Bear Market Rally Not Over Yet

Includes: DIA, RHHBY, ROH, SPY
by: Tsachy Mishal

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 (Private: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