Bear Market Rally or Did We Hit Bottom?

The S&P 500 is up around 10% since its low of 666.79 on Monday. (Investors 'sentiment, including my own, was so negative, that I decided to sell my puts and buy calls. It turned out to be a week too early, oh well (my calls are now about even).

It's remarkable how when the majority of investors are of a particular view the opposite of that view turns out to be correct. Remember, for example, the notions Nasdaq 6,000, Dow 16,000 (I'm thinking of Morningstar's call a year ago) 36,000, etc, China is safe until the Olympics, we'll have a stock rally until March? These, and many other consensus views, have been proven wrong.

In early March, the consensus turned very bearish. The mood was captured in the Motley Fool article "What's Next? Dow 5,000?" and the Wall Street Journal's "Dow 5000? There's a Case for It." The WSJ piece came out on March 9--the day before the current rally started. I hope the WSJ article has the same place in history as Business Week's 1979 "The Death of Equities" cover.

There are still plenty of reasons to think the market has far lower to go. We've been hearing the doom and gloom for weeks and know the story: the economy is in shambles, the previous decades' growth was based on spending borrowed money, Eastern Europe is collapsing and might take Western Europe with it, there are looming credit card and commercial loan defaults, hundreds of thousands of people continue to lose their jobs every month, housing prices are still plunging, etc.

But there are also reasons to think that the bottom in stocks was March 8th. Some consumer numbers are improving. The worst banks, if they are to be believed, are making money (but will write downs make them report losses?). The government is, at its customary slow pace, getting ready to reinstate the uptick rule and to modify the mark to market accounting rules. Whether these are good ideas or not, the market may respond positively.

The WSJ piece is another indicator. Further, the sentiment at the moment seems mixed. During all the past rallies many commentators were quick to call the bottom. There are many doing this now too. But what seems different is the growing chorus dismissing last week's market rise as just another bear market rally. The bottom callers and bear market rally callers seem about evenly mixed to me. I'd say this is a substantial improvement from the previous rallies.

Let's hope we did hit bottom. But don't be surprised if we go down another leg. I'll be looking to buy puts if we go up another 10% and I feel euphoric, or it seems to me that most investors are optimistic. An article from a major publication with a headline like "It's Safe to Invest Again" would be most helpful in making bearish bets.

Comments

[User 371080:]

Rally. Certainly not bottom.

Mar 15 12:55 PM

[User 371080:]

Blue Horseshoe Loves Anacot Steel

Mar 15 12:55 PM

[Prudent Man...:]

I figure that clueless pundits have found at least five "bottoms/and or "capitulations" the past four months. Anyone who bought them, like most traders and investors, have a lot less to invest or trade with than last year.

It does take people with money and the ability to assume risk to buy and/or shorts sell. Considering that most "money managers" are trying to keep their investable funds as well as their jobs, I believe that presently there is little visibility of the economic and political risks the world is confronted with today.

So, anybody's opinion is just a WAG!

Mar 15 01:06 PM

[dcb:]

A market can't go straight down. If there are no sellers of securities the prices only go UP. therefore in order to go down further the market has to go up enough to have enough sellers to make another low. I don't know if it was the bottom, and I actually think so, but if you don't understand how the system works you won't understand the destination that is required to get there.

Mar 15 04:56 PM

[prudentinve...:]

Obviously, for the market to keep going up, it needs buyers who are determined to keep buying, more and more, as it keeps going up.

There is an old saying that a fool and his money are soon parted. After the recent upheavals, it is fair to assume that this has come to pass, so most of those who still have money on the sidelines are not fools. To fully commit, they need visibility that companies have stopped layoffs and are about to resume hiring, consumers are getting better jobs (not more loans), home prices are stable and rational (not just propped up), companies are safe from bankruptcy, balance sheets are on the mend, corporate earnings are rising, dividends that have vanished are being reinstated, etc. The reality is that none of this seems quite imminent yet.

Mar 15 07:24 PM

[investor88:]

Agree 10% up from here and time to consider shorts.

Mar 15 07:33 PM

[William Cowie:]

Rally, for a few reasons:

1. Too much of the impetus from short covering, as already pointed out
2. Insufficient volume
3. No "double bottom" yet
4. No locomotive to pull the train, i.e. stock or sector to draw in the cash from the sidelines.

Of course, as the wife has pointed out a time or two, I have been wrong before :)

Mar 15 10:11 PM

[The AntiCramer:]

Not this time.


On Mar 15 10:11 PM William Cowie wrote:

> Rally, for a few reasons:
>
> 1. Too much of the impetus from short covering, as already pointed
> out
> 2. Insufficient volume
> 3. No "double bottom" yet
> 4. No locomotive to pull the train, i.e. stock or sector to draw
> in the cash from the sidelines.
>
> Of course, as the wife has pointed out a time or two, I have been
> wrong before :)

Mar 15 11:10 PM

[mac.barron:]

Oh sure, just like that we hit the bottom. Whew, that was scary for a moment, wasn't it? Now all you have to do is buy, buy, buy into this oversold market then live off of the dividends that are certain to roll in as the economy expands and profits soar. By spring high paying manufacturing and creative sector jobs will be plentiful, real estate prices will start to shoot up again based on actual solid fundamental value and (since we have world peace) oil prices will remain low and even fall.

Naturally taxes will stay low too because we'll never actually pay off our national debt and we can fund all of our new entitlement programs with our savings from single payer health care which will be waaaay better then even its supporters dreamed it would.

Cancer will be cured, bad weather abolished and that cute, super cool alterna-girl who played Division II volleyball but now works part time at the used record store since she had her knee scoped will actually ask YOU out on a date in a really bashful and sweet way! *ring* *ring* Oh wait, that's Francis Ford Coppola on the phone saying that he loves your screenplay and wants to green light it?

Too bad its time for work and you have to stop dreaming and WAKE THE HELL UP!!!

Mar 16 02:33 AM

[kelm:]

Rally in a bear market. The final bottom may well be something we don't recognize till much later. The longer this goes on the greater the likelihood that the bottom is something we ooze into rather than a a great cathartic sell-off. I also question whether the market will lead the economy in this environment or the other way around. I think it more likely that we see rising economic indicators first but no one wants to buy stocks because they have been burnt by false rallies too often.

Mar 16 09:44 AM

[Alphameister:]

The first advance of a bull market always starts out as a bear-market rally. This rally appears to have a better reward-risk ratio than its predecessors, though it seems unlikely there has been enough base development for a sustainable bull market to emerge. Even if the ultimate lows have been seen, that doesn't mean it's onward and upward going forward. One thing is pretty certain: the economy will look ugly when the market reverses course to the upside.

Mar 16 07:41 PM