Let's Put Monday's Market Rally in Perspective

Watching the US stock market rally yesterday on Secretary Geithner's Toxic Asset Plan reminded me of the following scene from the Dan Aykroyd and Eddie Murphy movie Trading Places. Yesterday afternoon was about 2:08 into the scene below:

It is worth noting that the 19% upward move in the Dow since March 9th, while impressive, does not equate with a 20% downward move. You need to move up more to cover that loss from higher heights. It is also worth recalling that between 1928 - 1932 the Dow dropped more than 80%, but experienced multiple 20% moves to the upside along the way, including one big one in 1929:

Even if the Treasury plan for buying toxic assets works (which is dubious), many parts of the economy and business models are still fundamentally broken. The banking sector still has not addressed the management, technological and business model issues that brought them to this point (hint: it is not only greed and lack of regulatory oversight). The automotive sector will continue to bleed cash and innovation will be a longer process that needs time and focused investment in the future to propel us out of this mess. Stock markets are leading indicators, but they lead by 6-12 months max.

Let's see what Q1 and full year 2009 earnings bring us before buying more crap from CNBC entertainers. Let's also not forget the debt that now weighs down and could bring down USA Inc.

As you smiled at the run up in the stock market yesterday like the Dukes, do not forget to watch the Trading Places clip above until the end.

Comments

[Schweizer:]

Based on Standard & Poors published earnings forecast, the SP500 fair value (PE=15) for Q1 through Q4 are 125, 63. 49, and 21.

Yeah - let's rally !!!

Not.

The Pros are feeding the sheep, and are massively net short.

Mar 24 08:26 AM

[schlumpf:]

too much optimismus is in the marked now.
cnbc indicator: march 3, pros say go short on banks, march 23 pros say go long on banks.

Mar 24 09:03 AM

[Truefire:]

Lambs to the slaughter, the blood will be deep.

Mar 24 09:53 AM

[The A man:]

Oh yes the roller coaster. Don't look down!
I promise we won't go alllllll>>>> the way to the bottom,
just enough to scare the riders.

Mar 24 10:04 AM

[Tmarigold80:]

Just stay strong and hold your short positions. Once this rally is done the market will retest the lows..again! How much pumping is taking place on cnbc now? Why would we jump into the market at this stage: with dubious fundamentals and a crazy 500 pt rally in the bag? I think I read somewhere that during no economic expansion or bull run was there ever a DOW rally of 300+. These sort of violent moves epitomize the fear and panic of bear market moves.

Mar 24 10:52 AM

[Mark Bern:]

I was short up until two weeks ago at which time I took profits because of the total lack of volume. We had high volume on Monday, but I suspect that once the S&P 500 moved much above 800 we took out overhead resistance which led to program trading buy triggers. Momentum traders jumped in and shorts bailed which lead the market higher. Short-term traders are not going to establish a foundational base from which a bull market can form.

We need more bargain hunters who are willing to stay the course over the long term. We won't know if this rally has staying power until we watch the follow through. If it continues (possibly after a day or two breather) with strong volume there may be a chance that the bottom is in. But I hardly expect that to be the case.

I fully expect that earnings reported for the first quarter in April will disappoint, especially in financials because of continued write downs on assets. What could be even more damaging to the market psyche is the guidance for the remainder of 2009.

I am going short again today, just a nibble, and plan to stay mostly in cash until I see some indication that the economy is likely to improve. Right now, most of what I have seen and read do not indicate a rosy picture going forward. I know that the market goes up before the economy, but I haven't seen any indications that the economy is approaching the trough yet, either.

Mar 24 12:28 PM

[Fred Voetsch:]

An excellent article that I believe is very pertinent to our current situation.

Ultimately the stock market lives on eanrings and earnings are negative for the first time in the history of the S&P 500. The last time we saw negative earnings was during the very time mentioned, in the early 1930's.

At some point the economy will rebound and earnings will rise once again but until then astute investors are wise to deal with REAL earnings and not fall for all the misinformation out there, an example would be the 11 P/E ratio that Bloomberg showed on their weekend ticker or the 16 P/E ratio that the WSJ is showing on their site.

Those are based on Q3 earnings and 12 months trailing while Q4 earnings are 99% complete:

www2.standardandpoors....

...and that gives us a P/E ratio of over 50 for the S&P 500 and it is estimated to go much higher. If estimates hold (not likely) then it will eventually drop back into the 20's, which means the stock market will only be 1.5x over its long-term historic mean average at a time when it should be considerably under.

For more info on this I suggest
www.decisionpoint.com/...

Best of luck to you all.

Mar 24 01:57 PM

[Fred Voetsch:]

On Mar 24 10:52 AM Professorsnape wrote:

> I think I read somewhere that during no economic expansion or
> bull run was there ever a DOW rally of 300+. These sort of violent
> moves epitomize the fear and panic of bear market moves.


I think that's a good point but please don't use points when you should use percentages. The percentage moves we are seeing these days are nothing out of the ordinary for these extraordinary times.

Mar 24 02:00 PM

[Michael Eis...:]

Right on. And I would add that we get real rating agencies or other types of accurate debt rating.


On Mar 24 01:57 PM Fred Voetsch wrote:

> An excellent article that I believe is very pertinent to our current
> situation.
>
> Ultimately the stock market lives on eanrings and earnings are negative
> for the first time in the history of the S&P 500. The last time
> we saw negative earnings was during the very time mentioned, in the
> early 1930's.
>
> At some point the economy will rebound and earnings will rise once
> again but until then astute investors are wise to deal with REAL
> earnings and not fall for all the misinformation out there, an example
> would be the 11 P/E ratio that Bloomberg showed on their weekend
> ticker or the 16 P/E ratio that the WSJ is showing on their site.
>
>
> Those are based on Q3 earnings and 12 months trailing while Q4 earnings
> are 99% complete:
>
> www2.standardandpoors....;br/>
>
> ...and that gives us a P/E ratio of over 50 for the S&P 500 and
> it is estimated to go much higher. If estimates hold (not likely)
> then it will eventually drop back into the 20's, which means the
> stock market will only be 1.5x over its long-term historic mean average
> at a time when it should be considerably under.
>
> For more info on this I suggest
> www.decisionpoint.com/...
>
> Best of luck to you all.
>

Mar 24 05:49 PM

[Greg Parker:]

Nice article, and spot on with the movie clip. I totally agree that we've not seen the end of the downside. There's still a lot of negatives that need to work their way through the system before we can experience a LASTING rally. I'm sure we'll see several bear market rallies as we resume the slide into negative territory.

The banking sector still has fundamental flaws in its business model, which will take time to correct. Added to which, the huge level of US debt is in danger of causing a collapse in the treasury market, particularly if countries such as China and Japan do not continue to purchase as much US debt in the future as in years past.

mostlymoneymusings.blo...

Disclosure - At the time of writing the author held positions in FAZ and TBT.

Mar 24 09:17 PM