An Expert's Market Forecast for 2009; Part 3

Right now, the investment climate remains risky, with the economy continuing to show weakness and pointing to a prolonged recession well into 2009.
 
At this time, I do not believe that any major rally is sustainable. There is really no reason for buying at this point, albeit President-elect Barack Obama taking office in a few weeks could drive some buying. The real issue is the sustainability of any major rally, which I continue to question given the high market risk. I continue to expect more of the same to start 2009, and will watch to see if the fiscal spending and record reduced interest rates will drive consumers to spend.

As I said, the market risk remains high, made worse by the fact that a near-term bottom is not in place, which makes the downside risk high. It is becoming abundantly clear that the fourth quarter and early 2009 will be a mess and investors are aware of this.

Now, as we say goodbye to 2008, some look at the New Year with hope and optimism of a fresh beginning and are praying for a sustainable market rally. It could happen if the U.S. and global economies begin to grow again, but I remain somewhat bearish at least for the first half of 2009.

The key for 2009 will be to retain caution and to watch how things develop. This is not a buy-and-hold market. The downside risk will continue to be high in 2009.

The ability of stocks to trend higher will ultimately depend on the severity and length of the recession. For at least the first two quarters of 2009, I believe that stock markets will continue to be volatile, and could trend lower and take another shot at the near-term bottom. If stocks hold, it could give more confidence to investors to buy; but failure to hold at the lows would be bearish.

Here's a brief commentary on what is a bearish technical picture for stocks.

Investor sentiment continues to be extremely bearish, which will hinder the sustainability of any upside move in stocks. Stocks have been edging higher. At this point, about 9.09% of all U.S. stocks as of December 30 are above the 200-day moving average, up from 7.58% a week earlier and from 3.83% a month ago. The same goes for the shorter-term moving averages.

The new-high/new-low (NHNL) ratio simply measures the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. The theory is that, in a bullish market, investors quickly bid up stock and you see a rising NHNL ratio. When investors get nervous, fewer new highs are made and the NHNL ratio will tend to decline, thereby giving you a warning. At the other end of the spectrum, bear markets have more new lows than new highs.

There is a general guideline that we use to examine the NHNL ratio. When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20%, it is bearish. Watch the sentiment to see how the market is feeling.

The NHNL on the NYSE remains extremely bearish, with 69 of the last 78 sessions with a reading below 20%, including 60 of the last 65 sessions, which were very bearish. There have only been three readings over 70% since May 22. The NHNL on the NASDAQ has also been weak, with only three bullish readings since October 11, 2007. In all, 73 of the last 78 sessions were below the bearish 20% level. The near-term trends are negative on both.

Taking a look at option volatility ratios, the readings are showing some decline at this time, which could suggest a near-term top. The CBOE NASDAQ Volatility Index or VXN -- a barometer of near-term market volatility based on NASDAQ 100 index option prices -- is generally viewed as a contrarian indicator. The five-day VXN has been declining in recent weeks, which suggests a near-term top on the NASDAQ. The same goes for the S&P 500.

Profit Confidential

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