Market Outlook

Disclaimer: This is obviously a personal opinion here so I highly suggest that readers here take this with a grain of salt.

I have been thinking about my plans to trade over the coming year and this post is to help me to keep track of my frame of mind over the coming months. That is, in the case that I screw up pretty badly, I'll know exactly what I was thinking.

With the stock market in confusion, I believe that the market will be over responsive to any sort of news in the coming future and I am expecting high volatility. The market will likely rebound over the next month in a similar fashion seen in the January crash after the Bear Stearn debacle. With government intervention from the US and around the world, I believe that the markets will temporally stabilize over the coming months.

However, I still believe that the fundamentals of the economy will still be weak.

My plans are to now to get myself into some positions in the market over the next few days. The market has rallied rather sharply over the course of the last 2 days and I believe that there will be a small dip coming up as people cash out to take out some profits.

I will mention that I did something rather bad yesterday and got into the market a little early (call it an emotional trade) and got hit by a small dip in prices towards the end of the trading session yesterday. I see that strong nerves are required to prevent reactionary trades and thus am requiring myself to formulate a strategy that I will stick to and evaluate as events develop over the coming year. But enough of this tangent...

After the rebound, I expect that winter sales will be poor due to the poor financial condition of the general public and will be expecting that companies to post sub-par quarterly results for the first quarter of 2009. With this said, I believe that the stock market will stagnate or slide downward towards the beginning of next year.

Officialy, the US is not in a recession yet as defined by having 2 consecutive quarters with negative GDP growth. However, I believe that the current Bush administration has been cooking the numbers so that they will not have to announce that the US is in recession and take the blame for their poor economic policies. The word on the street, however, is that the US is in recession as a result of rising commodity prices.

Monte carlo simulations on the November US election results indicate a 97.8% chance of a Democratic win for the election based on data posted at the intrade website. Assuming a Democratic party win in the US the stock market may start to rise with confidence in the Democratic nominee, Barak Obama, but that will not occur to next year.

Looking at the data posted at the US Bureau of Economic Analysis, the data there indicates that the US GDP grew by 2.8% in the second quarter of 2008 and personal income grew by 0.5%. The data here indicates to me that the average American is going further into debt because the GDP generally represents how much people are spending... and they are spending more than their earnings are increasing. I should note that the GDP represents spending by businesses and individuals but I am running on the assumption that the increased spending between businesses and individuals is approximately the same.

The next report on the economy will be on Oct 31 and it will be interesting to see the GDP growth number. If the numbers are negative this quarter, it could send the stock market down somewhat, though I am willing to bet that the numbers will be doctored to be positive. Over the past year, the GDP has been positive despite the sub-prime crisis. But it could be possible for the GDP to turn negative this quarter.

How will I play this?

I will play the current market by buying into a few positions now and holding them till after October and then selling those positions off as I do not have confidence in the current world/US economic situation. I believe that poor economic results will be posted over the winter season and probably to atleast the beginning of next year.

When the market rebounds over the next month or so, I am expecting the price of gold which is a hedge against bad economic conditions to fall as confidence in the market grows. When gold (and possibly silver prices) look attractive, I will move into take a small or medium position in the metals and keep approximately 50% of my portfolio in cash and move the money out of USD. The USD rallied recently against the CAD recently and it would be nice to take advantage of this. I believe that the USD may drop in value over the coming 6 months due to continued deficit spending and the weak economy.

I may decide on keeping small or medium positions in companies with good dividend yields while waiting for the economy to recover. During this time, I will be on the look out for good bargains in the market. I may hold some good dividend paying companies after the bounce as these companies will be paying out their dividends fairly soon in the 3rd quarter of this year.

Edit:

This was posted before the market opened on Oct 15th... the bad play I made yesterday, by jumping into taking some positions too early materialized as the market dropped today... silly me for not taking my own advice. I bought into some more positions and will be waiting (hoping?) for the market to bounce somewhat over the next few weeks.