We have mentioned in the past that most of our work is based on our experiences in the markets and to the extent that we have never experienced the stock market going to zero we tend to believe that the greater the decline the better things look from the long side. Of course this doesn’t help when prices are falling 5%, 10%, or even 20% on a daily basis.

We have spent quite a bit of time of late working on our thesis for the next quarter or two. It is our hope that we have covered this subject well enough that we are now free to move on to something new. The ‘something new’ today has to do with the tendency of the equity markets to make a pivot around the end of the first month in a new quarter.

Belowwe show a chart of the S&P 500 Index (SPX) from 2004. There is actually no particular reason behind this time frame other than it does a nice job of showing and explaining our point.

The SPX pushed upwards from August through into the start of October in 2004 before turning rather sharply lower. The trend was rather sharply lower through the bulk of the quarterly earnings reports leading to a low on October 25th. From there the equity markets reversed direction and headed rather impressively higher.

Our thought today is that for as bad as the markets have been acting of late- and 20% daily declines in the share prices of the major financials is no walk in the park- we feel as if we have seen this before. In other words the SPX finished the last quarter to the upside and has declined inexorably through the first few weeks of January.

In our glass-is-half-full world we tend to view any quarter that opens sharply lower as a bullish event. What we worry about more are quarters that start off very strongly because they often lead to peaks that resolve into sustainable weakness. When the equity markets push lower through the earnings reporting period it typically means that the markets are preparing for bad news and once the news has been released, discounted, and dealt with it is time to shift focus from the past back to the future.

In a perfect world the equity markets make the ‘pivot’ some time around the 22nd to the 25th day of the first month of the quarter although if we were to hazard a guess- and we suppose that we are doing just that- we would give the markets until at least the 28th when Wells Fargo reports.



Equity/Bond Markets

We have included three comparative charts of the S&P 500 Index (SPX) and the share price of biotech giant Amgen (AMGN). The charts below arefrom 1994- 95, 2002 into 2003, and the current time period.

After a 5% to 6% decline in the U.S. equity markets it may seem somewhat irrational to start off with a marginally bullish perspective- as we did on page 1- so hopefully this chart-based argument will explain why we are unwilling to dig a hole in the sand and climb into it.

This is obviously a fairly narrow argument but we remain somewhat fond of its message.

In both 2994 and 2002 the SPX completed a sharp decline and set a bottom for the share price of AMGN. For the next nine months the SPX chopped fairly widely as AMGN tracked higher. In both instances the SPX remained essentially ‘flat’ for nine months before resolving rather powerfully higher.

The point is that this is another example of something that we feel that we have seen before. The SPX completed a water fall-type decline this past autumn and set a low for the share price of AMGN and through trading yesterday we will argue that the trend for AMGN is still higher.

Now… it could be that the equity markets break lower to the point where the rising trend for AMGN is swept away but to date that has not been the case. Our expectation was that as long as AMGN is grinding upwards then the SPX should be mired in a choppy but relatively flat trading range that will extend through into mid-year. We are not writing that the SPX can not go lower- because obviously it can- but are instead attempting to make the case that the index will hold the 750- 950 trading range for the next four or five months.