yesterday’s trading

I was traveling to San Francisco today, so I wasn’t able to monitor much of the market action as it was happening.  I’m sure I would have been (even) more frightened, for the first time during this downturn, if I had experienced it first-hand.

Looking at the charts, the tumultuous day consisted of:

1.  a rally off the lows in Asia, aftermarkets there absorbed the shock of a very sharp decline seen in New York trade on Monday

2.  early weakness in Europe, followed by a sharp rally and a close in positive territory

3.  strength from the open into the afternoon in the US, a brief swoon on the Fed statement shortly after 2PM, then a rebound to a close that more or less doubled the earlier-day highs.

As I’m writing this at close to midnight Pacific time, Asian stocks are showing substantial follow-on gains.

my thoughts

The issue at hand is whether this action contains any evidence that markets will stabilize/are stabilizing at around these levels.

I think there’s a good chance that market are stabilizing, for several reasons.  None of them are strong enough to bet the farm on, however.   I also don’t see any need for me to act right away on my conviction, other than not to adopt a more defensive stance in my own portfolio.

My reasoning:

–My experience is that serious downward market movements don’t end until everyone becomes frightened by the damage done to their portfolios.  Since I’m usually optimistic, and because I’ve been around for a long time, it takes a lot to disturb me.  (Alternatively, maybe I’m just slow to catch on.)  In any event, when I finally think I should be hiding under my desk rather than looking at prices, a down movement tends to be pretty long in the tooth.  I reached the point of real fear yesterday and today.  My nonchalance had been the major reason I thought the markets had more to fall.  So, in the perverse way that equity investors think, I regard my own  fear as a good sign.

–turning points in the markets are often marked by considerable volatility, as bullish and bearish ideas struggle with one another.  Yesterday is the first day that attempts to rally weren’t overwhelmed by new waves of selling.  That’s another good thing.

–a minor note.  My experience is that when the Fed speaks, the first half-hour or so of market reaction is invariably in the wrong direction and is quickly reversed.  So it really doesn’t disturb me that the initial market move after the Fed said it would keep rates low into 2013 was down. In fact, the opposite.

–I don’t think recession is in the cards.  Or if it is, it won’t result in the dramatic falloff in earnings that happens when an economy that is expanding at an unsustainably high rate goes into reverse.  Developed nations may go from being slightly in the plus column for growth to slightly in the minus, but going from +1% to -1% won’t have the same negative effect on corporate profits as if growth went from +6% to -2%.

Let’s say S&P 500 earnings are $50 for 1H11 and $40 for 2H11, meaning $90 for the year.  Assume that 1H12 comes in at $40 and 2H12 at $50.  If so, at yesterday’s close, the S&P was trading at 13x 2011 eps and 13x 2012 eps.   That seems very cheap to me in a world where the competing liquid investment, government bonds, are yielding well under 4%, even for the longest maturities.  I also feel that a 15% or so drop in the index already discounts a lot of bad earnings news.

–I also don’t think that the EU’s financial troubles will trigger another Lehman-like event. I don’t have great reasons for this belief, but here they are:

In my experience, the worst possible political outcomes rarely occur.  The surprise factor of Lehman wouldn’t be present the second time around.  And the EU isn’t that important.  Also, my take is that EU politicians know what needs to be done with Greece.  They’re just trying to figure out how to do it without getting themselves all fired.  Sharp market falls may have given them the political “cover” they need.

support and resistance imply there’s no rush to buy

Under most conditions, when an index (or an individual security) is trading above a price where a lot of buying and selling has happened in the past, that level acts as a kind of floor, or support, for the index.  It’s hard for the price to go penetrate below it.

If, however, the index/security does penetrate below the support level, it tends to start to act as a ceiling, or resistance, to advance.

Looking at the S&P, 1200, or about 3% above yesterday’s close, is one of those levels.  So, too, is 1250.  They used to be barriers to decline; now they’re barriers to advance.

what I’m doing

…watching.  I’m satisfied for now with the overall shape of my holdings.  I can, however, monitor what I own for names that have fallen less than the market and are rebounding more (that’s good), as well as names that are doing the opposite (they’re strong candidates for elimination).