Back on September 8, we
outlined why it would take a few weeks before for the enormity of the Katrina
damage could sink into investors’ brainpans. Specifically, we compared the
hurricane to the impact of the 1973 Oil Embargo, and the 1906 San Francisco
Earthquake (you can read more details here).
In each of
those instances, it took investors a period of weeks to wrap their heads around
the economic harm that hath been wrought.
This disaster was no different. The exact same process
occurred post-Katrina. Markets rallied for two weeks, pulled back for as long,
and than rallied one last time before calling in sick last week.
And oh, how
sickly they were. The action last week did significant technical damage to the
equity markets, as trendlines cracked, breadth decayed, and a variety of other
indicators went from bad to worse.
It will take some time to repair the charts as well as
investors’ psyches. The more astute amongst you may have noticed that these two
things are often one and the same. This will come as no surprise to this
perceptive bunch: By repairing one, you often repair the other.
The technical damage we saw took place across both indices
and individual names. The Nasdaq dropped below 2100 – its breakout point in
July of this year, and the key support which has held since that time. So too
for the SPX, which sliced through 1215, and then 1205 with relative ease.
It will take some period of time before investors can muscle
these indices back over key levels. Perhaps it will be that earnings appear
good enough, with year-over-year S&P500 gains in the mid teens or better.
That may assure investors (at least those who rely on that single metric) that
all is ok. Assuming, that is, they don’t realize how much Energy is responsible
for these gains. Ex-energy, the SPX
would likely be growing in the single digits. Perhaps enough economic spin will
be generated to convince otherwise intelligent people that inflation is really
not all that big of a deal.
My best guess is this process will require a few weeks to a
month to repair the damage done. That still leaves all of November and December
for the well anticipated year end rally to take place.
If Santa does come to Broad and Wall Street, let me exhort
you in no uncertain terms: This will be a great gift from jolly St. Nick. Use it to reposition your portfolios in a
much more defensive manner. If you fail to take advantage, do not be surprised
if next year, all you get for the holidays is a lump of coal.