Who Can You Trust? A Q1 Review Of 2009 Predictions

• By Simon Maierhofer
• On 11:28 am EDT, Friday April 3, 2009

'I will go out on a limb and go on the record that, barring Armageddon, the market bottom has been set. While we may once again test it, I do not think that the closing lows set on November 20 will be reached, therefore the bear market is ostensibly over!' Dec. 11, 2008 - Jeffrey Hirsch, Editor Stock Trader's Almanac.

The Stock Trader's Almanac has assembled decades worth of historical data and identified many reliable, recurring trading patterns. By learning from history, investors were able to predict and exploit certain constellations. Some of these patterns include the 'Santa Claus Rally', 'January Barometer' and 'The Best Six Months.' History may not have repeated itself, but more often than not it rhymed. For this reason, the Stock Trader's Almanac has been right more often than it's been wrong.

This bear market however has rendered all sorts of established patterns and Wall Street wisdom obsolete. The 50% waterfall decline in the Dow Jones (NYSEArca: DIA - News), S&P 500 (NYSEArca: SPY - News) and Nasdaq (Nasdaq: QQQQ - News) took most investors by surprise and choked the Almanac's history-based forecast.

In fact, many other pros had it wrong, too. A few days before the stock market's all-time high, mutual fund investors had a record 96.5% of their fund's money invested. Historically, mutual fund cash reserves tend to be around 8% or so.

The only forecasts that came true were those of perma-doomsayers who have been expecting a market crash for the past several years. Even a broken clock is right twice a day.

Peter Schiff, President of Euro Pacific Capital, became famous for correctly predicting a U.S. equity market crash. According to Yahoo's Tech Ticker, some of Schiff's clients however claimed losses of 40%-70% after investing with Euro Pacific Capital. How can that be?

Schiff's clients were invested in foreign equities as he expected that the rest of the world would be immune to the U.S. slowdown. As it turns out, when the U.S. sneezes, the rest of world gets a cold. The decoupling foretold by Schiff became a commingling.

Many international markets were hit even harder than the US. Broad international ETFs such as the iShares MSCI EAFE (NYSEArca: EFA - News), SPDR MSCI ASWI (NYSEArca: CWI - News) and Vanguard Total World Stock Market ETF (NYSEArca: VT - News) finished 2008 and started 2009 weaker than domestic stocks.

On December 16th, 2008, Morningstar wrote the following: 'We think the Dow Jones is undervalued by at least 30%.' In February 2008, Morningstar stated that, 'our estimate of the Dow's fair value is around 14,000.' The fair value estimate was later decreased to Dow 12,500. The Dow finished the year 2008 at 8,776.

Also on December 16th, TheStreet.com featured the following headline: 'You are witnessing the stock sale of the century.' The following paragraph captures the essence of the article: 'According to some observers, a new bull market commenced Nov. 21 because the S&P has met the technical requirement of a 20% increase. If true, that fits the framework of market rebounds historically. That is, new bull markets typically occur at around the midpoint of a recession. Since the current recession is already one year old, we're at the midpoint if the recession lasts for another year. How should you be positioned for the new bull market'?

Goldman Sachs did slightly better, even though they reserved the right to update their forecast two months into the new year. On February 26th, Goldman's investment strategist David Kostin adjusted the year-end forecast for the S&P 500 to 940 from 1,100 previously.

Adjusting forecasts is a common practice used by Wall Street analysts. The value of adjusted forecasts to investors compares to someone telling you that you should have brought an umbrella as you are already trenched from the rain.

Merrill Lynch's top analyst Richard Bernstein (who's since left the company) got it right in his December 11th, 2008 CNBC interview: 'The United States, in fact, could be heading toward a climate similar to Japan's (NYSEArca: EWJ - News) early 1990s, when its economy collapsed under a real estate bubble and exaggerated easing in monetary policy.'

Unfortunately he went on to recommend defensive sectors such as health care (NYSEArca: XLV - News) and consumer staples (NYSEArca: XLP - News) and said 'cash is probably not a good place unless you're so risk averse.' Cash outperformed defensive sectors by 10% and more over the coming months.

In stark contrast to the many erroneous, readjusted and cumbersomely worded forecasts, ETFguide's guidance for the first two thirds of 2009 was very simple and straight forward. A breath of fresh air.

Subscribers to the ETF Profit Strategy Newsletter received the following update early January: 'The best target for a low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600. Once the new lows are reached, the markets should stage the biggest rally seen since October 2007.'

The Dow bottomed at 6,443 (intraday) on March 6th. In a March 2nd Trend Change Alert, we outlined easy to implement ETF profit strategies for the conservative, moderate and aggressive investor.

ETFs recommended included broad market index ETFs and sector ETFs such as the iShares DJ US Consumer Services ETF (NYSEArca: IYC - News), Vanguard Financials ETF (NYSEArca: VFH - News) and Vanguard Industrials ETF (NYSEArca: VIS - News).

For more aggressive investors we highlighted leveraged long ETFs such as the Ultra S&P 500 ProShares (NYSEArca: SSO - News) and Ultra Financial ProShares (NYSEArca: UYG - News).

ETFguide's January recommendations were reprinted in the February 12th issue of the Investor's Business Daily.

Even though there is general mistrust about the sustainability of this rally, the rally will go on. In fact it should break above Dow 9,000. At this point, investors will feel that the government's efforts to revive the economy are working and Wall Street will start to feel comfortable with the idea of new highs.

Dow 9,000 to Dow 10,000 (we'll narrow it down as we get closer) will mark one of the best profit opportunities for some investors while others will be seriously disappointed.

A grasp of the big picture is needed to discern the market's long-term direction. Such direction can only be discerned through an analysis of the most reliable long-term indicators: dividend yields, P/E ratios and mutual fund manager's sentiment. Historic patterns show that each major market bottom was defined by a specific dividend yield, P/E ratio and sentiment reading.

The market simply does not bottom until those levels are reached just as a light won't turn on unless you flip the switch. The March issue of the ETF Profit Strategy Newsletter contains a detailed analysis of the four most accurate long-term indicators along with target levels and ETF profit strategies.

Buzz up!