March was a pivotal month in almost every market, but that is only obvious in hindsight. There were many signs we can point to now that were easily discounted as we lived through the market’s gyrations 10 months ago. Considering everything, I did a very good job of highlighting many reasons why we were about to, or had already seen, a significant inflection point.
As you’ll read below, based on historical patterns, sentiment, ’smart money’ traders and other indicators, I argued again and again that this was a time to go long. The only thing that threw me off was the confusing behavior of the options market in this pivotal month.
To be honest, this is something that still confuses the heck out of me and perhaps I’ll never be able to have a satisfactory answer. For some reason, all the usual option metrics totally broke down and failed to flag March as what it was. If you know what I mean and have a clue, please enlighten the rest of us who don’t.
In any case, here are some highlights from my analysis and commentary for March 2009:
- Are We Headed Back To 1980?
At the start of the month, things looked grim as I looked at the possibility of a massive double top in the S&P 500 index which would take us down a terrifying abyss. However, sentiment, as usual, offered a reality check. The cult of “buy and hold” had suddenly given away to “time the market” - a sure sign of an inflection point.
- Inflation Adjusted Chart Of S&P 500
A very long term (inflation adjusted) perspective of the stock market showed support and resistance levels that were at once familiar but yet surprising. We were fast approaching previous resistance seen last in the 1960’s and the 1990’s (now support of course).
- Market Breadth: Down, But Not Out
While the market made new lows, several measures of market breadth were showing marks of exhaustion. That is, while the market proxy was lower, the average stock was trading stronger in March than it had in November 2008.
- Sentiment Overview: Week Of March 6th, 2009
The AAII sentiment survey for the first week of March “shows what can only be describe as total and utter capitulation”: 70% bearish & only 19% bullish. This was a huge contrarian alarm blaring in the ear of any trader astute enough to listen. But confoundedly, option traders showed no similar signs of capitulation and if anything, there was just a tad too much call buying.
- Revisiting The Long Term Bullish Case For Stocks
Back in late November, I showed a long term chart of the 10 year rolling returns for the S&P 500. It traced stock returns through peaks and valleys over decades and suggested that we were very close to the bottom of a valley. If you ignored history, I pointed out that many smart traders were suddenly bullish: Buffett, Kass, Grantham, etc.
- (Reverse) Parabolic: The Philadelphia Banking Index
In March, no sector was as hated as the banks. But if you looked at the chart of the BKX, it had gone (reverse) parabolic. This simple but powerful technical pattern was telling chart watchers that the trend was about to exhaust itself. Thanks to hindsight, we know it did indeed.
- Jeremy Grantham: Reinvesting When Terrified
In his quarterly letter to clients, Grantham shared his dilemma in being either too early or too late to get back in the market. What he wasn’t debating was that it was time to reinvest. This was a huge tell as Grantham had been one of the most vocal and successful bears.
- Bear Trap Is Set - But Will It Close?
I went back and compared the start of the 1980 super-bull market that started in August 1982 to the market in mid March. In both cases, prices had broken support only to sharply recover and go higher. This is what is known as a ‘bear trap’ as traders who had bet on declining prices suddenly found themselves hemorrhaging (and as they acknowledged their error and bought to get out of the trade, only propelled prices even higher).
- Another Reason We’ve Seen The Market Low
On the last day of March, I shared yet another reason why the recent low was a significant bottom: the huge gap between price and the long term trend. At its low, the S&P 500 traded an unheard of 39.8% below its 200 day moving average: “it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.”
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