Just keep thinking sweet thoughts

Extreme volatility is confusing. I once assumed that the bear market had ended last November. But last month’s sell-off dragged prices much lower. All the headlines were decidedly negative, as well.

It is easy to capitulate in scary times and close all positions. The opposite error is to ignore fresh facts and stubbornly hold on to obsolete views. Either approach can lead to painful trading errors.

Confounding my confusion was last week’s surprise 6 per cent rally.

As always, though, I try to ignore the headlines at confusing moments and study the underlying facts. Apologies for sounding like Pollyanna, but my analysis leads me to remain optimistic for the rest of 2009, in spite of current dismal economic conditions.

A good starting point is to compare the performance of the FTSE 100 and the 250. The Footsie is chock full of financial institutions. It fell 20 per cent in 2009 at its recent low. By contrast, the FTSE 250 fell just 9 per cent and remained well above its November 2008 low. The decline is painful, but not a calamity. Those who avoided financial shares were not too badly hurt.

Another issue worth thinking about is unemployment, a lagging economic indicator. The recent US unemployment report tallied 651,000 fresh job losses in February. There was much hand wringing by analysts but little attention was paid to revised unemployment counts just issued for January (655,000) and December (681,000), suggesting the speed of decline is slowing. Current unemployment is over 8 per cent. I have little doubt it will get worse. But a recent Bloomberg survey of economists forecasted a 9.4 per cent peak.

Data seem to suggest that the low point for this cycle approaches. The US’s Institute of Supply Management offers a similar clue. Plateaus or slight declines were evident on several recent economic activity measures.

The positive effect of US tax cuts and vast spending plans are also worth considering. They will help to end the economic decline.

The Blue Chip Economic Indicator newsletter offers hope as well. Many economists now believe the US economy will begin to grow in the third quarter.

Given that the stock market anticipates the future, I remain positive for my 2009 trading prospects.

Investor sentiment data also reassures contrarians like me. A recent survey by the American Association of Individual Investors yielded its highest-ever bearish reading.

Let me temper my view. I do not expect a rip-roaring market recovery. Rapidly rising consumer savings, weak labour productivity and tight credit conditions will slow economic growth. Further ahead, government stimulus could eventually trigger high inflation and rising interest rates.

But these are tomorrow’s problems. 2009 looks good for short-term traders like me. I shall continue to take advantage of trading opportunities when they appear.

One recent buy was Thorntons, the chocolate retailer. At first glance, it may seem a poor choice given current retailing
woes. But recall that Easter came very early last year and shortened Thorntons’ traditionally strong spring selling season. The company had less time to manu-
facture its Easter line and higher-than-normal labour charges were incurred.

I expect that this year’s figures will be flattered by lower manufacturing expenses and a longer selling season.

Stock market historian David Schwartz is an active short-term trader. Send any comments or suggestions to tradersdiary@ft.com