Stocks: Is the Tide Turning?

I posed the following question a few days ago: “Does the stock market rally have legs?” We have now had four days in a row of a higher market, something we have not seen since June this year. This is also the S&P 500 Index’s biggest four-day surge (+18.0%) since 1933.

A sharply weaker opening yesterday as a result of a barrage of gloomy economic reports was followed by a reversal on the news of former Fed Chairman Paul Volcker’s appointment to a new White House Economic Recovery Advisory Board tasked to revive growth in the U.S. Involving the 81-year Volcker in this way is a smart move by President-elect Obama.

The table below shows the performances of various global stock markets over the past four trading days, as well as figures since the respective markets’ highs and for the year to date (all in local currency terms).

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The gains of the various U.S. stock market sectors since the November 20 lows make for interesting reading, with previous laggards such as financials, consumer discretionary, energy and materials showing the defensive sectors (health care, utilities and consumer staples) a clean pair of heels.

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Interestingly, according to Bloomberg, Société Générale global equity strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices of stocks, corporate bonds and inflation-protected government debt.

This is a value investor’s version of heaven. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.

With all of these opportunities available I have never been more bullish! Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.

Barton Biggs of Traxis Partners, according to the Financial Times, said:

I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.

He motivates this viewpoint as follows:

1. Stocks around the world are very cheap.

2. Stock markets have been obliterated and are deeply oversold.

3. The fabric for economic healing is developing.

4. We must be pretty close to maximum bearishness.

On the last point, Investors Intelligence points out that its sentiment indicator has improved from its historical mid-October low of -32.2% (i.e. percentage bearish advisors less percentage bullish advisors) to -15.1% - still signaling low risk to accumulate shares.

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Another important development regarding sentiment is the fact that the CBOE Volatility Index (VIX) is threatening to drop below its 50-day moving average for the first time in almost three months. Given the inverse relationship between the VIX and stocks, this is good news for equity bulls.

Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow and 1,006 for the S&P 500. This will also result in both indices clearing their 50-day moving averages (see my post “Does the stock market rally have legs?” for a summary table of the key levels).

The question remains: have we seen an important turn to the upside? According to Richard Russell (Dow Theory Letters) we’ve had ten 90% down-days since September, followed by a 90% up-day on November 24. If the tide is in the process of turning up, we should now see a series of strong sessions. I will be keeping a close eye on market breadth in particular.

Although there is still little evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left.

All that remains is to say a big thank you to my readers for your support and friendship and wish you a joyous Thanksgiving.

Source: VosieSales

Comments

[CLH:]

The market is bouncing while the economy is still getting worse. This always happens. The market looks ahead.

2008 Nov 27 07:31 AM

[investor88:]

Good article, we can begin to be more bullish [with stop loss].

2008 Nov 27 07:35 AM

[jimmy Turano:]

Attention Prieur Du Plessis
America be prepared, the gauntlet has been issued! And Mr.Plessis you left out an important factor that is sobering.
Nov.27th-Happy Thanksgiving
Since late October the market has had multiple corrections and the recent four day rally consecutively, is not to be taken as "AN ALL CLEAR SIGN". Rather, now more than before investors should be positioned in cash for the next several months.
This is not a time to begin looking for bargains, just yet. I am not an alarmist by no means, but we are vulnerable to the forthcoming World events that will effect the stock market. Terrorist activity has begun in India just yesterday, and already their stock market has closed done today. The severity level of a well planned attack indicates to me that this is just the beginning of more to follow in the days ahead. And this is the ultimate warning sign that America better adhere to, because I am afraid to say we are definitely included in the overall bigger plan that is beginning to unfold. Between the economic crisis, unemployment heading to 10% by January, foreclosures, and a newly elected President to be sworn in January, the stage is set for radicals/terrorists to gain World wide attention while everyone is watching and feeling the pain financially.
This uncertainty and potential attacks that may happen in the New York area and Washington D.C. area, would certainly effect the stock market with negative consequences. Since the India terrorist attacks are of large scale proportions, it is evident to me that Wall Street itself remains to be the number one target to gain the biggest recognition and front page story to be read around the World.
We are in the most vulnerable position right now for being attacked, therefore it probably more than likely will happen.

2008 Nov 27 07:59 AM

[jeandit75:]

It seems like the sell-off in the market was so huge that the recent pick-up is just normal given the oversold conditions we ended-up with last Thursday. Now my only worry is the recent money flows have been negative. This has usually preceded important sell-offs. In short, don't jump on this rally both feet first and exercise caution.

2008 Nov 27 08:14 AM

[Timmy the T...:]

Americas romance with President Obama has his every word
moving the markets up ward. This romance will surely end
quickly. Just as quickly as this bounce up with evaporate.
Sorry kids. Reap your bounced shares profits or stop loss them.

2008 Nov 27 08:23 AM

[Pauly B:]

Ok to nibble, some great buys out there for sure. However I don't see anything positive out there to cheer about, housing, autos, jobs numbers, consumer spending, and so on.

Second it is unclear to me how this gargantuan world bailout by the countries involved will even work. As an individual I can't spend my way out of debt why should governements.

2008 Nov 27 08:38 AM

[xsuddensam:]

As a consumer, I haven't bought anything in the past two months except groceries, gasoline, and of course, wine and beer to ameliorate the distress.

I was fortunate to sell stocks early. I'm certainly not going back in now. As someone said regarding profits, "You can have the first and last 20%, I'll settle for the middle 60%"

2008 Nov 27 09:58 AM

[fjpenney:]

Just to nitpick on a minor point, the Canadian index is no longer the Toronto Composite 300. It is the S&P/TSX Composite Index.

FJP

2008 Nov 27 11:27 AM

[Kunst:]

About time to dust of the ultrashorts again. Another suckers' rally bites the dust.

2008 Nov 27 04:07 PM

[Anthony Alfidi:]

Four days of data don't make a trend! Counting up-days and down-days is meaningless without analysis of the macroeconomic contexts of those periods. Data mining of this nature is exactly what underpins the algorithims of hedge funds that are cratering.

2008 Nov 27 07:36 PM

[Pipo:]

"We’re ready for a rally. I mean, the market in October and earlier this month has had a huge selling climax. I covered a lot of my shorts. Who knows if I’m right or not. But I expect the market to rally for some time. It may rally into next year. But… this is a false rally. It’s not going to be great. It’s not the end of the problems in America and it’s not the end of the bear market." JIM ROGERS

jimrogers-investments....

2008 Nov 28 06:17 AM

[Bob Jones:]

This is a dangerous trading market, if you have time and money
start buying slowly for the long haul. I believe history and it tells
me buy quality and don't follow the masses , look for growth &
income vehicles. (example: MSFT,GE and XOM),
GOOD LUCK!!

2008 Nov 28 10:49 AM

[Fabien Hug:]

You wrote an interesting article about the state of the bond market. This article doesn't present a very optimistic view and kind of contradict what you wrote here.

2008 Nov 29 09:13 PM