, really nasty. The S&P 500 could easily fall to 400-600. Even if it stopped at 600, that would mean a whopping loss of 25% of today’s close of 805. Are you prepared to lose another 25%? And better yet, are you ready with cash to buy some stocks if the S&P 500 does fall to new lows?
I am not saying that the S&P 500 is going to fail this test of 2008’s low of 752; I am just saying that it may fail and that the odds of making a new low in this bear market are rising by the day. The banking sector is critical to what happens next. I hope President Obama can get a good night’s sleep tonight after all the balls and parties end, because when he wakes up tomorrow morning the problems that America created during the Bush years will be his to clean up. I wish him luck!
Speaking of which, I would congratulate President Obama today, but I already did that in my October 8, 2008 Market Update “Congratulations, President Obama.” I just hope that someone will forward him a copy of that Market Update and a link to my Sinocentury.com, because I want to make sure that he understands that America’s economic problem is not a mortgage problem, not a housing problem, and not a stock market problem. It is a debt problem!!! And the only fix to this problem is America spending the next 20 years or so paying off our existing debt. Throwing more money that we don’t have at the banks, housing, troubled assets or whatever else isn’t going to fix anything (but it may temporarily patch it). Quite the contrary, taking on more debt is only going to make the eventual economic adjustment harder for us to endure.
The S&P 500 falling to 600 or lower could be the Black Swan of 2009. We will know more later. Until then, if you don’t already own some, buy a little GDX; I expect gold will shine later on in this crisis. And, oh yeah, Happy Investing!
Gregory
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