Extreme Lows May Bring Rebound

11/17/2008 1:30 pm EST

Focus: MARKETS

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Pamela and Mary Anne Aden, editors of The Aden Forecast, see a similarity between today's markets and 1974.

Out of 63 world stock markets, 40 have plunged more than 40%, and 94% of them have dropped over 24%. World markets do move together. Some may fall more than others but once the market hits bottom, it'll be a global event. And since these markets are all stretched so far on the downside, and the drops have been so fast, at least some sort of rebound rise is overdue. But it could end up being more than just a rebound.

The stock market had several 90% down days in September and October. These panic days tend to precede the final stock market bottom and they're followed by a 90% up day. On October 28, the Dow had one, up nearly 900 points. A good sign and by the end of that week, it had surged in its largest weekly gain since 1974. This was followed by the biggest election day rise in 24 years. Since then, we've had a couple more 90% down days. But all of this volatility over the past month appears to be bottoming action.

Looking back to 1973, the Dow's leading indicator is extremely oversold, at the lowest level since (again) 1974. These major low areas precede significant rises in the Dow. Interestingly, the S&P 500 is signaling the same, only on an intermediate basis, meaning stocks could head higher at any time. What could trigger an impressive upmove?

It could be more evidence that credit markets are normalizing, better economic or housing signs, or just plain old optimism. The entire world is excited and hopeful that Obama will provide new direction and things will get better. If he were to pick a top notch economic team, indicating that they'll do whatever is necessary to get the economy back on track, it would help restore confidence on Wall Street, Main Street, and globally, and stocks could rise on this alone. The stock market leads the economy and the news.

One important sign that the bear market is not over, and therefore the economy is going to get worse, is the S&P 500's dividend yield. It's still below 3% and at important stock market bottoms the yield has risen to 6%. That was the case in 1932, 1942, 1973, and 1980. It was not the case in 1987 or 2002, but the Dow would have to drop to near 5400 for the yield to reach 6%. So we're not out of the woods yet. Nevertheless, the market is at least poised for a rebound rise. Our plan is to sell our very oversold energy and resource stocks at a better price during the rebound, assuming the market stays bearish. But if it turns bullish, we'll keep our positions.

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