Get Ready For 20%-40% “Retracement” Rebound

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Fibonacci analysis suggests that we should get at least a 50% retracement of the recent decline either from the 1,300 level held by the S&P 500 in late August, or from the 1,200 level held in late September before the wheels fell off.

In either case, you should theoretically get a rebound to the 1,020 to 1,075 areas, which would amount to robust 13% to 20% advances. Switching to the Nasdaq Composite (COMP), you could easily get a 40% retracement to the falling 12-month average at 2,325 and it would be essentially meaningless in the grand scheme of things.

From a fundamental/valuation level, I can see what appear to be incredible values cropping up now in commodity, steel, banking, global power infrastructure, tech and consumer products. I’ve talked in my Trader’s Advantage newsletter talked about the tremendous value emerging in KBR (KBR), US Steel (X) and Apple (AAPL).

You could also make the case for Cisco Systems (CSCO), with a forward PE of 9; maybe Google (GOOG) with a PE of 15; hot teen apparel brand Volcom (VLCM) with a PE of 8; or teen apparel stores Abercrombie & Fitch (ANF) and American Eagle (AEO) with PEs under 7; or Freeport McMoRan Copper & Gold (FCX) with a PE under 5.

You could even make a great case for future apparel titan Under Armour (UA) even though it’s valuation is still lofty at a 22 PE.

And the energy companies, my goodness, I’m beyond speechless looking at the prices now in Range Resources (RRC), XTO Energy (XTO), EOG Resources (EOG), Chesapeake (CHK), Peabody Energy (BTU), BHP Billiton (BHP) and Vale do Rio Doce (RIO). The term "dirt cheap" doesn’t do them justice.

GDP Growth Crumbling

Even if there is a strong rally the rest of the month, there are still many problems in the economy that must be worked out. Investors and citizens are losing faith in the ability to handle the financial crisis successfully and promptly. And so much personal wealth has been destroyed in recent months that consumer purchasing power is impaired.

Analysts at institutional research firm ISI Group in New York, who are normally terrific at forecasting the economy, held out against making a recession call for most of the year, but finally gave way a month ago. Now they’ve gone farther: On Friday, they cut their GDP estimate for the fourth quarter to -4% for the fourth quarter of 2008 and -2% for the first quarter of next year, as they say their company surveys have weakened significantly as credit markets have remained frozen.

One reason: ISI believes consumer net worth fell a record 13.5% in the fourth quarter, which leads their model to forecast a worse economy in 2009 than in 2001. In this context, the analysts forecast that the unemployment rate is on track to rise to 8.5% from its current perch at 6.1% and a global recession is now unavoidable.

ISI’s bank survey of consumer loans dropped to a record low last week, which explains why auto and tech firms’ sales have been horrific. At the same time, their house price survey also showed a record price decline this month. In fact, the house price decline is now accelerating. Along with falling stock prices, that is what is producing a record decline in consumer net worth.

The combination of a 35.5% year-over-year decline in consumers’ wealth tied to the stock market and a 7.4% year-over-year decline in house prices is producing a one-two punch that has threatened all consumer and electronics goods makers, and in turn their wholesale and commodity suppliers. This alone cuts GDP growth by 1.3% in their model. As an example, chain store sales’ year-over-year average annual growth rate has fallen to 1% today from 4% in 1998 and 2% last year.

So you can that stock market declines and deleveraging are not the whole story. They’re having real impacts on the real world. ISI forecasts -0.5% growth next year in Singapore; a steep decline in industrial production in India; and an extremely steep decline in the ocean shipping rates.

What could turn things around? ISI proposes we watch six markers: Further declines in oil prices; a decline in inflation; more cuts in European interest rates; a decline in mortgage rates by at least three quarters of a percentage point; more policy actions; and an improvement in credit markets.

Progress is being made on the first five, but that sixth one remains persistently resistant to improvement so far, and it is the crusher. With any luck, governments will figure out the solution soon and smooth the path to a much softer glide path for recession.

Come to Trader’s Advantage to see how we’re using these ideas to profit.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com today and check out:


Article printed from InvestorPlace Media, https://investorplace.com/2008/10/get-ready-for-retracement-rebound/.

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