Tiger Woods Effect on the Stock Market

RichardSchwartz — Tue, 15 Dec 2009 15:52:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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Monday, December 14^th, 2009:

MONDAY WEEKLY OVERVIEW

THE BIG PICTURE

Tiger Wood’s secret life being tabloided is still playing out. If the ultimate effect is his golf fans feeling unfairly disadvantaged, then just add that on to the same shafted feeling after our US government bailed out the rich, powerful, overpaid, connected & entrenched, who were infected with “Big Money Fever.” With the result, 8 million little guys taking the fall, ripping up if not totally ruining their lives and their families. Same feeling for Tiger fans if Tiger is forced to stop golf. Yep, the latest is that Tiger is quitting golf, taking an indefinite leave. His followers - I’m one - have to think: “Hey, WE didn’t do anything wrong! But now we lose the enjoyment and pleasure of watching Tiger play winning golf? We lose the chance of seeing history? Not fair! Again, we didn’t do anything wrong. Someone else did & yet we get screwed?”

If this psychological scenario above does unfold and people react irrationally that may be what revives this currently tuckered out bear market. Or spawns a new bear market. (Doesn’t matter which.) Everyone, all the investment professionals, think they have the public investor all figured out. But I’ve been convinced, after delving more and more into Elliott Wave doyen and socionomics inventor Robert Prechter Jr.’s writings, that crowd mood swings, the public and Mr. Market’s (the consensus of institutional investors), may come before big stock market swings, even cause them. Both value investing and contrarian investing, as two examples, use extreme market sentiment as or as an important part of their very foundations.

Still, the devil remains in the details. How things actually work out. How people take the Tiger news (along with all other news). Are we today at, I mean just passed, some optimistic peak? Mr. Prechter seems to think so, recommending selling in August & then to sell short, double leveraged, in November. Assessing myself, I didn’t note this optimistic peak. Lots of individual stock charts remain in steady uptrends, not spiking up. Of course any top arriving here or soon doesn’t have to be quite as optimistic as investors were at the likely tippy top peak of March 2000 or the October 2007 likely secondary peak. Most trends, because of a natural diminishment of momentum weaken as they lengthen before they reverse path.

Again, the Tiger Wood’s effect, because he’s been such an icon, global role model and the only golfer who doubles golf’s TV ratings when he plays, who draws in celebrity watchers and casual golf watchers alike, may prove very important to public psychology and in turn to stocks. So, for now, the saga continues as Tiger announces he’s giving up golf. It’s either golf or me may be the at-home conversation. Or maybe wife Elin says or feels: “You broke my heart, I’m never going to trust you again. The only thing I can do to hurt you as badly as you hurt me is to take away your golf. Take away your lifetime goals of beating Jack Nicklaus’s 18 majors record and thus being acknowledged as the greatest golfer ever. That’s the only thing I can hurt you with. To not let you break the record. So it’s me or golf!” Obviously, that path would make Tiger end up hating his wife. And make his army of golf worshipers hate her too, because we’ve all got our emotional skins in the game now, we desperately want Tiger to break Jack’s record, whatever his family life. That’s how I feel anyway. But that’s not fair either, not fair to Elin, who is the really betrayed party. Schwartz View: Having had my own personal apple cart and my son’s Brian upset too, my sense is that Tiger should move on and get divorced. There’s no point in (Elin) reconciling with someone (Tiger) who has once treated you so dastardly. If someone betrays you, all important trust is lost. I feel for Elin but she should just move on too. Tiger isn’t ready for marriage. Whether he’s taught some (military) lesson or not.

THE ECONOMY

“I think this Christmas season will be better than last year, not because it’ll be particularly good, but because last year was especially tough,” says Gregorio Izquierdo, head of research at the Institute of Economic Research in Madrid. From a larger perspective I see this observation “… better because last year was so tough.” applying right across the board, almost everywhere, particularly here in the US.

Extrapolating, after this normal, only and always to be expected market and economic bounce is over, I expect more global economies to deteriorate as shown by the recent revelations from Dubai and Spain and other countries too, all of whom really pushed the easy credit envelope for all it was worth during the easy money boom years. Sort of like the example here in US residential housing under former Federal Reserve Fed head Alan Greenspan and his “no ask, no tell” policies regarding bubbles and financial regulation.

I expect this newly admitted weakness, starting first in weaker, fringe countries, to spread out to other larger and more critically important countries next year. WWI history shows an assignation in Bosnia, far from the world’s economic epicenter, rapidly spread outward. So I don’t see why today’s debt problems in the Baltic States can’t spread to Scandinavia where most of Eastern Europe’s loans are held; Swedbank for example, being the largest lender in Latvia. Or remember just back to the 1997 Asian Contagion. Since Thailand’s currency was pegged to the US dollar, its currency defense drained Thailand’s reserves and forced a devaluation. Which led to foreign investment withdrawal which quickly spread to other countries. Just like last September’s run on America’s investment banks domino-ed. Schwartz View: I expect something similar in 2010, leading to a resumption of what Wall Street likes to call “risk avoidance.”

THE STOCK MARKET

There are just a few remaining bears standing today. A tiny # as identified by sentiment indicators like Investor’s Intelligence and by my reading of everything financial, stock market and economy wise. That’s because stocks have been rising for nine months now, retracing over 50% of total bear market losses in the Dow Industrials & Nasdaq Composite measures and almost 50% in the professional’s benchmark, the S&P 500. S&P’s 50% retracement comes in at 1121 which we almost touched back on December 4^th at 1119.13 intraday. Obviously the S&P is the laggard because is has lots of banks in the index. So where next? Below are some pros and cons about whether this rally is a new bull market & continues. Or not.

New Bull Market

The surge off the March bottom seems too powerful to be some sluggish Elliott Wave A-B-C bear market correction upward. Schwartz View: Just my inexpert opinion.
Richard Russell, the longest running stock market letter writer, wrote once that a bull market’s “diabolical objective is to advance as far as possible without any people getting in.”. Schwartz View: Sure feels like that in this “most hated” bull move up. By the way, I found this quote in big bear Bob Prechter’s writings although I’ve noted similar statements elsewhere for years. My point? Mr. Prechter is ignoring Russell’s quote. Why? Because of Mr. Prechter’s bearish bias?
Long time market guru Joe Granville says we’re in a new bull market. Schwartz View: Another veteran who I greatly respect. I have to admit we are experiencing the normal bull market phases.
Short term bull markets of multiyear duration have interspersed long term, multiyear bear markets in the past. Schwartz View: Like during the Visit of the Three Bears (from 1966-1974).
History shows “cry wolf” depression calls have been followed by amazing rallies. Think back after Black Monday, October 19^th, 1987. Or after the 1957 market collapse when Russia launched Sputnik I. Both proved head fake bear market signals. Schwartz View: My notes say the public sold hysterically for two weeks in October 1957 after the Sputnik, October 4^th launch.
This rally is following the step by step bull market phase guidelines offered up by Dow Theory almost perfectly. Schwartz View: Google Dow Theory and check for yourself. More to come.
The most common Fibonacci retracement after a big market plunge is 61.8%, which means Dow 11,246 and S&P 1229 are next up. Schwartz View: Odds seem high we get to these price levels.

Bear Market Rally

Elliott Wave squiggle reader Bob Prechter adamantly says this is just a big bear market rally. Schwartz View: He’s the expert, not me. History though shows he can be wrong, big time.
Common sense alone tells me the aftermath of “the worse credit crisis since the Great Depression” doesn’t get over in a year and a half. Schwartz View: The system has much debt to work thru!
Wall Street strategists are unanimous in expecting US stocks to rally in 2010. Schwartz View: That’s real scary! I see it as proof the credit MANIA still rules. Plus “keep my job” analysis.
I see “termite packs” all around us. Eating away at usual supports like housing, commercial real estate, private equity & hedge funds, state finances, credit creation, and much more.
Still way, way too much debt outstanding which needs to be restructured or defaulted away.
If we do get economic recovery, the Fed will have to raise interest rates. Schwartz View: Thus, we’re now in a Catch 22 position, darned if we recover economically and darned if we don’t.

SCHWARTZ SUMMARY. My intuition says we tack on another about +10% move up to the 61.8% in both the Dow and S&P. But my conviction isn’t strong enough to dive head first into the investment waters, not with Fibonacci expert Mr. Prechter saying we could top our anytime and for no reason.

PORTFOLIO STRATEGY

Essentially, I’m just sitting here, waiting for the Christmas rally to kick in, with some long positions in the Dow Industrials and the US dollar, both positions being larger than my 5% normal size. In the bullish Dow position I have between 15% - 20% allotments in accounts. I figure the Dow should be the last man standing, normally the case as market breadth-narrows, foreshadowing the end of an uptrend. Then, on the bearish side, I’m long the US dollar, 10% or 12% positions depending on the accounts. In both trades, I’ve used today’s modern specific sector funds with 2x beta (the position is doubled). Long the US dollar is my foot in the water trade for when the bear market returns in full force though right now I’m benefiting from both, last week’s dollar rally and the Dow rallying as well because the path of least resistance in the stock market remains up. I’ve sort of backdoor replaced my downside-biased hedge of being long the Dow and short the Russell 2000 with being long the Dow and long the greenback. I lifted the short side leg a day after it became apparent that my hedge had become crowded, that too many market professionals had caught on & set up similar positions. According to my time-developed Schwartz Rule: MOVE EARLY! So that left me with a sneaky way of getting long the Dow. At some point though I’ll have to make another stand, jettisoning the long Dow trade or dumping my long dollar trade, but for last week anyway, both rose. Schwartz View: For now my strategy isn’t going anywhere fast but I figure if I’m right about the bear’s return, I’m saving clients and readers’ financial health. If I’m wrong I’m not losing money.

Have a good week!

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Tiger Woods Effect on the Stock Market