Reflation: Deja Vu All Over Again?
March 24, 2009
As of 9:40 am EDT today, the S&P 500 remains down 10% YTD, even AFTER the recent gains. One day, one week, or one month will not dictate whether we are successful this year or thereafter. We will not be on the right side of the market every day, every week, or every month - the important thing is that we capture long-term fundamental and technical trends - trends which take time to develop, identify, and take advantage of. If new bull markets have started, we will participate. While big countertrend rallies are frustrating, if we remain patient and stick to our disciplined approach, we should be fine.
It is possible we are experiencing a Yogi Berra (former Yankee catcher) moment reminiscent of his observation, "This is like deja vu all over again." We all know the government is trying to reinflate asset prices with money printing, leverage, and bailouts. While stocks may not be out of the woods yet, yesterday's move through 806 on the S&P 500 sends a signal the markets are paying attention to all the "liquidity facilities". Since all of the gains from the 2002-2007 bull market were fully retraced, you can make a simplistic argument the entire bull market (2002-2007) was largely based on easy credit and asset inflation. The fundamentals did not support a bottom in stocks in October of 2002, but the Fed was able to inflate asset prices with easy credit and leverage. Since the Fed is using a page from their 2002 playbook, we can reference 2002 to help us better understand the possible effectiveness of the current money printing extravaganza.
We have seen some very positive signs which signal a probable change in the long-term trend for gold (and gold mining stocks). The key word above is probable, especially in the uncertain state of the world. Gold's move off the lows could also signal the process of reflation of asset prices has started again in 2008-2009. Gold and gold mining stocks bottomed first in the 2000-2002 bear market.
As shown above, oil bottomed after gold and gold mining stocks in the 2000-2002 cycle. Oil has shown some encouraging signs of a probable trend change in 2009.
In the 2000-2002 cycle, the stock market bottomed last, and well after gold and oil. While yesterday's move in stocks supports the recent moves in gold and oil, it does not mean stocks are out of the woods yet.
While some progress has been made, the primary trend in stocks remains down for now. We would feel better about stocks if a few more signs of a probable change in trend materialize over the coming weeks and months. Taken together, the moves in gold, gold mining stocks, oil, and stocks, may signal the great reinflation of 2009 has begun. Numerous fundamental risks still exist - so money management and principal protection remain extremely important for all investors and traders. If we continue to pay attention, rather than forecast, we will not go too far off the proper path.
The charts and commentary above are for illustrative purposes only and are not recommendations to buy or sell any security.
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com
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