Let's Not Get Carried Away: It's Still a Bear Market 27 comments
Kevin S. Price
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The recent rally in equities has returned a certain sense of non-Armageddon to the markets. That's clearly a good thing. But before anyone gets too pleased with all this "better-than-expected" data, let's be serious about what's happening out there. A few relevant items:
- New home sales and durable goods orders were a little better in February than they'd been in January. Super! Durable goods were 22% lower than in February, 2008, and new home sales were also much worse than a year ago. And ohbytheway...inventories remain wildly elevated and prices are still falling fast. See this from Calculated Risk.
- Traders appear to be optimistic about the Geithner Plan. We hope it helps, and it just might. But there's a lot more ugly stuff lurking out there...in the dank* corners of banks' off-balance-sheet vehicles.
- Mortgage equity withdrawals, and the consumer spending they support, are effectively zero. In the long run, that's a good thing, because it should improve household balance sheets. In the short run, it gives consumers less room to maneuver.
- The mother of all state economies, California, appears to be heading from bad to worse.
- The outwardly successful IBM will eliminate a non-trivial number of jobs in the U.S.--from its especially successful business services unit.
Let's be clear here. We welcome good news, and some recent reports have indeed been less-horrific than "expected." And we know that Wall Street often moves in relative terms, with underlying expectations providing the backdrop against which traders and investors operate in the short term. But as we noted in a recent post, the likeliest outcome is a slow-growth environment for some time to come.
Bottom line: This is a bear market until it proves otherwise.
~~~~~~~~~~~~~~~~
* This is not a typo. We could have gone with "dark," but dank is one of our favorite words. Always has been.
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This article has 27 comments:
I'm sure there won't be any anecdotal bummers to worry about when it's finally safe to invest! I'm looking forward to a repeat of the conditions of 2006, at which time I'll jump right in.
/sarcasm
Rally until friday and probably blow up on Monday after G20 clusterfcuk.
The further we get into the year, the better the numbers will become, because right now they are being compared to early 2008 numbers - almost an inevitable decline. However, as the year progresses, the benchmark will become lower, making whatever the results are look just a little better.
Where do you come from? Detroit.
Housing numbers are going to continue to make some gains, at least into summer.
Sure, there are going to be some more banking problems, but the worst of those are behind us.
The consumer spending is going to hang on to some better numbers through early summer. What happens after that will not be known by you or anyone else at this point.
Who gives a crap about California and their budget breaking green economy except Californians. They alone won't hold the rest of the economy at ransom.
As for IBM, we need um, but what the heck, I think we can make it without them also.
In summary, you are right, the bears are still in control, for now.
Well, they've made some of their money again this time, no surprise there, but the question remains , where do we go from here, and what is going to support an increase in future earnings growth, and vastly improved balance sheets, esp. the vastly overleveraged component?
More importantly , what is going to establish the systemic improvements that will make that growth and improvement possible?
The shark repellent that is being broadcast by the administration is only to keep us from being eaten alive.
I can see why this would delight some investors, but it is not the same thing as a brilliant plan for genuine progress that is possible to happen anytime soon, and which , of necessity, must be deferred until we can save our own skins and live to fight another day.
I don't see how this establishes a foundation for solid long term prosperity all on it's own relative to the intermediate term future of the next 18 months or so, at least.
That is yet to come, in my assessment. And , if you're looking out five years or more, who knows in these historically volatile times?
The investing world has changed, and we would be wise to change accordingly.
Otherwise, it would seem purely as faith- based investing to me. No thanks.
Bottom line: the market has gotten ahead of itself again on a fundamental basis and the recent runup action is only justified by a deep oversold that occurred previously on a technical basis - not good enough for my money for long term investing, but it sure makes for a good trading market where once again the potential short sellers are licking their chops again, -- I don't blame them.
www.wealthalchemist.co.../
- there is no driver for recovery. debt remains a economic drag.
- unemployment will continue to rise as corporations optimize profits
- the market has not priced in yet future earnings which are lower.
- there is a potential for a second economic cascade caused by unemployment or a european economic disaster.
fundamentals and market sentiment are two different animals. the market will do what the market will do.
A bull market could not persist unless the transport rallied as well, and usually before the industrials.
The Dow theory:
If manufacturers' profits were rising, they produce more and need to ship more goods to consumers. Healthy transports companies that ship goods to consumers are correlate to healthy industrial companies that make the goods.
The 2 should move toghether in the same why; if they diverge, this may be warning.
Being early cycle stocks, they could clue traders in to the next move in the markets.
So we have to take a look at the Baltic Dry Index ($BDI) to see the next market move:
en.wikipedia.org/wiki/...
This is the $BDI chart:
stockcharts.com/h-sc/ui?s=$BDI&p=D&b=5&...
But GE has huge financial toxic assets in Europe where the Russian mafia has them cornered, Eastern Europe economies are falling apart faster than Zimbabwe and the credit card slow to no pay shoe will drop of any second.
The IATA air industry has announced the huge losses greater than expected and no sign of recovery this year witch would mean lower orders for jet engines and service contracts. Generator sales and service contracts are down along with utility do to zero demand in the industrial sector
So where is GE getting enough production orders to maintain its operating cost, not enough real infrastructure this year and certainly no payments this year.
These items are not solved so quickly by any government plan that is set up to only transfer the real ugly assets to the government, the banks will mark the wanted assets the way they see them.
I done think too many vultures will be there to purchase and poison assets?
As we continue to borrow our way out of debt, (what's counter-intuitive about that !), the next debacle is coming down the pike: The collapse of the commercial real estate market. True, the TALF program will be forced to include bad securitized commercial loans.
However, the astronomical bill for this will be jaw-dropping. 700 or so banks will fail due to their inflated Tier 1 assets marks. Absurdly inflated valuations for relatively worthless commercial backed securitizations.
The stock market can stay irrational longer than you can stay solvent. The global economy is horrendous. Social unrest is spreading across Europe. Asia's exports have fallen through the floor. Our country is on a respirator. etc etc etc .
Cash is King ..Sell into this overblown bear market rally .
On Mar 25 04:37 PM The Mad Hedge Fund Trader wrote:
> And there are plenty of reasons. Now that traders are partying again
> on Wall Street, we have to ask, what will take the punch bowl away?
> The unemployment rate shooting over 10%, which could happen in April
> or May, would be my first pick. Losses on option ARM loans could
> accelerate, taking out a few dozen more regional banks, WAMU style.
> Another, until now apparently healthy corner of the financial market
> taking huge undisclosed positions in securities we’ve never heard
> of, could suddenly blow up. A giant hedge fund could close at any
> time, freezing existing investors in place, and dumping gigantic
> positions on the market. Defaults on some big, high profile commercial
> real estate projects could also pull the rug out from under the market.
> Given the magnitude of the move up over the past two weeks, we might
> even see a short seller bite the dust. And of course, if any of the
> administration’s $3 trillion in bailouts/ reliquifying/stimulus hit
> a wall that would trigger a sell signal. Party on ebullient traders,
> but do so close to the exit.
Momentum is starting go gain to the upside. This is not the end of this "bear rally". More downsides are still projected; but as this bear rally reaches new heights, the less likely the next run down will be as deep as first projected. We might end up with 600 to 630 final bottom instead of the projected 424 target before this rally begins. Not bad considering that the last bottom was 666. What's 66 points in this highly charged atmosphere anyway?
The 424 SnP target was derived using Elliott Waves analysis that assumed this rally will not break above SnP 805 major resistance. SnP bulls are able to break that resistance. A strong 742 support now exists that may or may not be challenged by the bears. 1018 is the next major entry for the bears with 850 the highest probability wild card (850 is the weekly 20ema resistance used by many traders as the holy grail short entry).
Bulls are not out of the woods by a long shot. They will have to do a lot more heavy lifting before wearing out the expectant bears. This is a news driven environment; fundamentals don't matter on a day to day basis and many times short-term technical analysis parameters kept on breaking down due to the extreme volatility levels. Trick is to use weekly and monthly charts in order for most TA indicators to work properly and use the daily charts to improve entry precision. Most traders had been using the daily charts for decades and have been accustomed to their "incomprehensible" wriggles, but this current sell-off is the biggest and fastest of them all sans 1929-1932. Using daily chart indicator parameters cannot cope up with the massive volatility of present days.
For long-term investors who bought the last bottom; it is a HOLD even if more downsides are projected for the next 6 to 9 months. This is the crisis of the century, remember? How many times in a century will seasoned investors will be able to buy dirty cheap and sell high? What will spook investors out of their positions? If and when we start reading company bankcrupcies left and right. Not the small banks FDIC take-overs, but rather non-financial big companies going bankcrupt with GM the primary target sitting right into the cross-hairs.
For short term traders; more of them will be roadside kills rather than get-rich quick survivors. The most experienced traders are the ones time and time again will prove to be the Kings of the Jungle.
The volatility alone can kill more neophyte traders and wannabe investors at a faster rate than before while seasoned investors will can time as long as they don't use margin accounts. A 50% additional margin applied to buying distressed companies can wipe out the whole account in a matter of weeks due to extreme volatility that has never happened before except during the early 1930's.
Time is the most trusted friend in long-term investments. The first opportunity to load up with SnP 666 bottom has already passed. The next opportunity for a final bottom to 600-630 is still a very high probability and may even be premature to assume at this stage since SnP is still not out of the woods for a potential 424 target.
The earliest indicator of gathering strenght is IF the bulls can re-challenge 850 after the first waves of holy grail short sellers tried to do their usual trick. Then 1018 is the usual fibonacci level where many investors will try to unload some holdings and more shorts will be added to the equation. A rally that can break above 1050 will give considerable boost to bullish morale and is the earliest indicator by which the most intrepid bulls will start buying shallow pullbacks. BUT only a strong break above 1145 level by which the probability of a sustained recovery will be added to the equation. This is the "initial" immediate future roadmap for the bulls in the next few weeks to 4-6 months ahead.
The case for the bears has already been well laid out long before this relief rally has started - it has been laid out already since Oct2008 and proved to be correct since there was more than 90% probability of a lower lows after the last 840 SnP low of Oct2008. Only the execution remains to be seen for the next lower lows after SnP 666 level but probability is diminishing to perhaps 65%, still very high and must not be taken for granted. In TA, a 65% probability is a very high probability, very few cases are able to reach more than 65% chance of success such as the Oct2008 lower lows probability.
Those numbers did not come out of no-where. They are based on usual fibonacci levels used time and time again in EW analysis extended rules method that proved to be correct in more cases but not all the time. There are also many cases of failures but the succesful ones outweights the failures - a game of probabilities which is the stock market is all about for most TA traders.
We are starting to enter an undefined area of TA at this stage. Nothing is predictable with high probability of success at this time. That is a good reason to start speculating for a Roadmap for the Bulls as early as possible. It is a lot better than no roadmap at all. Bears be warned!
As for long-term investing, those TA mumbo jumbos do not matter. They have their own ways of measuring probabilities in more arcane ways than traders do.
Thanks, very helpful comments!
On Mar 26 01:30 AM capital pains wrote:
> These past 2 weeks have been the personification of "don't fight
> the tape"..The cheerleaders at CNBC have been just breathless with
> enthusiasm, practically orgasmic. The "Fast Money" monkeys are extremely
> pleased with themselves. Contrary to their past track records, these
> unseemly traders just can't pick a loser lately.
> As we continue to borrow our way out of debt, (what's counter-intuitive
> about that !), the next debacle is coming down the pike: The collapse
> of the commercial real estate market. True, the TALF program will
> be forced to include bad securitized commercial loans.
> However, the astronomical bill for this will be jaw-dropping. 700
> or so banks will fail due to their inflated Tier 1 assets marks.
> Absurdly inflated valuations for relatively worthless commercial
> backed securitizations.
> The stock market can stay irrational longer than you can stay solvent.
> The global economy is horrendous. Social unrest is spreading across
> Europe. Asia's exports have fallen through the floor. Our country
> is on a respirator. etc etc etc .
> Cash is King ..Sell into this overblown bear market rally .
The question that's still open, though: will the next bottom be significantly below the last one? The bear arguments above are valid, but how much more will they drive the market down? Could it be we're at a good place for the classic "double-bottom" where the next bottom is close to the last one? If that happens, that will be as good a signal as any other that the Big Bull is about to do its Pamplona thing and run.
One factor deserves to be highlighted:
Flooding the market with printed dollars cannot but have a positive impact on stock prices, possibly even overwhelming the bear factors. Of course, we all know about the nasty side effects for the rest of the economy, but printing money alone will cure a multitude of other stock market shortcomings. The question is when does that effect begin to kick in.
This roar rally is based on sentiment/momentum, not fundamentals. If you're a trader (as I am) you don't fight the tape, you look for opptys to make money, long or short, day or multi-day. Arbs are great opptys. And I agree wholeheartedly - keep one foot out the exit door!
On Mar 25 09:27 PM RiskReturnOptimizer wrote:
> Why has Cramer been so bullish? He's quoting institutional investor
> needing to get back into the market to catch up. Are we (individual
> investors) being sucked into this sucker's rally???