3 Reasons This Rally Has No Legs

November was another bad month. But we had a nice rally after Nov 24. If you look at the chart of the S&P index (or SPY), there is the perfect reverse head and shoulders formation with bottom on Nov 24. And then we had a rally. Number of bulls on TV grew a lot.

This rally might mean that hedgies finished forced selling for the year. Or maybe they just paused.

I don't feel that this rally has legs. Here are three indicators that are against it.

1. Number of bulls on TV (contrarian).
2. Falling volumes last week (weak indicator, might be related to the holiday).
3. S&P is right at the level of October lows, if you don't count Oct 27

I'm waiting for direction here. If S&P breaks above 950, it might be bullish. To see complete reversal of the bear market, we need a break above 1000, better yet, above 1050. If rally stops here, I probably would go short S&P, either by shorting SPY, or by going long SDS.

Full disclosure: at the time of publication author had no positions in SPY or SDS. Positions can change any time.

Comments

[investor88:]

Good logic and alternate view to the raging bulls out there.

2008 Dec 01 08:08 AM

[Ramzi:]

"If S&P breaks above 950, it might be bullish" so how are you bearish ... it perplexes me that 951 is bullish and 949 is bearish

2008 Dec 01 08:10 AM

[Alex Filonov:]

First of all, my apologies. Local bottom was on Nov 20, not Nov 24.

Ramzi,

I don't say that 951 is bullish and 949 is bearish. When I say "break above 950", I mean that S&P should go well above 950 and stay there for a while. For example, couple of days closing in 960-970 range or higher would be bullish. And of course, it's just my opinion and I can always be wrong.

2008 Dec 01 11:15 AM

[soonerxii:]

What rally?

2008 Dec 01 11:20 AM

[User 68127:]

So after the market goes up, the author will be bullish? But if it goes down further, he will be bearish? Wow! We should re-name this blog "Seeking Lemmings"!

2008 Dec 01 01:59 PM

[Alex Filonov:]

To User68127:

Lemmings follow each other for a reason: it's evolutionary trait which improves survival chances. Sometimes they drown together, true.

2008 Dec 01 06:45 PM

[Alan Brochs...:]

You cite the "number of bulls on TV", but you include neither that number nor a methodology. Are you watching all channels, all the time? Can you tell me what number greater than zero counts as "high"?

2008 Dec 02 08:27 AM

[Alex Filonov:]

On Dec 02 08:27 AM Alan Brochstein wrote:

> You cite the "number of bulls on TV", but you include neither that
> number nor a methodology. Are you watching all channels, all the
> time? Can you tell me what number greater than zero counts as "high"?

It's usually people on CNBC, when I watch it. Which is usually Squack on the Street and between 2 and 3 pm Eastern. Sometimes it also includes traders and guests on Fast Money, if I watch it. When more than 75% of all these people are bullish, it's a bearish signal for me. And vice versa. Not scientific at all, subjective, but worked lately for me.

2008 Dec 02 06:37 PM