President of FullHouseTrader.com
Program(s) Developed: Commodity Research
Interview Date: February, 2010
Interviewed by William Gallwas - Firm Principal of Striker Securities, Inc.
Mr. Bishop began his trading career in the mid 1980's, and is current President of FullHouseTrader.com, a stock and commodity study and research web site.
William Gallwas: During your market presentation last year in Chicago, you nailed the stock market bottom in March... congratulations on a great call. In hindsight, what were the forces that made the March 2009 low and will this hold?
Stew Bishop: Last part first, will it hold: The actual Dow Jones Industrials low was on March 9 at 6440. Full House Trader has had a primary long signal in place since 3-18-09. So, that low has held to this point. Will it ultimately hold I would say that "barring the very unusual" it will be a major low and as such is a major low in our "sideways box" that we forecast for the market as far back as January of 2003. The sideways box in turn being a result of the "Buffett Effect" where stock and bond prices decouple. Background on all this material may be found in the stock market PDF's of our Annual Market Outlook at FullHouseTrader.net.
The first part of the question: what forces led us to call the market turn on 3-18-09? It was a confluence of factors, rather than any one single thing. As we point out in the Annual Market Outlook, we called the 2002 market bottom on October 18, 2002 at the Striker Conference at the Hotel Intercontinental, Chicago. If you compare the chart we showed at that conference, illustrating the factors of the October 2002 bottom, the chart of the March 2009 bottom is strikingly similar. So there's the first factor: the shape of the technical pattern coming off the Oct. 2007 high. That pattern was a classic 5-wave Elliott-type bottom, as was the low in October 2002. But there are several other important issues: 2) In keeping with the Elliott analysis, we had a 1st low put in late Nov. 2008, this would be an Elliott 3-wave. The market needed to re-test this low. It rallied from Nov. 2008 then turned in early 2009 and headed for a re-test. The March 2009 low took out the Nov. 2008 low slightly, confirming a successful re-test and establishing a wave 5 bottom. 3) On January 12 2009 we forecast: "... an S&P low in the 650 to 700 range..." and "... a Russell 2000 low in the 350 to 400 range...". As of the March 6 2009 we noted that the Russell had just closed at 351 and the S&P had closed at 683, both right in our bottoming forecast zone. So we had both a nice 5-wave Elliott bottom AND this bottom was occuring in our forecast bottom price range. 4) Trendline breaks to the upside. As we wrote on March 18, 2009: "... virtually every major US stock index is now in a believeable bottoming formation for the bear market which began in Oct. 2007...This has been further evidenced by breaking of various downsloping resistance including, for example, the S&P upside breakout through the critical 3-point resistance trendline connecting the late Sep '08, early Jan 09 and Feb 09 highs..." 5) GLOBALLY stock indices were bottoming in this same pattern. As we wrote on the chart in the February 2009 FHT Monthly: "... one more 'global stock pancake' is technically likely and soon..." Well we got a coordinated global stock index bottom in Mid March so you had global stock bottoming in unison, much as was the case in the October 2002 bottom. We showed similar global index bottoms back in October 2002 as well. 6) There was positive market breadth divergence heading into the March 2009 low. As we showed on the chart dated Feb 18, 2009, even as the S&P was heading towards the re-test of it's Nov. 08 low, the Value Line Arithmetic was looking stronger, diverging positively. This was exactly opposite to the chart we showed of the S&P / Value line relationship at the October 2007 top where the S&P was making a new high but the Value Line wasn't confirming. The Value Line Arithmetic is useful in these circumstances, it functions much like an advance-decline line because each stock is equally weighted, unlike the S&P, Dow, NASDAQ and others that are capitalization-weighted. SO, we had positive market breadth developing heading into the March 2009 bottom. 7) The price range of the low in the indices was very telling, in most cases, with slight exception of the NASDAQ, the March 09 low was in the same area or lower than the October 2002 lows ! This first gives us perspective on how dramatic the selloff from the Oct. 2007 high was, but it also is an area we would expect the indices to bottom if we're expecting a "sideways box" type secular trend, as we had forecast in January 2003. 8) Lastly, as the market headed towards the March 09 lows, the momentum of the selloff was slowly noticeably, not nearly as strong as the momentum heading into the 1st low (Nov. 08), another reliable sign of an iimpending change of trend. NOW, all of the above were tracked in real-time in Full House Trader. As we look back in hindsight in the Annual Market Outlook, we also note another very important development in March / April, and that is a global breakout in numerous commodities: Coffee, Cotton, Copper, Sugar, Orange Juice, Soybeans among others all had dramatic breakouts from long selloffs. In hindsight this was a strong confirming indication that a reliable low in Stocks was in.
William Gallwas: Many bears on Wall Street believe the current rally is getting all its fuel from the government stimulus and predict bad your for equities in 2010... how do you respond to this talk?
Stew Bishop: Well I'd definitely agree that the vast majority of economic momentum is from fiscal policy (government deficit spending), which is currently labelled "Obama stimulus", but is actually just massive fiscal stimulus (govt. outlays far exceed revenues) so the government runs a very stimulative deficit.
Will this be bad for equities? That's a difficult question with many possible answers including: A) if you believe that our choices in late 2008 were either stimulus or go into depression, then the stimulus is better for equities than the alternative (depression). Certainly the stock market has been rallying since March so it's received the stimulus reasonably well, at least up to this point; B) Are corporate earnings real or are they just "temporary borrowing from grandkids"? I think that progressively the market will start to question this economy and the certainty of earnings. We're at 560,000 annual housing starts, that is depression level housing stimulus considering 1.4 to 1.6 million units is typical for a 3% GDP growth, we're nearly a million housing units short here. Also private corporate investment is very negligible, both voluntarily and due to bank contraction of credit, and the consumer is net contractionary, so the "consumer of last resort" is the federal government. This is a horrible situation, but again the alternative may be depression.
Lastly, the market looks technically toppy here for other reasons, so if the market is to selloff here, even if it's just a "pause that refreshes", the media will attribute the selloff to Obamanomics, among other things.
William Gallwas: Will the Brown win for Senator in Mass. race change the game for Obama, where do you see political forces in 2010 that could affect stocks and interest rates?
Stew Bishop: Well this is partially a political question. I'm not dodging it for that reason. Personally, I look at a $65.6 Trillion net present value deficit in our national retirement programs (See slides in the Annual Market Outlook). This incredible, historic shortfall has been wracked up during BOTH Republican and Democrat administrations and Congresses. Anyone who has any hope that a change in party will alter the course of our certain bankruptcy of our national retirement systems is fooling themselves.
Will this change the landscape for Obama, almost certainly. It will probably forestall his medical insurance plans among other things. But we the American people have even bigger fish to fry than following these two parties around. We now have a documented $65.6 Trillion net present value shortfall in our retirement accounts, its time to hold ALL POLITICAL LEADERS feet to the fire to get this incredible mess sorted out, rather than playing "politics as usually" and supporting one or the other of these two political marketing organizations (repubs and dems).
William Gallwas: How much longer will rates be kept so low? Do you fear inflation later this year?
Stew Bishop: As for inflation this year, not so much. But as to the question about rates generally, rates can go one of two ways: A) The more likely direction is up as the economy slowly recovers and there is a "slingshot effect" in rates as corporate and consumer borrowers slowly re-enter the credit markets and find themselves competing with massive government borrowing. This might not happen for at least another 6 to 12 months as 2010 is starting out decidedly soft economically. But eventually if the "recovery" continues it will happen. On the other hand B) If the stimulus fails and we have to go towards a global liquidating bankruptcy then rates will probably soften further, of course there will be little or no lending (as in 2008). We just can't rule out at this point that the entire global government stimulus fails and we're forced into bankruptcy, so I like to hold this alternative out there even though I think (or maybe it's just hope) that it doesn't come to pass. For those familiar with the old "Kondratieff Wave" concept we're truly in that situation now, 20 years later than it was expected, but it's here, hopefully we can dodge it.
William Gallwas: Is now a good time to buy a house? Is there pent up demand?
Stew Bishop: Great question, somewhat complicated but I'll try to keep my opinion as concise as possible. 1) First, real estate is local. There are many US markets that are in a supply glut that still have at least several years to bottom: Las Vegas, Florida, parts of California, parts of the Atlantic coast, and just generally pockets of excess all over the county. 2) On the other hand there are numerous markets that never got to the same excessive overbuilt condition and have already bottomed. Buyers need to assess rationally where their particular market stands; 3) The cost of home purchase is not only the home price but also the borrowing rate (mortgage interest rate). If we assume that mortgage rates will drift upward as we mentioned for bonds in the prior question, then mortgage rates are fairly low right now. If you wait for home prices to fall a bit more you may find a slightly lower home price but a higher mortgage rate so your net cost may actually be higher. Buyers have to factor this in as well. 4) Lastly there are two major factors "overhanging" the residential markets: a) net immigration to the US continues, and this is long-term positive for home prices AND b) there is a huge number of Americans (up to 70 million) who are retiring in the baby boom starting now through the next 20+ years. These retirees just aren't going to see the government retirement benefits (SS, Medicare, and Medicaid) that their parents received because ("surprise surprise") our "leaders" have allowed the retirement system to go into the red to the tune of $65.6 Trillion in net present value as of fiscal 2008 (see slides in the Full House Trader Annual Market Outlook at: http://www.FullHouseTrader.net If this is true, I suspect those 70 million Americans will be under continuous financial pressure to raise case to cover their cost of living and medical expenses, and the primary way they can do that is to downsize their homes. SO, this may turn out to be a drag on the overall residential market for the next couple decades. But again, even this factor is local. Assess your LOCAL conditions closely!
William Gallwas: Would you suggest people begin to think about adding gold stocks or silver stocks to their portfolio? Lately, this stock sector has done terrific.
Stew Bishop: Again, mixed answer. In the short run it looks like Gold bullion may be at or near an intermediate-term top. There still looks to be one significant downleg to the dollar (at least), to take out the 2008 lows, and this could be expected to spike gold to take out it's recent highs, but in general the top in Gold looks near. See the Full House Trader "Dollar Gold" slides at: http://www.FullHouseTrader.net
On the other hand, because so much government borrowing is occuring, and so much is needed to begin to bridge the deficits in the retirement system, it's not hard for the markets to forecast widespread "currency debasement", not only in the US but in all major industrialized nations. If the market perceives that government deficits are "here to stay", and that governments will have to borrow up to their eyeballs to satisfy the political pressures from their retiring baby-boomers, then this is probably a long-term upward pressure on gold.
Right now the gold stock sector is relatively neutral to weak vis-a-vis other sectors. Traders probably won't be so interested in it in the short run. Investors, on the other hand, may look to dollar-cost-average into gold with a small portion of their discretionary capital.
This interview is for informational purposes only and is not intended to be
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