Friday we mentioned that although the recovery stage has started, it is not clear what type of recovery we will be seeing- be it U shaped, V shaped or W shaped.  There are some solid signs we can look to that would signal what type of recovery it is that is in our near future. 

The most likely type of recession that we will see is a U shaped recovery.  I base this on the 1981-1982 recession to which the current one is very often compared.  A sharp drop was followed by a period of economic stagnation for just over a year where the dow remained in the 800s and was eventually followed by drastic growth once the economic fundamentals began to recover.  The flat period is caused by uncertainty multiplied by mixed economic signals.  In terms of mixed economic signals there is no doubt that the markets are giving us mixed signals ranging from an increase in the rate of decline of unemployment to mortgage news and others.  Thus it is possible that the flat line we have seen over the past two weeks with the Dow plateauing near 8500 waiting for more news to react to is where we will be for quite a while, maybe even until the end of 2009 and the beginning of 2010. 

The possibility I believe is the true situation is a V shaped recession in which our recovery will be rapid and we will see the markets lead economic indicators by significant margins.  So far, the Dow has been following this pattern having seen an incredibly rapid period of growth from March 9th to today during which it has seen a 2000 point gain.  If the momentum is able to continue through to permit the Dow to break 9000, economic speculation and increased confidence dimply due to hope and optimism could send the Dow through a sharp recovery.  Moreover, just like the Great Depression, we will see a sharp influx of government money both into the economy and more importantly into the hands of middle class consumers.  Once consumption levels increase, it is unquestionable that people will be far more willing to invest and the markets will see rapid recovery.  Such a recovery would be very similar to the Great Depression where the stock markets recovered despite the wavering economic conditions that continued for at least another year. 

The third possible form of recovery is a W shaped recovery in which the recent bounce from March 9th to today has been purely speculation based and eventually people will sell off due to the small gains they have already made.  Should the markets follow this type of recovery, we will probably be met with poor economic conditions for at least another year and the markets may not see 9,000 until 2010.  This would follow a pattern similar to that manifested in the 73-74 economic crisis perpetrated by the energy crisis and oil embargo.  The notion that we will see such a recovery could be seen by the fact that the Dow has leveled out and is bound to fall back down to 6500 after an unwarranted bounce in stock price.  I personally see this as unlikely since the Dow has been so incredibly oversold that even a small correction will probably not send us below the critical 8000 support level. 

At the end of the day, whichever form of recovery you believe in, you should begin considering to invest back into the markets while stock prices are so cheap.