3/5/2009 ALERT: New Bull Market or Bear Market Rally Imminent !!!

3/5/2009 ALERT: New Bull Market or Bear Market Rally Imminent !!!

Written By: Matthew Xiarhos
Categorized in: NEWSLETTERS

ARS

Global Equity Markets
Our last market "alert" was the "WARNING" message of May 8, 2008. This warning was only 10% from the market high and was followed by a nearly 50% decline (basis S&P 500). Since then, I have successfully maintained a defensive position in our managed portfolios and this newsletter throughout the bear market (please see the archives to establish the veracity of this claim). This has allowed us to almost entirely eliminate the damage inflicted upon countless investors worldwide. However, a watershed event has occurred that I believe heralds the end of this bear market or, at the very least, an imminent and significant bear market rally.

I say "until today" because, while market internals have recently been improving and showing quiet and stealth accumulation of stocks by savvy investors, what has been sorely lacking is a cathartic and highly polarized emotional response that would signal a bottom. However, last evening the AAII reported the highest number of bears of the entire bear market.

In fact, the AAII Sentiment Survey Percentage of Bears is the highest ever recorded! Higher than the levels seen after the crash of 1987, during Gulf War I in 1990 and following the "Tech Wreck" of 2000-2002. This shows an extremely strong polarization and one-sided view of equities that rarely occurs. It illustrates the loss of hope and tremendous anxiety. Historically, such high bearish readings have occurred either coincidentally with the market bottom or preceded it by up to several weeks.

In cases when the highest bearish reading occurred before the ultimate bottom the subsequent price damage was not tremendous. In other words, while prices may remain volatile and go lower from here we could expect that it wouldn't be significantly lower. Today's market plunge of nearly 4% (as I write at 2:00pm EST) additionally provides the necessary short-term abandonment of hope.

What should one do now?

Certainly pull in any short positions. Second, ease up on any selling campaigns of existing long positions. Third, get out your shopping list.

But, let's wait for some trend confirmation of the bottom. It doesn't have to be much but in a tremendous bear market one has to be especially careful not to get trapped. At this point in time, what I am saying is that ALL of the requisite factors exist for a substantial rally. However, this is no guarantee. Price action must confirm.

Our equity models are trend and momentum following and, accordingly, aren't designed to anticipate but rather follow the market trends albeit quite sensitively. Accordingly, we will need to see some follow through before we get BUY signals in our model portfolios.

International Equity Regions
Our portfolios are in a defensive position. However, the coming weeks and months hold the possibility for the greatest rally seen in many, many quarters. Accordingly, below I have, for the first time in as long as I can remember, provided some commentary on equity regions around the globe. Again, no BUY signals yet but the commentary below shows where furtive and nascent leadership is developing.

ASIA (ex-Japan) -
Since December, the relative performance of the Asian countries (ex Japan) has been improving suggesting that this area will resume its leadership role in the coming advance.

EMERGING MARKETS -
Much like Asia, relative performance is improving and suggests that this region will also be among the market leaders in the coming advance.

EURO -
There's rarely been reason to look to the ECU for opportunity given its quasi-socialist economy and poor competitive position globally. This time is no different. Avoid.

JAPAN -
Should be avoided at this time. I'm expecting massive capital outflows to occur as risk appetites increase.

LATIN AMERICA (LatAm) -
As the past bull market leader, LatAm was a personal favorite and I expect great things from this region in the coming advance. Tremendous natural resources make it the "raw materials store" of the world.

USA -
(see Equity Style section for specifics)

Equity Style & Sector Trends
Since the beginning of the year, Large-cap Growth (with its heavy technology emphasis) is the leading style box domestically. In fact, I noted just yesterday that the last time the NASDAQ and tech stocks actually witnessed improving relative strength during a decline was at the beginning of the last bull market in early 2003. It appears that story is replaying again today...

Mid-cap Growth was the previous bull market leader and is showing excellent leadership characteristics today. It could be that the tech stocks of yesteryear which haven't had any play in nearly decade could get a good run here. This bodes well for the entire "growth" style.

At present, I am least enamored with the Small-cap area and Value stocks. The value stocks have large financial services weightings and though they may see some great rebounds, the long-term fundamentals and required balance sheet repair leaves me suspicious of this area and the relative performance supports that view at present.

Investment Grade Bonds
High Grade Corporate Bonds remain on a BUY. However, I am not adding positions until the uptrend reasserts itself.

High Yield Bonds
Our model is on a SELL. Keep in mind that High Yield Bonds are highly correlated with equities. Accordingly, any recovery in the equity market will be seen in the High Yield sector also. Credit spreads are huge providing the possibility of very high income coupled with potential capital gains. High Yields bonds/funds are best bought at the end of bear markets when credit spreads are highest, defaults are escalating rapidly yet the equity market is finding a foothold and bottoming; as I anticipate.

Inflation Hedge / Real Assets
Our Real Assets/Inflation Hedge model is invested in GOLD Bullion.

GOLD Bullion - (GLD) - On a BUY. Speculators might be interested in knowing that the valuations of gold equities (basis XAU) is the lowest we have witnessed in the 25+ years for which we have history. This suggests that once the equity market weakness subsides there could be tremendous potential in this area. However, be forewarned that the risks and volatility of gold stocks is also quite high.

Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL .

Real Estate - Our models rank REITs as a SELL. Anticipated strength in the equity market MIGHT bode well for this area. Time will tell and I am not altogether convinced, however.

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