Fear Factor: Why the Market May Surprise Us All (SPY, OEF, IYT)

You don't have to travel far to catch a negative headline:

•          Credit Crisis Slams Consumers

•          Soaring Energy Prices Push Economy to Brink

•          Housing Slump Worst Since Great Depression

In each of the stories, the writer is quick to relate the topic to the death of the current bull market in stocks. "The ride" they say, "is over."

What's more, many technical analysts have also boarded the "Pessimism Express." You have the "200-day-moving-average" folks who believe that... when the S&P 500 SPDR Trust (SPY) dropped below its long-term trend... the new bear for stocks began. And you have Dow Theorists. They proclaim that when the iShares Dow Jones Transportations Index (IYT) fell further in the November correction than it had in the August correction, all hope had been lost.

Fortunately or unfortunately, predictions and forecasts for the financial markets are notoriously inaccurate. Stocks move higher or lower for a wide variety of reasons, including interest rate policy, investor psychology as well as fundamental value of share prices.

Does this mean that technical analysis has no value? No... on the contrary. It is a piece of the information puzzle where the risks of more downside may increase.

Yet how many times has the S&P 500 fallen below its 200-day trendline where we did not end up in a bear market? More than one can count on his/her 20 digits. Similarly, history demonstrates numerous occasions when the Dow Jones Transports Index marked a "lower low" at a correction bottom, only for the Dow Industrials to quickly record new highs. (This happened in October 1998.)

What about interest rate policy and the U.S. stock market? For instance, following the first interest rate cut by the Federal Reserve, the average historical return for the S&P 500 over the next 18 months is 18%. The Fed began cutting rates in mid-August, suggesting we would see the S&P 500 hit the high 1680s by year-end 2008.

What about the price-to-earnings ratio for the S&P 500? It is actually lower than it was in 2003, roughly 14x forward earnings. That's another positive for stock assets.

What about investor psychology? History shows that the more pessimistic the investing public, the more likely stocks will go higher. The 60-day put-call ratio shows such a high level of negativity, contrarian investors should be jumping over themselves to scoop up bargains.

And there's more. Insider buying/corporate buyback programs suggest that the "smart money" is moving towards economic resilience. This activity was confirmed by the Business Roundtable Survey released today; specifically, corporate leaders expect sales, capital investment and hiring to remain at current levels or even improve.

So... will the markets regain their mojo? Or are the naysayers correct in their interpretation of an upcoming recession and/or a technical bear for stock assets? Nobody knows.

That said, when I look at the data, I don't see "dead people." I see bond yields too low to attract long-term investment dollars. I see the real estate cycle in the middle of its own "correction" or "bear." And I see prosperous large companies with extensive sales from overseas.

Invest in the S&P 500? Well, I am more inclined to take the top 100 via the iShares S&P 100 (OEF). We may not get a bear market, but we certainly have rotated to "bigger is better."

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.