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A Bottom In March And A Rally Next ?

By Rudi Filapek-Vandyck, editor FNArena

Whatever happens on global equity and commodity markets in March never receives the same amount of media and investor attention as what happens in January ("The January Indicator") or between May and September ("Sell in May"), or in the closing weeks of each calendar year (the Santa rally). This doesn't mean, however, that March is simply a four week period between February and April.

According to some market researchers March can be a very important month, especially the first two weeks, as they often signal whether the trend is about to reverse. Investors might remember what happened last year when share markets continued to fall during the first two months, but come March equity markets started to stabilise -which took about three weeks- and what followed next was a big rally into April and into May.

If you look back at index charts from the year past, this is the pyramid that took the S&P200 index in Australia from close to 5000 to just under 6000. As we all found out, after that the trend simply reversed again and 6000 for the index now sounds a bit like a fairytale (or at least a long, long, long time ago).

Guess what? In 2007 the world woke up to what seemed like a meltdown in Shanghai at the end of February. But come March equity markets again stabilised and they rose for several weeks from the third week onwards.

I have looked at the pattern of the Australian share market over the past years and this appears to be the optimum scenario: shares stabilise in the first two weeks of March -in other words: there's little difference between where the index is at the beginning of the month and by the middle- so that from the second half of March onwards shares can rise for weeks.

There's one caveat though: if the share market starts to rise too early, as occurred in 2003 and 2004, the opposite happens. Now we all know what to look out for in the 8 trading days ahead: either a stabilisation of the markets, or a new low, but we don't want to see any rallies just yet.

US research backs up these findings with the US share market often reaching a bottom in the first half of March, after which a recovery starts (often in the form of a big rally).

More and more share market commentators and experts have started talking about the next bear market rally. When will it start? It's long overdue, or so the communis opinio goes, after six months of continuously declining share prices it's time for a break out to the outside, these experts argue.

I would like to agree with them, and so far the initial pattern in March seems to leave the door open for this long overdue rally, but I haven't yet discovered what might trigger such a move to the upside.

One of the most obvious places to look for the next catalyst would be, of course, in Washington or at the White House. According to research done by Bank of America-Merrill Lynch economist David A Rosenberg, this would indeed seem the most likely origin for the next trigger to start a global share market rally.

Rosenberg has noticed "a flood of policy proclamations always seem to happen just as we are enduring one of these breakdowns in the stock market to new lows - Jan/07 (75 bp rate cut), March (BSC bailout), July (Fan and Fred), September (TARP), November (TALF)."

Rosenberg: "Hit a low, make an announcement, bounce violently off the low, then break below the new low again. This has been a recurring pattern - investors short the market should anticipate that upon making a new low in the S&P 500, the government is likely going to make some major announcement to resuscitate the patient".

Rosenberg wouldn't be a true economist if he wasn't opposed to the pattern he describes above. He believes that government intervention in the share market simply prevents the market from reaching its ultimate capitulation. In other words: it's a short term fix, but it won't do any good in the longer run. (Experts like Rosenberg in essence suggest US authorities are responsible for extending the bear market by preventing the market from reaching total capitulation).

I have little doubt that, after six months of losses, most investors will grab any rally with both hands; short term or longer term fix included or not.

The first two weeks of March can also be important for the price direction of gold. Shanghai based newsletter The Speculative Investor has found the first half of March often brings a trend reversal for the gold sector.

Since the beginning of the long-term bull market for gold in November of 2000 the HUI (otherwise known as the Amex Gold Bugs Index) has reached a top or bottom of note during the first half of March in every year except 2004. Here's a list to prove the point (data provided by The Speculative Investor):

The first two weeks of March have delivered gold:

• A major top in 2008
• A short-term bottom in 2007
• A short-term bottom in 2006
• A short-term top in 2005
• An intermediate-term bottom in 2003
• A short-term bottom in 2002
• A short-term top in 2001

As The Speculative Investor is positive about the prospects for gold, the newsletter suggests the precious metal could be headed for a short-term bottom during the first half of March this year.

The main question all of the above leaves us with is: can global equities and gold rally at the same time?

Only one way to find out.

AAA - This week's Weekly Insights are a little shorter than usual due to the fact that I only arrived back at Sydney Airport at around 7.30pm after giving a presentation titled "Which Way Forward?" to investors in Adelaide. I will explain more about the event and the presentation in Wednesday's editorial.

ZZZ - My brain must have been temporarily frozen when I wrote and sent out last week's Weekly Insights. In earlier versions I misspelled the name of BIS Shrapnel chief economist Frank Gelber. This has been corrected in later versions, and on the website, but the damage, of course, had already been done. This is extra-embarrassing as I talk to Frank Gelber every six months or so, and I have been doing so for the past years. What can I say? The ultimate signal I am not infallible after all?

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