Don't Get Carried Away with the Rally

05/13/2009 12:04 pm EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says the stock market rally is running out of steam, and he sees a good buying opportunity in commodities coming soon.

It is time to buckle up and tie down the hatches. The weather is going to get stormy for a few weeks before the Obama rally moves higher in July. I do not look for the Standard & Poor's 500 index to break much below 800, if at all, but a decline of, say, 10% or so is to be expected. It is simply time for traders to take some money out of the game and relieve the market's current overbought condition.

Cyclical and seasonal issues [are] coming into play here. For example, the market's traditional "best six months" of the year (November-April) have come to an end, and we are now in the "worst six months." This is not to imply that the market moves straight up from the end of October through the end of April, or that it will fall straight down for six months beginning in May. My work suggests that it will wiggle a little higher until August before it turns and begins a savage descent into the end of the year.

Regardless of additional strength this summer, I fully expect the averages to close much lower by the end of October than they are now. In fact, I expect the S&P 500 will break below its lows set last March when the current rally began. In the meantime, though, look for a consolidation-basically within the 800 to 900 zone in the S&P 500, followed by a break above 900 by June.

I think all sectors will sink a bit in May, along with the popular averages, and this will give you an opportunity to add metals and energy to your portfolios. Don't get overly pessimistic about the market's prospects this summer if the media runs heavy with "gloom and doom" stories this month.

Unless there are some surprise changes in my technical work, the Obama rally will resume and extend into August. That leg will give you an opportunity to liquidate any non-commodity-advantaged investments you hold. Come August, weakness in the US dollar will support gold and other raw material prices going forward into 2010 while the popular averages will break from the crowd and head to new lows. To see the bear market low when it comes, look for a 6% yield in the Dow Jones Industrial Average, P/E's under 10x, and the Dow/gold ratio well under five (likely two or less).

This will not happen any time soon. Over the next few years, the biggest losers will be financial assets, including bonds and the US dollar. The money will be in tangibles-commodities. Once late summer arrives and the averages top out, I look for the commodity markets and financial assets to once again begin trading inversely-as gold and the averages are now.

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