The Bear Market Takes a Breather

The meltdown that began in February is nothing short of spectacular. Like a tornado, its ferocity and destruction is frightening, yet fascinating to watch. On Thursday, the S&P 500 had lost 20% since inauguration day, resulting in some calling this recent leg down “Obama’s Bear Market.” To be fair, we have been in a bear market since October 2007. Whether this recent downtrend is the fault of the current administration is “above my pay grade.” What is not above my pay grade (or at least I think it’s not) is analyzing the recent price action of the indexes.

The market initially rallied after the Jobs Report was released, indicating an unemployment rate of 8.1%. That rally soon fizzled and the market sunk lower. Within the last hour of trading, however, the market rallied back to post some minimal gains.

The DJIA continues to lead the way down. As you can see by the chart below, it has been moving downward in a well-organized channel. The few moves to the upside have failed to make any significant gains. A break in the channel may signal a move to the upside. Resistance is still located in the 7000 and 7550 areas.

The S&P 500 is also moving in a tidy channel. Resistance is located in the 750 area.

It was only a matter of time before the rest of the market pulled the Nasdaq down below its November low. Clearly, the Nasdaq was the strongest of the three indexes. With no financials to drag it down, the Nasdaq hung tough. However, the pull of the other indexes was too strong to continue resisting. In a bear market, even the quality stocks (and staple stocks) get pummeled. They might withstand the direction of the overall market at first, but eventually almost all stocks succumb to the pressure. The Nasdaq actually lost almost a half percent on Friday, but it did rebound significantly from the intraday low. Currently, the Nasdaq is less than a point below intraday low of November.

Somewhat surprisingly, the VIX has not spiked up or made any large moves this past week. It currently sits at 49.33. Is this an indicator that investors are just indifferent to the market’s movements? Investor apathy is an ingredient required for bottoms. People grow weary of the stock market and just stop caring. Of course, this is an inexact timing mechanism that shouldn’t be used to solely to base decisions.

Does Friday’s tape action provide any clues for next week? Not really. While it was constructive for the indexes to bounce back at the end of the day, a lot more than a feeble one-day reversal is required to demonstrate the market has found its footing. Keep in mind also, that while the indexes did reverse, they could not make headway in the morning. Moreover, while the market is oversold, it can stay oversold for an extended period of time. Therefore, trying to pick a bottom is a dangerous game.

The market will require time to sort itself out. Even discussing a bottom is premature as there is little evidence that this downtrend is exhausted. Unless you initiated short positions over a month ago, the market should only be a spectator sport for you at this time.

Positions: None.

Comments

[the ilster:]

Those trend lines you identified are very helpful! I will watch those closely as I am extremely short at this time. QID IYR AMZN

Mar 08 06:49 AM

[Crude Oil T...:]

Yep, looks like we are giving mid March to the bulls. But you have to feed your bulls if you want to eat steak! This counter trend rally will only make way for the plunge.

Great post!







crudeoiltrader.blogspo...

Mar 08 11:02 AM

[formerhawk:]

You call Friday a breather?

Mar 08 12:21 PM

[anarchist:]

my god! all this print in this and other articles on SA about a small end of the day rally that was nothing compared to the late day sell-offs we have seen recently. Yeah, could of been shorts balancing their books before the weekend, could have been bottom feeders but put into prospective- it was a nonevent.


On Mar 08 12:21 PM formerhawk wrote:

> You call Friday a breather?

Mar 08 01:42 PM

[Prudent Man...:]

If you want to buy there seems to be plenty willing to sell to you.

Is the buyer smarter than the seller in the zero sum game of trading?

Higher taxes, higher deficits, Socialism, entrenched politicians, excess profit taxes, terrorists lap dogging, PLO, Iran, Afghanistan, etc., etc.. Now that is bullish.

It is always best to buy when it looks the worst. Is this the worst it can get? The stimulus is for two years? Don't count on it.

Don't believe this is your father's recession.

Mar 08 02:00 PM

[Conan the B...:]

If the going does not get better, by the 2010 ellections, even the Entrenched politicians will be beheaded.

Since my Father was born in 1918, it is similar to his GD. Better in some ways, worse in others. And We are nowhere near 25% unemployed.

The Fed is talking 3rd/4th quarter positive GDP, anemic but positive. That is 6-9 months from now, A Bull Trap based on that expectation can start anytime.

I believe it should be sold into but also believe the Charts above indicate extreme unsustainable pessimism.

The time between New index lows is longer, Oct, Nov. now February. While a Selling climax to end the Bear may be required, A Bull Trap does not need that requirement.

Just on a theoretical basis, what will the markets do if the Mark to Market Rule is suspended amd the short up-tick rule is reinstated.

Mar 08 02:37 PM

[silverfox:]

How about some fundamentals to try and predict where the market is going like maybe....( EARNINGS)......
GRAPHS SHOW A NICE PICTURE OF WHAT THE PRESENT HOLDS BUT THIS IS NO WAY TO PREDICT WHAT WILL HAPPEN NEXT WEEK OR NEXT MONTH.
I keep my eyes on EARNINGS in any Company case thats what keeps them alive.
Until any company starts showing (GOOD EARNINGS) keep your power dry.
And remember, never try to catch a falling knife.

Mar 08 02:37 PM

[sarkanda:]

"Just on a theoretical basis, what will the markets do if the Mark to Market Rule is suspended amd the short up-tick rule is reinstated."


Paultaut, I'm wondering the same thing. Opinions on that seem to really vary amongst analysts. I'm also hearing that credit default swaps (CDS) are helping to ruin the market.

Mar 08 04:46 PM

[pacificapat...:]

"And We are nowhere near 25% unemployed."

Think again: If the unemployed were counted as they were before the 1980's, we'd be at 18% unemployment.
John Williams at shadowstats counts in the old-fashioned, i.e., the honest way.
Why do you think Europe has had higher unemployment figures than the US for years? Because they don't use the bullsh@t US method.

Mar 08 09:06 PM

[Conan the B...:]

Don't I know it: Unemployed + part-time looking for full employment + those who have given up entirely. Did I miss anyone?

In addition, while Obama fiddles, Jobs lost since the beginning of 2008 are now above 4 million. His entire stimulus plan Will Save or Create 3-4 Million, does this mean that any further job losses are permanent?

The CDS market estimates vary, last year I saw as high as $65 Trillion, this year I've seen $55 Trillion. Do I believe Short sellers are linked directly to the CDS market? Absolutely. Can I prove it? Nope.

I believe there was an auction where CDSes received .925 on the dollar, last year on a bunch of semi-waste by an investment house.

It might have been Merrill, don't remember. Anyway, using the 7.5% loss on the $55 Tril. that may still be out there, I get about $4 tril worth of losses for some insurers yet to be realized or more considering the swiftness of the decline in the Economy.

Me? I say shove all of this back where it belongs, Tier 3. If you don't know what its worth, why is the taxpayer going to hold it?

Let it stay on Tier 3 and on Institutional books instead of ours. As long as Tier 1 is above a certain level, leave the Banks alone.

IMO

Mar 08 10:45 PM

[ejhickey:]

Compare the Obama Bear Market with the FDR Bull market of 1933. Duirng FDR's first 8 weeks in office the DJIA rose 48%.

Mar 08 11:30 PM

[Conan the B...:]

EJ: Obama may have been Inaugurated on Jan. 20th, but unofficially, he has been in office since the election. "There can be only one President at a time."

You might say he was referring to Bush, my opinion is that he was referring to himself.

Mar 11 02:46 AM

[E Nuff Sed:]

All these yahoos who shrieked about the "Obama bear market" when stocks struggled in early March haven't turned around and declared an "Obama bull market" even though the S&P 500 has rallied 37 percent since March.

Jun 08 10:36 PM