Invest in a post-panic rally?

I was changing an the "Y" yesterday, still losing weight, and the financial channel was listening to talking heads, whose job it is to coordinate rumor and propaganda. The journalists were explaining that commodities are heading south (deflation argument) but that gold was in a class by itself. No rationale, just talking-head conclusions.

The simplistic "must be" logic would not even be aired on a sports-talk show. Life is not a syllogism based on high-school level observations.

In the last blog, the argument put forward by Adam Hamilton was that, no there is no deflation; there are market forces driving down commodity prices because demand is cool as business looks around to see what is going on. At the same time, Hamilton states people are buying gold to prepare for the "big" inflation. This is logical and worth considering.

I checked in with the author on other matters. One. I excerpted below. you will find interesting. This argument proposes a big stock rally - soon. I like the approach as it involves human nature and history, not something generally followed by those wanting the certainty of little numbers and advice from TV "journalists." Hamilton is an avowed contrarian, as is Buffet.

I suspect a 25%+ year is virtually a certainty.
And a 50% year would not surprise me one bit."

The argument is that, even though the economy will suffer for some time, there will be an incredible rally, probably soon. This approach would propose one buy high quality stocks, now rather than later, especially with dividends, or even Spiders. For most people, this means averaging down.

The buy now approach does make some sense as the market is an advance indicator. It moves as investors' project, though fully attentive to the past. The market movers don't want to miss the bottom. Things will get better, even with the drag of sophomoric socialism.

The argument does not address inflation, other than propose a way to get ahead of it. Again, the point agrees with the notion: get out of today's greenbacks.

From: Post-Panic Stock Rallies (I even like the attention to grammar.)

...Among these historical episodes, perhaps the most relevant to today is the infamous Panic of 1907. It was the most famous event in market history until the Great Depression, even though most investors today aren't aware of it. In 1907 the DJIA plunged 37.7%. As the next chart shows, this decline looked uncannily like today's. Then in 1908, despite the widespread fears in late 1907, the DJIA soared 46.6%.

Realize there is no trickery in this chart. Both axes are zeroed so that there is no distortion in the relative slopes of the DJIA in 1907 (when it had 12 stocks) and the Dow 30 in 2008. The resemblance of these two panics, separated by the vast gulf of a century, is uncanny. I am sure I could pass one chart off for the other and almost no one would be the wiser. This pair of panic events was incredibly similar.

How can this be? The markets are vastly different today than 101 years ago. Very true. But one thing that hasn't changed is human emotions. Greed and fear drives speculators today just like it did a century ago. The interaction of these emotions with herd psychology works the same way today as it did back then. A 10% or 20% selloff episode in those markets was just as scary to those investors as a similar decline is to us today.

In October 1907, a major brokerage (Gross & Kleeberg) collapsed after a stock-cornering speculation scheme failed. In September 2008, a major investment bank (Lehman Brothers) collapsed after a hyper-leveraged real-estate speculation scheme failed. Both events led to a cascading loss of confidence among investors and bankers, the latter becoming too frightened to lend resulting in credit becoming scarce. Then selling begot more selling, mushrooming the panics, until everyone remotely interested in selling had sold.

Both panics had tops in October of the previous year (on the very same day, October 9th!). Both had similar cascading selloffs in the panic year before the panic erupted in October. Both had similar sharp panic plunges in October and November. Both bottomed in November (1907 on the 15th, 2008 on the 20th). Both saw similar peak-to-trough losses over that entire sliding year (45.2% in 1907 and 46.7% in 2008). Both felt like the end of the world at the time, and both helped drive sharp economic contractions. The parallels in time and selloff magnitude are amazingly similar.

But after its November 1907 bottom, that panic started to gradually recover despite horrendous sentiment. It even saw a couple of sharp pullbacks after this recovery stealthily started. In 8 days in December 1907, the DJIA retreated 8.0%. I'm sure that scared traders into thinking the panic wasn't over yet. In January 1908, there was a second 6.9% pullback in 8 days.

These are provocative as we've just seen a January 2009 DJIA pullback of 9.0% in 6 days and everyone is freaking out. But it looks like par for the course. The initial recovery out of panic lows is during a time of great uncertainty and residual fear, so it is not just a nice smooth climb back to normalcy. As usual in an uptrend, the stock markets take two steps forward then one step back. November 2008 to January 2009 fits this post-panic pattern perfectly.

Of course over the next year following the November 1907 panic lows, the DJIA surged 66.8% higher! It peaked on November 13th, exactly one year after the panic low (the 15th was a Sunday). This recovery rally was enormous and exceedingly profitable for those brave contrarian souls who bought in the midst of the panic at the depths of popular despair. And this big rally happened despite the economy not expanding again until Q3 1908. It's a fascinating and encouraging parallel, no?

Everywhere you look today, Wall Street and market professionals expect 2009 to be flat to horrible. The economy is not recovering, they claim. Yet history shows the markets really don't care outside of a Great Depression-like catastrophe. Stock markets recover sharply after big down years even if the economic recovery takes longer to arrive.

As a hardcore contrarian, I expect 2009 to follow this big-recovery-rally pattern so I am fighting the crowd and going heavily long. Odds are 2009 will be awesome. In late December I wrote to our Zeal Speculator subscribers regarding the SPX, "...2009 should be outstanding for the US stock markets. I suspect a 25%+ year is virtually a certainty. And a 50% year would not surprise me one bit." I still believe this today.....