Doom, Boom, and Gloom: Waiting for a Market Pullback

Given issues related to gas prices and unemployment, one has to wonder why the market continues to climb. On Feb. 24, 2012, the S&P 500 closed to 1,365.74, a gain of 8.6 percent thus far in 2012. Does the recent climb signal a healthy recovery or a coming drop?

I. While We Wait for a Market Pullback

Despite the recent gains and appearance of optimism in the marketplace, one cannot help but notice considerable headwinds approaching. On a recent episode of APM's Marketplace, Cardiff Garcia from FT Alphaville and Felix Salmon from Reuters discussed issues with gas prices, political uncertainty in the US, Eurozone issues, and unemployment as being obstacles to a recovery. Garcia: "I think that fundamentally the US economy is in better shape than it was early last year, but you certainly want to talk about gas prices..." That being the case, both Garcia and Salmon responded in the affirmative in that they were both "actually optimistic" going forward.

To say the least, other commentators are not so optimistic when it comes to economic recovery. Zero Hedge had an interesting article Friday with the ominous headline "Oil Won't Stop Until The Economy Breaks". The article discussed how John Burbank of Passport Capital believes that "the negative feedback loop...of oil prices into the real economy will be devastating." As wages remain flat and costs rise, Burbank suggested that US consumers will have less funds for discretionary spending. Burbank: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go." Thus, oil is not going to stop "until the economy breaks which is a real risk... The average consumer isn't doing well."

The specter of gas prices will probably be a formidable obstacle to a healthy, viable recovery in the US. Zero Hedge also recently had an article from Charles Hugh Smith on how rapidly rising gas prices affect the economy. The article discussed how disposable personal income falls in relation to rising gas prices. As fuel costs rise, consumers and businesses have less money to spend on other things including purchasing goods, services, and hiring workers. From the article: "Since incomes are stagnant (actually down since the 2007 top) and gasoline is once again on the rise, the ratio [of income and GDP to the price of gasoline] is returning to recessionary levels." According to Smith, "the Federal government can cover up the damage by borrowing 10% of GDP each and every year...and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the 'recovery.'"

From a bearish perspective, rising gas prices in conjunction with possibly rising unemployment portends that any such recovery will hit a consumer roadblock in the not so distant future. Other various stories from Zero Hedge have discussed issues related to consumer debt, central banks' printing money, underemployment, and unemployment. These factors and more seem to suggest that a market pullback is coming.

The specter of a severe market pullback has caught the attention of a number of commentators. On Feb. 24, 2012, MarketWatch's Kevin Marder discussed that "[t]he inevitable correction in this Nasdaq market that has been on a one-way ticket northbound may be occurring right in front of our noses." The Nasdaq Composite is up 13.77 percent thus far for 2012. As per Fox Business' Tom Taulli commentary from Friday, "markets never climb in a straight line forever. Inevitably, there will be a pullback. And there are plenty of signs one might be here soon." An article from Canada's The Globe and Mail written by Paul Brent boldly asked, "Is the stock market due for a pullback?" Whereas there have been bright spots to the global recovery, Brent's analysis suggests that the future is uncertain owing to factors like monetary policy, gas prices, and unemployment. In pertinent part from the article, Levente Mady, the managing director of derivatives at Union Securities Ltd. in Vancouver, commented that "[s]ince the end of November the market has only gone one way. It is a little bit overdone here, so we are due for a pullback." MSN Money's Charley Blaine also recently wrote, "Early in the year, the stock market often briefly pulls back. It happened in 2010 and 2011. It happened in the years before the 2008 financial crash. And it looks like it will happen this year, possibly quite soon."

II. The Bigger They Are, the Harder They Fall? The Less Inflated, the Softer the Landing?

If the market is due for a pullback, how far could the stock market fall? As with so many other questions regarding the economy, the answer remains uncertain.

Even so, regarding a possible drop in the stock market, I am reminded of an article from TheStreet.com's Doug Kass from December 2011. At that time, Kass suggested that the market may have been entering analyst George Lindsay's "three peaks and a domed house" technical pattern. Kass: "The chart...indicates that the technical pattern...is almost exactly synchronized. If history follows, we are about to move toward the domed house (and much higher stock prices) in the months ahead." Whereas the article's included chart of the S&P 500 with the "three peaks and a domed house" pattern may not have precisely come to fruition, the current level of the S&P 500 is reminiscent of Kass' insights regarding a possible fall.

The current rise in the market also reminds me of some of the comments to Kass' "Doom and Boom" article. One individual commenting on Kass' article two months ago article wrote how "Kass is stretching [the three peaks and a domed house] chart pattern to fit his own view. As for me, I don't see the market breaking out of 1350." Interestingly, another individual commenting two months ago wrote, "Very eerie. We're at S&P 1242 as I write this, about half way up the leg from [steps] 20-21. If we bounce our way up to 1400, time to bail!" Months later as we look to a market that has appeared to rebound significantly (though not yet to 1400), one has to wonder if a "time to bail" is approaching with respect to an impending market pullback.

Regarding a market pullback in the spring and/or summer, one must also recall the various Wall Street firms' projections as to where the stock market would end up in 2012. At the end of 2011, TheStreet.com's Robert Holmes discussed what Wall Street firms were expecting for the stock market in 2012. From a bearish standpoint, Goldman Sachs had projected that the S&P 500 would end 2012 at 1250 and HSBC projected the S&P 500 finishing at 1190. From a more bullish and optimistic standpoint, Deutsche Bank projected that the S&P 500 would have a 20 percent rally. The average of the 2012 year-end targets for the S&P 500 discussed in Holmes' analysis was roughly 1348, thereby suggesting a bullish sentiment at the time. Even so, in the spirit of the wisdom of crowds, with the S&P 500 currently at 1365, it would appear that the market is due for a pullback. In light of rising gas prices, tension in the Middle East, and a stretched US consumer, one has to wonder where the market will end in 2012.

At the very least, the comparably high level of the S&P 500 would suggest that now is not the time to buy. In taking into account an average target of 1348 or a more bearish target of 1270, on the one hand, 2012 could end up looking like a hill whereby the stock market rises to a mid-year level around 1400 and then dips back down towards 1300 at the close of 2012. On the other hand, with volatility and the specters of national debt, unemployment, and rising gas prices, one could see the course of the S&P 500 in 2012 looking more like a wavelength -- with the S&P 500 reaching a crest around 1400 in the spring, dropping considerably in the summer reaching a trough in August (akin to the market's course in 2011) to around 1150, and then the S&P 500 would work its way back towards 1270 to 1300 in the twilight of 2012 sometime in December.

III. The Other Side of the Coin

Though we may not know precisely where the market will end up in 2012, we can say with some confidence that gas prices are probably not going to magically decline to $2 per gallon anytime soon. With rising gas prices, we can also say with some confidence that the US consumer is probably going to be left with less funds for discretionary spending on non-essential things like entertainment, leisure, luxury items, and vacations. High gas prices this summer could spell doom for retailers like Kohl's KSS and Macy's M and companies related to the entertainment and vacationing industries.

Another dimension to the market in 2012 is the fear of doomsday. MarketWatch's Al Lewis had a thought-provoking article on Feb. 22, 2012 regarding the prospect of doom in the markets. Lewis: "When people ask me about investing in gold, I often reply that my two favorite sectors are canned food and ammunition. When the young and unemployed ask me for career advice, I tell them to learn how to organize friends and neighbors into a militia and establish a perimeter." Lewis discussed how some are preparing for a possible breakdown of civil society. Lewis wrote, "After years of sluggish economic recovery, endless wars, and a skyrocketing national debt, the national zeitgeist has gone 'Apocalypse Now.'"

Apparently, even the Wyoming House of Representatives is taking precautionary measures "in the event of a complete economic or political collapse in the United States." House Bill 85 would initiate a "state-run government continuity task force" to help prepare the state for possible disasters. From the article: "The task force would look at the feasibility of Wyoming issuing its own alternative currency, if needed."

While such doomsday fears may seem premature or outlandish at this point, it appears that some individuals are preparing for economic meltdown. That being said, nature does have ways of maintaining a sense of equilibrium in the economy and in society -- and at the end of the day, when push comes to shove, we are all living on this planet together. And even in the context of an apocalyptic breakdown scenario, a doomsday stockpile can only last for so long. Per Lewis' article, if it is true that "71% foresee a major disaster in their lifetime as an act of God, not man", then even in the event of a possible divine wrath, tribulation can only go on for so long, right? What, maybe three years, seven years, ten years?

At some point, even apocalyptic global tribulation has to come to an end; yes, even the coin of doomsday has two sides. And in light of the rising stock market and doomsday fears, one phrase keeps on coming to mind for me: What goes up...