Closing Out 2008...

Heading Into 2009

With about 8 weeks left in the year, 36 trading days to be exact, I have become more nervous, anxious, & concerned about the market action.

Nervous that the economy is in even more trouble than most believe & that stock valuations haven’t fully discounted that. Anxious that the market is fluctuating (volatility) more than most can handle, both retail & professional players, creating a very unstable investment/trading environment, where neither rallies nor sell-offs can be "trusted". And concerned that the dreaded 'black swan' event (dislocation/crash) is yet to happen.

Bailouts all around. Unprecedented rate cuts. A new & improved president & congress commited to doing anything & everything to fix what is wrong... regardless of the consequences. Capital injections into the banks, backstops for important industries & companies, and a middle class stimulus in the works should all set the stage for a recovery going into 2009. So why wouldn't the stock market be anticipating a much better economy & corporate profits 6 months from now?

Clearly, the end of 2008 will continue to provide dismal economic data & weak corporate earnings reports with cautious guidance going forward (this is now widely expected & anticipated), yet the news will almost certainly improve, at least relatively, in the early part of 2009.

The new president & congress will act quickly & boldly to do things to address the most important & critical problems and will pass a stimulus package ASAP. That could happen shortly after the Jan 20th innauguration & be implemented before the end of the 1st quarter. Getting from here to there, the market will have to get through the next 8weeks of gloom & caution, portfolio rebalancing, tax loss selling, & hedge fund liquidations(closures).

The holiday season will be muted by the overall economic bad mood (which is headlined in the news), layoff announcements, & stressed consumers. With this as the backdrop, I think the stock market will bottom sometime in early to mid December... volatility will hopefully subside & investors will come to terms with the new, lower stock valuations.

I am also anticipating an increase in trading volume...maybe a sharp increase. Dollar weighted average volume must increase dramatically in order to accommodate for the much lower stock prices across all equities. That increased volume could be problematic for the market to handle as investors/professionals continue to withdraw (lower exposure & reduce leverage) from the stock market.

Early January could be the time to begin setting up portfolios for a better market in late 2009. I'm not exactly calling for a new bull market to begin, rather a sustained bear market rally that would coincide with the new administration & its bold plans & policies to fix the economy. An exhaustion of bad news & data which will become "boring" & uneventful (anticipated & expected), and possibly some relatively better news &/or economic data.

Bullish I am not. Less bearish...ok.