Six Months After the Market Hit Bottom

It's Come a Long Way Since March, But Many See a Hiccup on the Horizon

Wednesday -- Sept. 9 -- marked the six-month anniversary of the March 9 stock market bottom. It's been quite a ride up since then.

The Standard & Poor's 500-stock index is up 54 percent, with 97 percent of the stocks on the index trading higher. The Dow Jones industrial average and the Nasdaq composite index have also posted huge gains.

The question now is: Where do we go from here?

Historically, September is the worst trading month of the year. So we've got that going for us.

The surge of the past six months has been the payoff for traders and investors who stayed in the market on the way down, buying more stocks as they got cheaper and cheaper. (Check out your 401(k) since March. You'll see what we mean.)

I e-mailed Art Hogan, chief market strategist at Jefferies & Co. and asked: What should we expect? Will the markets test the March lows? How long will it take to get back to the Dow's high of 14,000, hit in October 2007?

Most traders believe that if you have been sitting on the sidelines and waiting to get into the market, you've missed the moment for big profits. Unless, of course, you think stocks are going to rise another 50 percent in the next six months.

The swift run-up to October 2007 was built at least partly on the highly leveraged earnings of the big banks and other financial institutions. In the old days, a bank was considered highly leveraged -- another word for its debt-to-equity ratio -- if it held 10 times as much debt as equity.

But by 2007, big banks such as Goldman Sachs were running debt-to-equity ratios of 30-to-1 or more. This drove earnings and the markets higher -- the more you borrow to invest, the bigger your investment payoff will be, if it works out. But if those investments start to sour, you suddenly find yourself overleveraged, or unable to pay your debt. Going forward, at least for the next few years, banks are likely to be much more conservative in their leverage ratios, which means lower earnings and slower stock market growth.

"I agree that expectations in the short- to mid-term are not for significant upside," Hogan wrote. In fact, he said, the consensus is that the markets will drop 10 to 20 percent from this point through October, though he is unsure what "catalyst" will kick off the pullback. The best reason he has to offer is what a lot of people have been saying: The markets have come too far, too fast, and are due for a correction.

On the upside, however, Hogan does not think the March bottom -- the spooky 666 on the S&P 500 -- will be hit again. So that's good news.

"I do think we will see markets and economy in slow-growth mode over an extended period of time, which plays in to your last point," Hogan wrote, regarding the general deleveraging of the economy. For the Dow, "eight percent annualized market growth will take us five years to get to 14,400 from here."