We warned in December of 2009 of a likely correction in 2010 that could reach 20%, writing that it was most likely to occur in the first couple of quarters of 2010. "To summarize, we see a correction in the stock market sometime next year that could hit 20% and is likely to occur sometime in the next few quarters." (December 19th 2009). The S&P 500 has fallen just shy of 15% so far at its May 25th low.
We wrote about the high risk nature of the current U.S. stock market, first in February of 2010 and then again in March. On February 18th we wrote, "Further deterioration in the chart - in particular a breach of the recent 1042 low - will likely cause additional profit taking that could lead to our predicted 20%-30% 2010 decline." Finally, we wrote on May 19th that, "Prudent investors would do well to heed the warning shot that was fired on 6 May 2010, it quite likely presages more trouble to come...." (Six days later the S&P 500 hit a new low for the correction of 1040 inter-day, after falling almost 7% in just four trading days).
The wise guy traders (which includes just about everyone these days it seems like) bounced the market hard off the 1040 level on 25 May, making the 1040 area a line in the sand, a breach of which is likely to trigger a further round of selling. The bad news is that the S&P 500 recently failed to take back the 200-day moving average during last week's three day bounce and is setting up for another test of the now critical 1040 area. A close below 1040 opens the way for further declines, first to the big round number (1,000) and then to support at 950. It is possible that the market will rally out of its current very oversold condition first, which would delay any sell off to the 950-1000 level likely until the fall. (Even if an oversold rally does materialize, taking the S&P 500 back to the 1200 level, it is likely that the market will eventually test 1000 and perhaps 950 in the fall as the stalling economy pressures stocks.)
Now, the technical mumbo jumbo is a useful guide primarily because so many professional money managers utilize it. Mutual funds are speculative vehicles these days, turning their portfolios over 80% per year on average. The short term focus puts pressure on managers to track the technicals, making them a self fulfilling prophecy to some extent. It was no coincidence that the market bounced hard from the 1040 level. Everyone can read a chart and everyone could see that the February 1042 low was sitting out there as support. Likewise, it is no coincidence that the S&P 500 recently traded back to the 200-day and failed. Mutual fund managers see the 200-day there and place sell orders accordingly, creating resistance.
Fair value for the S&P 500 is still in the 850-900 area. A return to that level by the fall is still a real possibility and a decline to 950-1000 a fairly high probability event. Hopefully your advisors haven't ignored the high risk market and kept you fully invested over the last few months. Hopefully they too recognized, by late last year, that risk levels were building and prudent risk management was in order. Wouldn't it be nice if you had some cash built up already with which to buy good companies at great prices? Biechele Royce Advisors values price discipline above all else, knowing that the only sure way to outperform is by consistently buying assets for less than they are actually worth. Cash builds up on our clients balance sheets when we can't find undervalued assets to buy - that cash is available to put to work when assets sell off and good companies can be had again for great prices.... perhaps by this fall.
