Bear Market Rally Not Over Yet

The S&P 500 rallied over 20% from its lows two weeks ago to its highs after the Fed announcement. That rally was the first phase of this bear market rally. We are currently in the second phase, which is a consolidation of the gains. This consolidation should be followed by the culminating rally or the third phase. On the chart below I labeled the November rally by phases (click chart for larger image) .



At the current juncture the market is overbought, as shown in the chart above. Typically, during the second phase of the rally the overbought reading is worked off. The market should work off the overbought reading by late this week or early the following week. Please note that the market need not go down in order to work off the overbought reading. Going sideways will achieve the same thing.

There are also some catalysts in the next few weeks that should help propel this market higher once the overbought reading is worked off. Both the Rohm & Haas (ROH) and Genentech (DNA) deals are scheduled to close in the next few weeks. The combined deals are worth close to 60 billion dollars in cash. Trim Tabs estimates that a deal closing acts like a market inflow of approximately 50% of the deal value. That means that 30 billion dollars will be coming into the market in the next few weeks.

My plan is to buy into the market as the current overbought condition is worked off. While it is possible that this bear market will eventually see new lows, I believe there is some business on the upside that remains unfinished.

Disclosure: Long DNA

Comments

[JR Ewing:]

Of that cash how much will stay in the sector. Would it makes sense that a chunk of that ROH money would go into DOW as the people who follow ROH (employees, retirees, industry investors in the know), might see through the depressed stock price, possibly poor decisions of DOW management, and other DOW short term issue to see a Global Chemical powerhouse when the market turns at a 90% discount? Plus with that a short squeeze as there is nothing left to squeeze out of DOW, the potential with rising oil that a MEast country may step up and complete a Kuwait style deal. Guess what I am saying is DOW as about $2 down and $10 up as we start to work toward a recovery and might see a pop short term for the above reasons.

Long DOW at 6ish

Mar 22 10:51 AM

[CautiousInv...:]

I have reviewed my own indicators and read many blogs and believe there are legitimate reasons to offer divergent opinions as to market direction over the next several weeks.

Most technical signals are mixed with a bias towards selling, though the MACD for the SPX suggests the rally will continue. Coversely,RSI, Williams, and Ultimate Oscillator for the SPX tend to suggest a sell-off though the signals are not at compelling levels. A proprietary price/volume indicator suggets a fall in the SP500.

In the recent rally, a significant downward trendline was breached but it failed to hold putting in place a possible pivot point. It's fair to say we are at the 50 yard line and for the bulls to have there way we will need to see the SPX move through 786 and then tackle the more difficult resistance line of 805-808.

Since most of the recent rally stemmed from gains in financials and materials, resolution may turn on how much more short covering and taking of profits will influence index direction. Announcements from Washington will continue to play a role and could prove to be decisive.

Mar 22 12:40 PM

[F. Bradeen:]

Buying long in a professed bear market, along with selling short in a bull market, sounds like a very risky strategy to me as the odds are not on your side. I was under the impression one only buys in bull markets (unless hedging) and only sells short in bear markets.

You can add to that folly, guessing bull market tops and bear market bottoms (lately a fashionable game.) Bull markets nor bear markets are over until the fat lady sings. Each sucessful investor has his own "fat lady sings" signal. Mine is the 200 day MA and it has not signaled bottom yet. Better to be late rather than early to the next party (I.e. bull market ) especially since this is not a normal bear market.

Mar 22 02:19 PM