Is It a Bear Market Rally, or Something More?

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (March 9th):

...[T]he downtrend year-to-date [YTD] has been brutal, leaving only a few sectors higher for the year. To be sure, of the 96 subsectors we follow a mere three are now up on the year. Those are: Mobil Telecom (+9.71% YTD), Internet (+1.06%), and Nonferrous Metals (+15.72%).

Even Gold, which had been higher for the year, is now down 5.05% YTD after losing 6.79% last week. Fortunately, we deferred on buying more gold stocks a few weeks ago, adhering to Chris Puplava’s sage advice when he noted, “The recent surge in gold as it approaches its 2008 highs has pushed the ratio of gold to the S&P 500 nearly 60% above its 200-DMA, the most overbought condition since the peak in gold in 1980, more than 28 years ago." Instead, we recommended platinum, which was trading near parity with gold, an occurrence that rarely happens. At the time we wrote:

Typically, platinum sells at a substantial premium to gold, but because of the collapse of the auto industry platinum is approaching parity with gold for the first time since the early/mid-1990s. Investors, therefore, might want to consider platinum in addition to their gold positions, for they will be purchasing a relatively ‘cheap’ metal with a ‘call’ on an auto industry rebound. Our vehicle of choice for this theme is the iPath Dow Jones AIG Platinum ETF (PGM/$24.70).

On that Monday (2/09/09) PGM opened at $24.34, last Friday it closed at $26.33, so at least for now the idea of favoring platinum over gold has worked for the past few weeks. And speaking of working, we awoke this morning to find that Merck (MRK) is acquiring Schering-Plough (SGP) for stock and cash. The takeover price “pencils” to roughly $23.61 for each share of SGP. While this is not as high a price as we had hoped, it should be pretty positive for our recommendation on Schering’s convertible preferred shares.

The call for this week: ...[I]t is day 19 in the “selling stampede” and such stampedes rarely go more than 25 sessions before exhausting themselves on the downside. Meanwhile, our oversold indicator is more oversold than it was at the October/November “lows.” Therefore, we begin this week as we began last week, suggesting that the only question is, “does this stampede end with a whimper (selling dry up), or a bang (selling climax)?

While only time will tell, we continue to think the nadir is near. Indeed, we have opined that the bottoming sequence should see corporate bonds bottom first. They did in November. Then copper should bottom. It did, as can be seen in the nearby chart from our friends at thechartstore.com. Next should be stocks. The real question will be, “Is it a bear market rally, or something more?”

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Comments

[AssetReset:]

What caused this rally?

A letter from a CEO saying "we have a good quarter before certain stuff", the possibility of reinstalling the upstick rule and suspension or change of market to market rule.

What are the one-time items? What will the chargeoffs be? Investors are betting before Q1 numbers hit the streets
What has fundamentally changed about this market?
Nothing
Continued pain, financials are still diseased, more unemployment, additional wealth destruction

Good luck with the sucker rally
Reinstalling the upstick rule is just installing obstacles in an efficient market (or what should be a fundamentally efficient market)
Altering the mark-to-market rule will only could bank balance sheets EVEN MORE and delay the pain when banks have to write down their non performing assets

Mar 10 04:50 PM

[doubleguns:]

Citi had a "good" report. HOW CAN THAT BE. The stock price is in the gutter and earnings are not probable since they still have to pay off us tax payers. Lots of hype for a stock that just got out of the penny stock category and will probably be back in it soon enough.

looks like a bear market(sucker) rally to me.

Mar 10 05:21 PM

[Chrisj:]

Are the Dem's playing politics with MTM and the Uptick rule, to get the markets off of BO's and their backs, so they can push the Dem agenda?

Mar 10 05:23 PM

[Larry House:]

Well, answer your question. What do you think? A little insight should be a requirement along with the tease. Anyone can ask questions.

Mar 10 05:23 PM

[themackattack:]

Well, it's definitely a bear market rally...the only question is - is it a one day wonder, or might we see a sustained bounce up to the 800 level over the next month and a half. I think there is a decent chance the latter occurs, barring any major shock (like GM bankruptcy).

Mar 10 05:25 PM

[Chrisj:]

If it's such a great idea to change the rules... whay wait a month...

Mar 10 05:28 PM

[Mad Hedge F...:]

At last!! It only took a few dew drops of good news for the Dow to recover from its near death experience and rocket 350 points. The “I love America trades” of long bonds and Treasuries came back with a vengeance. The “short America trades” were last seen running down the street with their tails between their legs, with gold breaking key support at $900. News that Citigroup was profitable in 2008, and rumors of the suspension of the uptick rule and mark-to-market accounting were enough to do the trick. It also helped that every technical analyst on the planet was screaming “Buy!”Although this may not last, even a single day of fresh air is welcome.

Mar 10 07:01 PM

[SoCalsurfbum:]

"...[I]t is day 19 in the “selling stampede” and such stampedes rarely go more than 25 sessions before exhausting themselves on the downside."

One of the dumbest sentences I've ever read from an analyst, and I've seen some doozys. Statements like this remind me that if stock analysts knew even a little about what they write about... they wouldn't be an analyst. They would be printing money as a trader.

This reminds me of a guy at a roulette table looking at the screen where 8 reds hit in a row and is thinking to himself "Black is due".

My question is why did he pick 25? Why not 100 and up his chances of being right. Every day is a 50-50 chance of being right. Please be the bottom, Please be the bottom... {holding breathe}

Mar 10 07:34 PM

[Steve in Gr...:]

Q: Is It a Bear Market Rally, or Something More?
A: No. It is a one day 5% dead-cat bounce.

Mar 10 08:26 PM

[MarvinMBA:]

The basic fundamentals of Citi has not changed. Of course the banks will all be profitable if Uncle removes any and all losses. A one way street upward as long as the taxpayers pay the losses...market rally based on these fundamentals do not turn me on...MarvinMBA

Mar 10 08:50 PM

[Moon Kil Woong:]

If the worst of the worst bank is profitable and making money why do we need TARP or any other new bank lending?

The simple facts are, if you hold of disclosing losses but still have them on your books you can appear profitable. If you have tons of money going to reserves for loan losses, even though you declare you have tons of cash it is not yours to spend. It is not free cash flow.

If you say you are profitable except extenuating circumstances how profitable is that? If Citibank renegotiates a few bad loans and gets concessions, then books it as profit (their losses dropped) is that really the type of profit you are looking for and what are the odds the shafted guy at the other end will accept more concessions? Of course Citibank will tell them that if they are bankrupt no one wins but rubbing their faces in the mud saying they are profitable while their derivatives partners get dragged in the mud is really unprofessional.

I would applaud if Citibank was profitable by selling off the good pieces of itself so the unmanageable part can go through legitimate bankruptcy. The odds of that with a megalomanic lying CEO who holds the US taxpayer hostage is 0%.

One of the reasons we don't trust these banks is that they twist the truth in ways they shouldn't. What do you think Citibank has been doing holding talks with the US governent for more funds and guarantees the lest 6 months? Do you think they have been talking about how great business is in 2009? Do ya think?

I'm glad the market is up. i just hoped it would have been on solid fundamental grounds. My call, this was a short covering phenomenon coupled with a few well placed lies by Citibank (it is far from a market hero).

Mar 10 10:30 PM

[logicalman:]

i don't think this is the end of the bear,only a little example of what is in store for them eventually..this year 2009.

Mar 10 10:39 PM

[j_remington:]

No consolidation. No capitulation. This is not rally of any sort.

Mar 10 11:30 PM

[tedfoo:]

It's either a dead cat bounce or bear market rally, for sure. It's mostly short-covering. Look at the gains shorts have made in the last month. They're taking profits.

Bottom line, I think there are a lot of shorts that aren't used to being short. Another up day Thursday and emotions will get the best of them and I believe this rally will have more gas in it.

This ship isn't righting itself on citigroup making a profit off of billions of cheap tax payer loans to them and a government effort to bend the rules in the bank's favor. The only cure is time. In the meantime be the contrarian, play the volatility right, and it's easy money.

Mar 10 11:44 PM

[Gold Barron:]

Citigroup claims they are profitable and then downgrades Walmart! Haha

The stock market is totally rigged.

Mar 11 12:26 AM

[Chezfrederick:]

Citi's assertion of profit in January/February, was possibly meant to be an encouragement for demoralized staff and nothing more. There are too many uncertainties on the balance sheet to be taken seriously. An oversold market needs a pressure valve and the excuse to let the steam out. City was the excuse, but it will be short lived. A convincing outline of damage control will spur the market in a much more powerful and sustained fashion.
Hopefully it will not be too long now!???

Mar 11 06:50 AM