Not Out of the Bear Market Yet

Repeat after me: six percent rallies don't happen in bull markets, six percent rallies don't happen in bull markets....

A six percent rally did happen yesterday, however, which tells you everything you need to know about what kind of market we're in. It was possibly (probably?) overdue, and now that it's come, it's time to survey the landscape and say "what now?"

Macro Man is struggling to get too excited, he must confess. 750 on the SPX, which more or less marked daily lows for a solid week before giving way, should provide some decent resistance on the way back up. That's only 30 points from yesterday's close; given that spoos have already rallied 50 points from the lows, the implication could be that the correction is already more than half done. Ouch.

March is often a month when crowded positions get shaken out. If the equity rally were to get more legs, one possible casualty would be the front end of Europe. German two years yield just 30 bps more than their US counterparts, despite the obviously larger spread in policy rates. True, the US has a bit of a supply issue, but still; given the scope of the rally in Schatz, euribor, et al, would a 30 bp backup in yields really be that surprising?

Speaking of yields, today sees the onset of QE in the UK. While the Treasury is auctioning Gilts as fast as they can print 'em up, the Bank will start reverse auctioning them out of the public domain. Somewhere in Westminister, Gordon and Alistair will share a quite high five, no doubt.

Finally, back to China. First, the good news. Fixed-asset investment rose 26.5% y-t-d in February, better than the expected 21%. Hurrah, the stimulus package is working! Looking at the details, however, Macro Man was less enthused. Despite dealing with a real estate bubble of his own, Chinese property investment has yet to decline y/y, and in the first two months of the year represented more than 23% of all fixed investment. That's a higher percentage than was recorded for all of 2008. Not exactly what Dr. Keynes ordered when there's already a 14 year excess of office space in Beijing, is it?

Meanwhile, the trade figures were a literal shocker, as the surplus collapsed to just $4.8 mio, much less than both the January surplus of $39 bio and the expected $28 bio. Interestingly, the narrowing was all on the export side; imports actually rose in February (while still collapsing y/y on Macro Man's preferred 3 month moving average measure, of course).

It will be interesting to see the breakdown by region when that data is released next month. China has recently swung into surplus with Asia, might today's figures suggest a reversal into deep deficit, which could buoy growth in the rest of the region?

Perhaps, but the anecdotes aren't supportive. The price of Australian thermal coal, used to provide electricity in manufacturing powerhouses like Japan, Korea, and Taiwan, is falling sharply due to collapsing demand.

Repeat after me: we're not out of this yet...

Comments

[Bartlesby:]

Agreed Macro Man - we are far from out of the woods. I would recommend qualifying any data that comes directly from Chinese officials with independent market data. The Baltic Dry index, and particularly the charter rates for Capesize vessels (which carry the Australian thermal coal you referenced), can serve as a good qualifier for gauging Chinese industrial activity.

We should also be wary to assume that a Chinese rebound will lead the global economy out of the dark. The China-US relationship is predicated on Chinese production and US consumption. The path to recovery may very well require the Chinese to develop their domestic consumer economy, while the US must save and produce more.

Mar 11 03:29 PM

[Larry House:]

You are so right. Caution and ride the rallies is all one can do right now. If one cannot be nimble, it would be best to be on the sidelines.

Mar 11 04:07 PM

[J. D. Swampfox:]

It really does seem that sitting on the sidelines is appropriate, rather than going long, if all we get out this "rally" is another 6 to 10%. Even if the rally grabs enough more to make the gain amount to 25%, it still may be better to just wait on that and then get short again. If "poof" there are suddenly no more problems with the banks, I'll be surprised (not to mention on the wrong side of the trade).

Mar 11 06:42 PM

[The AntiCramer:]

Generally a 6% rally would have a bear like me licking my chops looking for my next chance to get back in on the short side.

From what I've noticed over the past few weeks there has been three camps on SA. The first group is the bears who have been bearish the whole way down and trying not to gloat. The second are the bulls who have finally "seen the light" and turned bearish. The third are the permabulls.

Between the rapid increase and bearishness and the bulls constant braying that a "correction is due" one could easily see this rally coming.

That's why I find it so odd. It was SO contrived. Unfortunately hope doesn't add value to the bottom line.

Mar 11 08:47 PM

[Jim Hawthorne:]

Thanks for another well-reasoned and well-researched piece. Bear market rallies can and do really shake things up, and this rally may very well chug along longer than many expect.

But there are some troubling signs in today's tape:
1. for much of the day, the miners and IT software (net) were doing the most heavy lifting; this dispite falling copper, zinc and lead spots; they fell off in the afternoon; not a good sign.
2. the Banking & Financial Sectors appeared to weaken noticeably into the close. Until we see clear leaders emerge, those two bad boys MUST contribute stability to any sustainable rally, IMO.
3. the oils & energy are weak and weakening...
4. where is the strengthening volume? This is, perhaps the most troubling indicator of all.

I found it to be a disappointing day, and the words of caution from the author and commenters above is sound advice!

Mar 11 10:15 PM

[j_remington:]

The rally will stop once the weak shorts have covered. Also, options expiration is driving this. Call option strategies have to unwind accordingly. Also, end of Q1 performance is in play for March.

Sellers are out there. Let's see how long the Buyers will stay in this game of chicken.

Mar 12 12:15 PM