Timing the market with LIBOR rates
I am convinced that the bottom of the stock market is dependent entirely on low LIBOR rates. The Libor rate, or the rate at which banks lend to banks, represents the best and easiest source of funding for banking institutions. I firmly believe that by timing these events we can accurately time a bottom in the market.
In the previous recession the market bottomed in October 2002 with LIBOR rates sitting at 1.6%. We’re getting awfully close to that level, right now the one year LIBOR is 2.02% after dropping from 2.69% in just one month.
Most interesting from the 2002 crash is that LIBOR rates didn’t actually bottom until months after the market did. LIBOR rates hit their bottom in June 2003 at 1.2% which was eight months exactly from the market bottom.
It shouldn’t be hard for banks to generate a profit when buying credit at 2.02% and lending at 5%. This is plenty incentive to start lending again and start pushing credit back into what is still called a frozen credit market.
The current Dow chart is starting to look like a complete trough having stayed at virtually the same levels throughout the “credit crisis” and maintaining reasonable levels even as Libor rates drop.
When we cross the 1.6% rate on the 1 Year LIBOR I think it would be safe to call a bull run in the stock market resulting from a surge in credit. At that point we’ll have to hope that history repeats and that the LIBOR rate continues to fall for another 8 months. Falling LIBOR rates after a market bottom would secure the ultimate bottom for the market.
