S&P Breaks 1000, Bulls Remain Rabid, US Q2 GDP

Well, in case you haven't gotten the news yet, the S&P 500 index has broken 1000 for the first time since November 5. Below is the first tick above 1000 since then, which occured earlier today:



It has since remained around 1000, occasionally going up to 1001 or down to 999. 1000 is an important milestone, and one that everyone that follows the stock market has been waiting to see. For months, the bulls had been vocalizing that the S&P was going to 1000, and the Dow was going to 10 000. While the Dow is not at 10 000 yet (it's now at c. 9300), the S&P 500 has broken 1000. Will this run above 1000 be enough to satisfy bullish sentiment? Or will the bulls take it on up to 1100 or 1200?

If this is enough to satisfy bullish sentiment, we may see a spike above 1000, which would probably represent the last possible buyers coming into the stock market. After this spike, there could be a correction to 900, or perhaps 750-800, which would represent a 10-25 percent downturn from current levels.

So far, these are the statistics on the current bear market:
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2007 Peak (1565) to 2009 Low (666):
Down by 57.4 percent

2009 Low (666) to Current Levels (1000):
+49.97 percent

2007 Peak (1565) to Current Levels (1000):
-36.1 percent
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Based on these statistics, the length of the rally (5 months), and the strong bullish sentiment, I believe it would be fair to call this a little bull market. Even if this is the beginning of a new cyclical bull market, it is too early to tell.

This is not unprecedented. In fact, something like this rally happened after the most infamous stock market downturn to have ever occured: the 1929 crash. Below is a chart of the 1929 peak through 1930:



That large, 6-month rally was called the Little Bull Market, which had all the bullish sentiment and rabidness with the real indicators of the economy declining regardless. During the top of the rally, things seemed to be back to normal, and it was thought that Hoover's proclamation that the crisis would be over in 60 days was correct. After the rally was over, it was straight down by 88 percent for the Dow, and 30 percent for the economy. The market would not bottom out for another 2 years, and it would take 24 more to recover fully.

The 1929 crash bottomed out at 198, and the Little Bull Market took it up to almost 300, a gain of about 50 percent. Sound familiar? It should.

Of course, there have been rallies in the past like this which have ended up as the starts of bull markets, but what convinces me that this is similar is the complete absence now, as in 1929, of a real bottoming process. Bear markets, when they turn for good, always have a double- or triple-bottom process over a period of months before moving back up.

Just to show a few... (again: the source is Yahoo! Finance)



And this market does not exhibit that pattern:



It is for this reason that we should be suspicious that this is a new bull market.

Meanwhile, the US government has reported that GDP contracted by 1.0 percent in the second quarter, better than traders (and myself) expected. Economists have raised their forecast for the "second-half recovery" to 2 to 3 percent growth. If this recovery fails to materialize (and it won't, at least not by that much), then this does not bode well for the stock market. My prediction is for the first real positive number for GDP to occur in Q4 2009 or Q1 2010, which is more in line with Nouriel Roubini than the consensus.

Also take into account my belief, based on reasons I have elaborated upon previously, that the Bureau of Labor Statistics understates inflation by 2.7 percent or so.

If true, then that would mean that real GDP would be worse than it seems. Below is a sample:

Quarter	Growth (Gov.)	Growth (adjusted)
Q3 2008	-2.7	-5.4
Q4 2008	-5.4	-8.1
Q1 2009	-6.4	-9.1
Q2 2009	-1.0	-3.7

Now, this may be true, or false, but I ask Americans to take a look in their local grocery and drug stores, and write down the prices. Then go back 3-6 months later and write them down again. This simple observation will show that contrary to what BLS puts out, there is still significant inflation in the US.

This concludes the Patrician Economic Report for August 2009. The next regular report will come in September 2009.