Why This Is Just Another Bear Market Rally 26 comments
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The equity market has taken a turn for the better in the past couple of weeks, reversing losses for many investors who have ridden this market down. It has been a welcome change for investors as we bounce off lows and are beginning to put some faith behind equities again. The million dollar question: is this the turnaround we have all been looking for, or is this just another bear market rally?
In my opinion, this is just another bear market rally. Rallies of 5%+ in one day do not occur during bull markets, but they are very typical of bear markets and normally occur during bear market rallies. What has really changed fundamentally over the past few weeks in the macro-economy? To tell you the truth, not much.
It is my opinion that three things need to get better before we can consider ourselves to be out of this crisis: an improvement in the employment picture, more stable credit markets, and a somewhat stable housing market. Let’s look at how these criteria have changed over the past few weeks.
- Employment - Currently the unemployment rate stands at 8.1%, with estimates for the March unemployment number to be somewhere around 8.6%. Initial jobless claims went up for the week ending March 21st by 8,000, with a total of 5.56 million filing for continuing unemployment claims. These are still at 25+ year lows and have shown no sign of improving throughout this whole rally. Everyone is still expecting possible double digit unemployment, which will wreak havoc on consumer spending, since individuals will have no steady source of income. This could also lead to more and more defaults on loans, mortgages, and credit card payments; further deteriorating the state of the financial sector.
- Housing - The housing market has yet to reach a bottom! New home sales were up 4.7% in February, so a bottom must have been reached, right? Wrong. Housing prices fell 2.9 percent and inventories are still at extremely elevated levels at a 12.2 months supply. In a normal housing market there is only about 6 months of supply in the system, so for those that don’t think that housing can get worse, it can. There are still more sellers than buyers in the market. Home prices are down about 28% since the peak according to the Case-Shiller Index, but this number faces some more serious downward pressure as sellers are going to have to compromise to bring the market closer to equilibrium in order to reduce inventories. So unless we see a huge drop in prices in a very short amount of time, I am not ready to say that the housing market has bottomed. Until the housing market reaches equilibrium, I do not think we can see an economic recovery because of all the ties it has to other aspects of the economy, like credit.
- Credit - Conditions in the credit markets have not really improved throughout the rally. I think if there is one thing everyone has been adamant about, it is trying to revive the lending markets so that the economy can get going again. Companies need debt to fulfill short term working capital needs, and having access to liquid credit markets is essential for day to day operations. Since the beginning of March, the TED spread (the difference between the 3 month treasury note and 3 month LIBOR rate), which highlights credit risk within the lending markets, has gone up by almost 10%. This is indicating continued weakness in the short term credit markets, which must be corrected before we can see any type of recovery within the financial system.
Looking at the above factors it is clear that it has not been a broad based rally where we are seeing recovery in some of the most depressed asset classes, credit and housing. The fundamentals of the macro-economy have not gotten better and this really makes me doubt the sustainability of this rally, considering that unemployment is skyrocketing, the housing market is still in free-fall, and the credit markets have not had any marked improvement. Couple this with an increasing savings rate, a $13 trillion loss in household balance sheets (with another $6 trillion loss probably in 1Q09), the highest inventory-to-sales ratio (at about 1.8) and $1 trillion in excess capacity in the economy, we are likely going to see decreased consumer spending going forward. This is going to be the worst part of the recession for the consumer and the recovery still seems a few months away from a fundamental level.
All that being said, one thing that could keep the rally going is corporate earnings. As earnings season approaches in April, it should help paint a better picture of what we can expect going forward for the economy and the stock market. Hopefully earnings come in better than expected, but I am not convinced yet.
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This article has 26 comments:
Wow ... lot's of experience here!
however, in this case the author forgets that unemployment is a lagging indicator.
i also like the fact that he's out there - more wall of worry money to come back into the market when they understand that we've truly bottomed this time.
I dont think the market is ready to turn around to a bull market but if enough people believe in a bull a bear market rally will occur and seriously fake out some investers and cost them some money.
If you trade on this wip sawing then money can be made but it can really be dangerous or you could be married to one of your trades for longer than you hoped for. Trust me I know!!
We just experienced the most grueling six months witnessing the defrocking of practically every sacred capitalist notion that existed in the American psyche. Swift and dangerous precedents were created overnight that toppled the most stoic investors among us.
Overt Government's intervention in investment banking, banking, insurance, and manufacturing was done on such a colossal scale that no one ever imagined could happen here. Literally, overnight, without debate, discussion, or explanation, the capitalistic system collapsed in a huge thud.
It all came upon us like a sudden plague of locusts and evaporated any conception of free market thoughts that anyone had.
In light of these developments it impossible to predict the future course of the markets as we are now on the brink of a truly "new world order" (and not a good one, if anyone had delusions of such).
All bets are OFF. All predictions are bogus. So, any19 year old or an 80 year old, can pontificate all they want, "this isn't your father's stock market".
So what do the technicals say now? They speak with forked tongue. The market continues to be a mess of conflicting signs. The VIX has broken out of the pennant consolidation it's been in all year to the downside (bullish) but it immediately refused to go through the major support at the nearby 200 dma from which it is moving higher (bearish). But the Shanghai index has not only gone above its 50 dma, which the American markets have failed to overcome since last year, this market has actually gone above its 200 dma after a 50/200 cross! If China and the others are to lead us out, this is very bullish. And then there is the point about 5% one day gyrations up hardly ever occurring in bull markets (this is a technical point). Some much higher buy volume is happening with the big up days, but the A/D is much weaker. If this were a fight, we'd have to call it a majority draw.
He has backtracked from the rest of his article.
Recovery is MANY months away.
Our government isn't fixing things, it's making things worse....much worse. We're buying our own debt, we're playing with accounting rules just to make the banks balance sheets look better, Stock Exchange rules are being bent just to allow entities which are "too big to fail" to continue to trade their worthless shares.
Give me a break!
Too many stuck in market from WFH and dreaming that the market makes new highs late year - yeah, right with the "second half recovery" in the economy, right?
In Bear Market Rallies you SELL the rallies.....
You can ignore reality but you can't ignore the consequences of ignoring reality
On Mar 31 04:46 PM User 386525 wrote:
> "The author, Vinay Ayala is a 19 year old Finance and Economics major
> at the Pennsylvania State University"
>
> Wow ... lot's of experience here!
Every day the same article with a different author. I'm getting tired.
No one has a new theory about the markets?
The monkeys.
You see, the age is not important.
On Mar 31 04:29 PM Cetin Hakimoglu wrote:
> The market keeps surging because huge funds are buying in anticipation
> of many years of of steady growth. Consumers will resume spending.
> Savings rates will dip back into negative where they will remain.
> Oil and gas will eventually return to June 2008 levels.
On Mar 31 04:29 PM Cetin Hakimoglu wrote:
> The market keeps surging because huge funds are buying in anticipation
> of many years of of steady growth. Consumers will resume spending.
> Savings rates will dip back into negative where they will remain.
> Oil and gas will eventually return to June 2008 levels.
I can say absolutely we have bottomed in the commodities segment of the market, and the euro has bottomed against the dollar. (my private indicator, that never fails). I will also say baltic dry index is moving downwards, so hard to imagine we aren't headed down from here. Bond market is still pricing for a disaster, and stocks can't really stay up unless the bond market allows them too.
On Mar 31 07:21 PM BrucePile wrote:
> It's futile trying to discern a market bottom by reasoning through
> things like housing, credit, and all the fundamentals because a market
> bottoms well before you see the turn in all that. That's because
> the market is a digest of millions of researchers who, as a group,
> know more than any one of us. The technicals are better for seeing
> a bottom.
>
> So what do the technicals say now? They speak with forked tongue.
> The market continues to be a mess of conflicting signs. The VIX
> has broken out of the pennant consolidation it's been in all year
> to the downside (bullish) but it immediately refused to go through
> the major support at the nearby 200 dma from which it is moving higher
> (bearish). But the Shanghai index has not only gone above its 50
> dma, which the American markets have failed to overcome since last
> year, this market has actually gone above its 200 dma after a 50/200
> cross! If China and the others are to lead us out, this is very bullish.
> And then there is the point about 5% one day gyrations up hardly
> ever occurring in bull markets (this is a technical point). Some
> much higher buy volume is happening with the big up days, but the
> A/D is much weaker. If this were a fight, we'd have to call it a
> majority draw.
> The market keeps surging because huge funds are buying in anticipation
Funds without money
> of many years of of steady growth. Consumers will resume spending.
consumer without money
> Savings rates will dip back into negative where they will remain.
lol
> Oil and gas will eventually return to June 2008 levels
sure, a recover with high oil prices. lol
Employment is a lagging indicator and will worsen long after the stock market rebounds. Housing will lag as well. The last time home prices fell during the 1990 recession they remained stagnant until 1994 even though the stock market rebounded years before that.
As for credit you are dead on. I'd only add that the key ingredient you're missing is the earnings piece. Corporate cash flows are still deteriorating and the market will remain in a bear market until that is rectified.
There appears to be more cash because as a percentage of portfolios cash has increased. This isn't necessarily because investors are hoarding cash waiting for the opportune moment. Their other assets have PLUMMETED in value therefore increasing the percentage of cash held.
Further, how many investors do you really believe are dying to put all their precious cash back into the market? These are the very same people who just lost 50% or more of their net worth via housing and asset losses. Many of these same people are worried about their jobs, are scalp deep in debt, and face further losses in net worth due to the asset deflation the Fed and Treasury are desperately trying to combat.
Just because you read something in Barron's doesn't make it the an incontrovertible truth. Those saps are permabulls who only benefit professionally when you are fully invested. Listening to their (or CNBC's advice) thusfar sets you back to the early 90's.
Talk about a weak bullish argument.
On Mar 31 04:17 PM dharmabob wrote:
> stock prices aren't based on today's situation, but on expectations,
> so an analysis of the current economic status isn't necessarily a
> good indicator of which way stock prices are going. There's a lot
> of cash out there waiting to come back in.
Look at the economy; Not necessarily down the drain vis-a-vis corporate bankcrupcy rate. The sky is not falling (yet) but our eyes see devils and storms biting our necks with impunity.
Look at the stock markets (US and Europe), They are going the down the drain or rather already down the drain however you look at it. Bathtub, the bathwater, and the baby have already been thrown out the window so to speak. Only China and the other developing countries are refusing to go down the drain since Oct 2008 and instead China made a huge 75% rally since Oct.
Look at the monthly charts for technical analysis.
The Dow Jones was able to produce a BULLISH hammer bar this month of March 2009. Likewise, SnP has a bullish hammer bar, not unexpected. But Nasdaq or Compq was able to produce a bullish Engulfing hammer bar. What a stretch!
Now, it is not unusual for the hammer bar to be retrace. It is also not unusual that more new lows to happen after the first appearance of a bullish hammer bar. But in more cases than not, the new lows are mild and tolerable rather than drastic and dibilitating.
What is important is that the very existence of a bullish hammer bar in the monthly chart and after more than 18 months of sustained sell-off with no indication whatsoever of potential bottom - is now upon us.
A bullish hammer bar "after a sustained sell-off" is the high probability in many many cases of stock charts in all time frames of an IMPENDING bottom if not THE bottom.
Bet with high probability - not the public perception of current events.
On Mar 31 04:29 PM Cetin Hakimoglu wrote:
> The market keeps surging because huge funds are buying in anticipation
> of many years of of steady growth. Consumers will resume spending.
> Savings rates will dip back into negative where they will remain.
> Oil and gas will eventually return to June 2008 levels.
I mentioned housing and unemployment mainly because these are some of the indicators that I am looking at in looking for a turn in the economy.
But let's take a glance at some of the components of the Leading indicator index. The ones I will touch on are: credit spreads, consumer sentiment, initial claims and average weekly hours by manufacturing workers. Source: www.investopedia.com/t...
There is no arguing the fact that the credit markets have yet to come back to sustainable levels. As I mentioned in the article spreads are still not at encouraging levels. Consumer sentiment is still at extremely depressed levels and is signaling a deep recession. Initial claims are still increasing, as last week they registered an increase of 8,000 to 652,000. Looking at the payroll data today, it doesnt look like this situation is getting better very soon. Average weekly hours worked by manufacturers is still decreasing (www.bls.gov/news.relea...). This paints a terrible outlook for spending and hence earnings for companies going forward.
For those conerned about my age, I am turning 20 soon, so I guess that is a positive. Right?