I'm Skeptical About This Rally

How quickly things change…..

Some stats from today’s rally:

S&P: +54 (7.1%) to 823

Dow: +497 (+6.8%) to 7776

NYSE Up Volume: 1,866,836,012

NYSE Down Volume: 44,683,760

NYSE Total Volume: 1,914,836,622

It was just 2 weeks ago (March 9th) that the S&P closed at 12-year lows and the stock market felt like it was forecasting the end of the world. We’ve now rallied 22% in 2 weeks!

But if we look at the catalysts for this rally, they really don’t seem to justify such an explosive move. Citi said they were profitable in the first two months of the year and JP Morgan (JPM) and Bank of America (BAC) said they were too. The Fed initiated some serious quantitative easing. And now Geithner’s toxic asset plan this morning.

I agree with the Capital Spectator when he wrote this morning:

We’re skeptical largely because the rally this month has drawn power primarily from a new round of hope that Washington’s various experiments to right the economy will finally hit pay dirt. Perhaps, but it’s not the stuff that powers sustainable rallies, much less secular bull markets.

I’m a seller of this rally at this point…..

Comments

[NickH:]

Hey guys, its not about the fundamentals, its about the emotion. You forget, stock prices are not based on reality, they are based on people's perception of reality. Big difference. Pendulum swung too far in the negative direction. Now it will swing too far in the positive direction. Can you keep ahead of the pendulum? Where will the pendulum be in 24 hours? That's the trick. Mondays generally carry the trend of Friday. But Friday was down. Tuesdays follow the trend of Monday. Wednesday is fickle. Thurs follows Wed. Friday is "OMG, I don't think I should be long into the weekend!"
Prediction, follow through bullish in the AM Tuesday, then a look down from the overbought heights around noon, with an afternoon fade into the close with profit taking. Happy trading

Mar 23 09:12 PM

[Mark Bern:]

Today's rally was fed for the first 40 percent by true believers up to the technical overhead resistance of around 811 versus the S&P 500. After that much of the buying was caused by two groups: shorts covering the positions and hedge funds driven by quantitative models using momentum and technical triggers to define entry and exit points. I'll be watching the next few sessions for strong follow through on continued high volume before I get too excited.

Once the shorts are cleared out the volume may decrease and the momentum players may decide to take profits. Remember, short covering, technical traders and quantitative models are not buy and hold, in for the long-term investors. They flee as quickly as they appear. If this is a real turn off the bottom we will see continued high volume with the "real" bargain hunter investors providing the follow though and taking the market back above the highs of the last rally. If we can't break to higher ground on a sustained rally, I'll be getting ready for another leg down.

I suspect we need encouraging numbers from Quater 1 results, and if the write offs from financials are not over, it will be hard to get a positive earnings number from the S&P 500. I am not wishing for things to awry, just recommending caution. After all, the reports from Citi, Wells Fargo, etc. did say that they were very profitable for the first two months of 2009, excluding non-recurring items. Don't forget those non-recurring items. The wording as used could just as easily mean that they lost money in the first two months of 2009 if the non-recurring items were included. I expect the later to be the case. And I also expect them to pre-announce on April 1st (you do know what day April 1st is, right?)

Mar 23 09:18 PM

[Minlita:]

The following chart presents the Dow Jones Industrial Average's average year cycle from 1896 to the present:
www.dogsofthedow.com/y...
This chart helps demonstrate that in general, the trend is up except for the end of the tax season (mid April - end of May) when all those checks go to the IRS.
We are in March, It’s conceivable that SPX 650 will be at the bottom, but we’ll see that level at least one more time.
I find hard to believe that the current rally could have much steam left in it.

Mar 23 09:48 PM

[EMS:]

ABSOLUTELY correct.


On Mar 23 06:54 PM youngman442002 wrote:

> I too am not buying into to it long term...its strictly a day trade.....so
> the Banks are AOK now..except Sheila Blair said some are not...BUT
> of course she would not say which ones..so much for the new transparency...its
> the bankers(seekingalpha.com/symbo...) making the American
> public feel like all is good....so they can get onto baseball or
> something while they fleece the rest of the TARP monies away....GS
> will be a big buy of these so called "Bad Assets"..and yes the government
> will cover 95% of them...so GS will squeeze out a 40% profit them
> dump them back to the US to cover....and down we go again....but
> hey its only Monday and only another trillion...probably 3 more by
> Friday....

Mar 23 09:49 PM

[Celcius:]

I think these stimulus packages are causing irrational exuberance as the Fed and Treasury attempt to re inflate the bubble. This Country and our Corporations are insolvent. They piled on debt financed by 80% of the worlds savings. Do you really thing that the world will keep financing this fiasco? I believe that we are at a tipping point. The US as the world's reserve currency is coming to an end. It happened to England after WWI. And, I believe that it will happen to us in the coming decade.

I am long on the EURO. I don't think the EU has the stomach for the political consequences of high inflation; especially, since the Nazi's emerged out the hyper-inflation of the 20's.

Mar 23 10:04 PM

[William Cowie:]

The S&P broke through the 50 day moving average. That's a start. but one break does not a summer make, so Husker Mark's comments stand.

We may not see good numbers for Q1, but from Q2 on we very well might see better numbers, for no reason other than the comparative numbers (2008) began to drop in Q2. Q3 and Q4 are probably going to look splendid for that reason alone.

So... if this rally isn't it, we're not far from it. I got my dip in good the past few weeks, so I'm good to go.

Mar 23 10:17 PM

[Rocket Scie...:]

ALL of you are full of it

What goes up comes down, what goes down can go back up

Geez - how hard is that to figure out

Mar 23 10:26 PM

[Willy Walnuts:]

A few months ago, I read that the Dow would bottom at 6500. I wish I could remember where I read that... I didn't think it would drop that low at the time, but that is sounding genius now.

I think we've had a good bounce, but I think we may retest the lows when we get a long string of bad Q1 earnings reports coming up. With a market this volatile, the bulls and the bears can both be right, so enjoy the ride. But everyone needs to keep their eyes open.

Have the fundamentals in the market changed? The only change I see is the QE flood. Does inflation lead to earnings growth? Or, does the risk of holding cash outweigh the risk of owning stocks at this point.

On Mar 23 10:17 PM William Cowie wrote:

> The S&P broke through the 50 day moving average. That's a start.
> but one break does not a summer make, so Husker Mark's comments stand.
>
>
> We may not see good numbers for Q1, but from Q2 on we very well might
> see better numbers, for no reason other than the comparative numbers
> (2008) began to drop in Q2. Q3 and Q4 are probably going to look
> splendid for that reason alone.
>
> So... if this rally isn't it, we're not far from it. I got my dip
> in good the past few weeks, so I'm good to go.

Mar 23 10:46 PM

[VP of Commo...:]

There is some truth in "Rocket Scientist" humor, those that are predicting an L shaped bottom may not get the joke. I think we may yet hit new lows, but if anything the market will go up and down. Any range bound trading will be limited to a few months at most.

I agree that the government is trying to partially reinflate the credit bubble, the key word being partially. Having swung from too much credit (no credit score, nothing down, how about a condo in Manhattan?) to too little (700+ credit score, <20% down, no house for you! and no car loan either!) a partial rebuilding of the credit market is exactly what we need.

Like it or not our economy depends on credit availability. It would be nice if that dependance was lessened, but that will take time. I doubt that the average american will remember any of this in 10 years unless reminded, but I strongly hope that the average underwriter or risk assesment professional will.

Mar 23 10:50 PM

[Manbearpig:]

stick to building rockets. what happens to rockets (e.g. challenger) that had big malfunctions and crashed to the ground? did those go back up in space? also during your free time, look at this nasdaq chart (see that rocket exploding to orbit 4800 in the index at the height of the dotcom bubble?... where's the nasdaq now?)...

www.google.com/finance...


On Mar 23 10:26 PM Rocket Scientist wrote:

> ALL of you are full of it
>
> What goes up comes down, what goes down can go back up
>
> Geez - how hard is that to figure out
>

Mar 23 11:02 PM

[Michael_Cohen:]

In the 1929-32 crash, there was a rally after the intial 50%+ plunge. The Dow managed to get back about 50% of its losses (so down about 25% total).

Then the market crashed over the next couple of years and the Dow was down by about 89% from peak to troth.

I think history might be repeating itself...though I don't think the market will be down 90% overall. The 1929 bubble was much larger, and I think this will be the Great Stagflation, not the Great Depression. Market wil be down 75% in real terms...which may just end up being a 50-60% nominal drop.

Mar 23 11:55 PM

[cynewulf:]

Why is the President always laughing? I am Canadian. It makes me nervous. It makes me want to sell my canadian bank shares when he laughs so much. Did he not get one hundred thousand dollars in campaign contributions, from A.I.G.? AND HE WANTS TO UNIONIZE WALLMART.----Enjoy the rally while you can.

Mar 24 12:00 AM

[sboardemc:]

We WERE oversold for once, there was too much news about the crash, the crash, the crash and thats exactly when you can expect a rally like this. The 10-day and 20-day MA were pushing up, you shouldve been expecting this push upward.

Mar 24 12:10 AM

[fox4:]

Well, I don't trust anyone on the economy anymore. Too much conflict of interest. Fundamentals and technicals? Big money now determines the winners and losers. The challenge is to figure out who they've anointed... Not a big believer in the IMF, but the site offers some useful perspective. Could more wars be on the horizon? You can retire a lot of debt this way. Let's hope not...

www.imf.org/external/p...

Mar 24 12:28 AM

[sam131:]

Did you guys happen to look at skf ......it is reaching lows it hasnt touched for a long time ......it actually has never been lower than 70 since it inception.....we are at 90 right now...and this rally is far from over ......i don't know but something is cooking here ...
if the dow breaches 8200 ....get ready for a real rallyyyy

Mar 24 12:59 AM

[Schweizer:]

Based on a PE of 15, Standard and Poors predicts these prices for the SP500 in the next 4 Quarters based on company reported estimated earnings:

125 63 49 521

Yeah, let's rally.

Mar 24 08:38 AM

[pockyclips ...:]

Agreed. I'm on the sidelines until I see some positive 1st Q numbers from the big boys.

Mar 24 09:14 AM

[pacman1947:]

Greg,
As you well know, the most money that can ever be made on the upside is during the classic bear market rally. That is what we have, no matter how it was caused and no matter how reasonable having a rally now may or may not be.

Ride it through until the media starts screaming, "Buy, buy!"

Then, run like Hell.

Mar 24 09:22 AM

[prudentinve...:]

People don't become poor by taking profits.

Mar 24 10:15 AM

[Andreas:]

There is no reason to be optimist in US. Dow will soon (within 2 months) hit 5000.

Mar 24 11:42 AM