Monday, July 27, 2009

Is 2009 Like 2002?

I have often thought that the 2009 rally resembles the rally off the September 11, 2001 lows that lasted into March, 2002. Even though the causes of the "crisis" are different, there are many noteworthy similarities.

In both cases, the bear market had been going on for greater than a year, and like then, investors are now hopeful that the worst is behind us. In the after math of 9/11, there was a lot of hope that America will bounce back. Hey, "we always do" is the phrase. "America is great. America is strong." (And I don't doubt our resolve as citizens in this country, but feel good rah rah is not going to get it done when we have real problems to face.) But by March, 2002, economic reality set in leading to one vicious head fake that led to new lows and a more solid base to launch a new bull market.

Is 2009 setting up like 2002? Will economic reality set in? Is the worst really behind us?

The short answer is that the jury is still out on this rally. It has been strong. It looks good as prices breakout to new 9 month highs, but the bulls remain hopeful that the all knowing, all seeing stock market has a crystal ball that can see those things that us normal folks can't see: better economic times ahead. Most would agree that the economic landscape is frought with landmines.

Investors are clearly under the assumption that the worst is behind us. But as we found out in 2002 for stock prices, the worst was not behind us. Back then, the economy had bottomed as the recession had officially ended in November, 2001, but the market's bottom was much lower. Currently, signs are pointing to a bottom in the economy as in "things" are not getting worse, and yet with unemployment still rising, we could even argue this point. But I know we can agree that "not getting worse" doesn't mean that they are going to get better either, and this is were investors remain hopeful.

Like 2002, 2009 finds the Federal Reserve extremely accommodative. Liquidity remains abundant. Like 2002, the leading economic indicators in 2009 are improving. Like 2002, the S&P500 is above its 200 day moving average. Like 2002, we find prices on the S&P500 having closed above its simple 10 month moving average. Yes, the similarities are there.

The S&P500 rally in 2001 and 2002 went from the low on September 21 to a high on March 19. It lasted 123 trading days. From low to high the percentage gain was 21%. The currently rally has gone on 98 trading days since March 6, 2009. Through Friday, the percentage gain on the S&P500 has been 43%! Rather than say that such strength is just a sign of new bull market, I could argue it is just mean reversion of a deeply oversold market.

Technically, the current rally is hitting new highs while the 2002 rally ended in a triple top. See figure 1 for a daily graph comparing 2002 (orange line) to 2009 (blue line). This is a clear difference - new highs (2009) v. failure to make new highs (2002).

Figure 1. 2002 (orange) v. 2009 (blue) / daily

For now the current rally has come a long way. A lot of hope is built in. Some may call this "the wall of worry" as the markets continue to climb in the face of bad news. Technically, I look at a market that has been driven higher by short covering -i.e., the "this time is different" scenario - and where stocks are for renting not owning.

I still believe that this time period will prove to be a bear market rally, but in my mind, it doesn't matter what we call it anyway. Simply put this is just not the time or place to jump in with abandon as it is difficult to see how we get there (secular bull market) from here.

Does this mean we re-test the March 9, 2009 lows? I think we are a long way from seeing that happen. Stocks would have to move lower, and of course, if they move lower, investor sentiment will become bearish. This will be a buy signal. If this buy signal fails to produce a sustainable tradeable rally, then there is risk that the markets could retest their March, 2009 lows. As I stated, this is a long ways off.

Is 2009 shaping up like 2002? Possibly. As stocks are hitting new highs, investors certainly have put a lot of hope in a recovery that has yet to materialize.


Dave Narby said...


I have a similar conclusion, but put a date on the next IT bottom... FWIW.

Guy M. Lerner said...


It is a consensus! You make a good point about the recent upswing being a bull trap; we just had a bear trap; now we will get a bull trap.

Anonymous said...

Dave, make better graphics, it is impossible to read
Guy, all tech analysis is off when market is manipulated

Guy M. Lerner said...

Anonymous: it is the hand we are dealt. I do not buy your premise that markets are manipulated; we all assume they are but I have no personal knowledge of such; does the government have a vested interest in protecting the public? It would appear so as our politicians have decided that we cannot bear the pain of a recession; the thought is that things are better when markets rise, so our politicians have adopted a policy that supports a rising market and this should bolster confidence. That's the theory at least.

Jérôme said...

The first rally of the Dow Jones after 1929's crash last for 157 days and returned 48%. If the same thing happens, the current rally could last until mid-August. We have been rallying for 141 days and the return is 37%.

But the SnP monthly close will probably end up above the 12M moving average, which has never lied about new bull runs since the 70's.

Finally, based on the International Valuation Standards (IVS) valuation methods (calculation with GDP and long term interest rates), 666 was 48% undervalued. This is a bottom consistent with the overvaluation reached during the bubble (as typically bottom undervaluation percentage = 1-1/(1+x%), x being the overvaluation).
Under those valuations methods the fair value of the SnP is now around 1150.

This guy called the bottom around 675 and wrote it in January this year. He got the timing wrong (he tought that would not happen before 2011) but the correct price. You can read all his articles here

Well, am still bearish but I'll go long if SnP closes July above the 12M moving average. Funnily, I'll be bearish and long!

Guy M. Lerner said...


Thanks for the information. Although I am not a fundamental "guy", one would think that SP500 666, which was the low, for all of about 5 minutes, wouldn't qualify as value. Prices were low and stocks may have been mis-priced but I don't think of something that has been mispriced for 5 minutes as being of value; value in my mind has more permanence. Either way, we are here now and these discussions are only a matter of semantics. In the end, you got to pick your poison and live with it.

dacian said...


"...value in my mind has more permanence".

Can you detail that a bit? I am rather a "fundamental" guy.

As for the markets being manipulated, yes they are: how can we call micro-managing rates by FED, fractionary reserve system, government stimulus profiting some, insider's information manipulation, etc.? The prices will go where their place is anyway (like any social tendencies for that matter), but these manipulations distort things and hurt those trying to play honest enought to make them lose their shirt, unfortunately. My idea is yes, there is manipulation, but most of the time manipulations fail miserably (that's why I don't believe in them and not because they don't exist, they do).

dacian said...

oh, and regarding the title of your post (which is great as usual), I drop a comment from the great David Rosenberg regarding what are the markets anticipate and put in a bottom: is it the end of the recession or the next expansionary cycle? I guess your post's title gives us the answer as well as David's: markets don't put in the bottom when the recession ends, but when the expansion can be seen at the horizon.

Guy M. Lerner said...


Thanks for the feedback

By "value has more permanence" I was trying to convey two things: 1) that there is sense of time to things that I value; for example, I collect Persian rugs; I am by no means a major collector but I have a good eye for what is good which has taken years of going in and out of stores, etc; in my home I have many 100 plus year rugs on the floors; now as a collector/ aficionado of rugs, there is more value to an older rug that was made for the purpose of going inside some nomads hut then a rug made for the export trade to sit on the floor of a house in Europe or America; the rug was made for a purpose that had some permanence of sitting in a hut to keep people warm; it wasn't made just to create trade. The second thing I was trying to convey was that stocks were said to be undervalued because they hit 666 for 5 minutes that day; I just find this idea of value kind of odd based upon something so fleeting as stock prices.

As far as my words about being a fundamental investor, I am not. I don't read balance sheets; I try to stick to things that I can excel at which is price analysis. I have leveled the playing field by concentrating on price alone.