The "see, I told you so" event

By Ron Meisels
Globeinvestor Magazine, June 18, 2008

Ron Meisels is the president of Phases & Cycles Inc. and a contributor to NA-Marketletter.com website.

We have recently entered into the third part of a four-part pattern that occurs at the beginning of almost every bull market. It happened in 2002-03 most recently.

The first part of the pattern consists of falling North American indicators (the S&P 500 and the S&P/TSX). The more these indexes decline, the more the existence of a bear market becomes evident and accepted. When the sell-off culminates with an easily recognizable "selling climax" (most often accompanied by a bear on the front page of Time Magazine or The Economist), it is dismissed as just another decline, sometimes even as the beginning of yet another down-leg. This was the case in October 2002, at 776.8 for the S&P 500 and at 5,695 for the S&P/TSX. The same thing happened at 1,273.4 for New York and at 12,132 for Toronto this year. The voices that are heard at these times include: "How can you say that this is the end of the bear market, when the economy is ....., when interest rates are ......., when the housing market is ....." (Fill in the blanks!).

The second part of this pattern consists of a concentrated rally (in reality the first move of a new bull market) that is described by the majority as "just a recovery rally."

"What else can it be", they say, "look at the economy, look at interest rates, etc." This occurred in late 2002/early 2003 for New York and Toronto, as their respective indexes rallied to 938.9 and 6,837. A similar event began in March of this year and eventually culminated in mid-May at 1426.6 and 15,047 respectively.

As these rallies develop, they bring about an overextended (over-bought) condition. A shock (asset-backed commercial paper this time) then reverses the rally and another down-leg begins (the third part of this pattern). In 2003, the S&P 500 and the S&P/TSX declined to 800.7 and 6,228 as part of this down-leg. While the professionals recognize this as a necessary correction to the previous rally, the common opinion heard on the street by those who still think that it is a bear market, is "see, I told you so". This is the sentiment currently, as both markets have goneg through a correction to the rallies mentioned above, although the S&P/TSX did rally to a record high of 15,068 on Wednesday.

This sets the stage for the fourth part of this pattern, the "shock", the "surprise", the "oops" stage, when the common word on the street is usually "how come they fooled me again". This occurs after the corrective move exhausts itself, when the professionals recognize the bargain prices and re-enter the market, when the markets exceed the highs of the second part mentioned above. In 2003 this occurred when the S&P 500 moved above 939 on its way to a record high of 1565.2 (a 96-per-cent appreciation), and as the S&P/TSX composite index moved to 14,626 (for a 135% gain).

Will history repeat itself; will the indicators repeat this pattern once again? The levels to look for, the "spring-board" for these moves is the S&P 500 1,425 and the S&P/TSX 15,100 levels respectively. We may not have to wait long, as this event may occur as soon as the end of this month.

Special to The Globe and Mail