Technicals: Where Is the Pullback? What Pullback?

After a 25% rally in the past 40 days, is the market set to undo its 45% loss from the S&P500 all time highs? Many bulls are now claiming that now all is back to normal, and that despite the loss of the securitization product, the government will be happy to releverage consumers and companies to historic credit levels following the bail out mantra "take out debt now, spend tomorrow, save... oh, at some point."

In the meantime, the question of whether the slowdown in the macro economic collapse is an indication of a recovery or just, as David Rosenberg states, a "slowing down in the collapse." Regardless, the market's greed and optimism seem to be back, ignoring all bad news (WMT up on a big miss in comp store sales, BRK downgrade) and rushing higher on anything remotely perceived as good.

So while the fundamentals (or at least the positive side thereof) point higher, what do technicals imply?

Thomas Lee of JP Morgan is skeptical that the exuberant rally is sustainable, purely on empirical technical data. From JP Morgan:

What happens after a 20%-plus rally (3/6 to 4/3)? Since 1900, a 7% pullback, implying an S&P 500 of 780 or so . . . . The question on our mind (and many investors’) is whether this rally is a Bear trap or the start of a Bull. For either camp (bull or bear), a market correction/ pullback would be helpful, allowing short sellers to cover and providing an entry point for real money buyers. But this market has been frustrating, as equities have shown an “underlying bid” and not provided the correction/pullback many are seeking.

We believe an 8%-10% pullback will be seen in coming weeks and supported by the historical pattern following a 20%-plus gain (in 40 days or less). Since 1900, the Dow (as a proxy for equities) has risen 20% or more within 2 months, 24 times. In the month following this gain, the Index has on average fallen 7% from a peak (see Figure 3). Using the S&P 500 recent closing high of 842 implies 783.

We still see a Final Low in the 750-775 range in the coming months . . . . We believe the data support our notion that US equities are in “proximity to the bottom.” Our view is based on the notion that risk appetite naturally improves as the economy recovers, which implicitly assumes the US economy troughs midyear with a return to growth in 2H, consistent with J.P. Morgan Economics. It is also supported by the idea that breaching a 12-year low in the S&P 500 in early March signaled we were at an important juncture in this Bear. In our idealized view, we believe a final low is ahead of us in the coming months, with an S&P 500 close in the 750-775 range as the signal for us to make a big move into equities. In other words, absent incrementally negative news, a close in the 750-775 range is probably the level we see this Bear market ending.

Another interesting data point presented by JPM is the shift in sector leaders year to date: on an extended basis Technology and Telecom have been by far the best performers for the year (the NASDAQ is now solidly in positive YTD territory on expectations that it will be the first sector to recover, tech earnings next week will be interesting), while over the past month, the leadership has been concentrated in the most shorted sectors: financials and discretionary, leading one to argue yet again that the major move in March has been forced by the covering action after the S&P failed to break the 666 low.

So as Wells preannounces and takes the market ever higher in the context of accelerating California home foreclosures, increasing credit card rates and delinquencies, record unemployment, tight consumer credit, mortgage rates that had fallen and are since almost back to levels pre the QE announcement, an 80% increase in S&P earnings back to 70 in 2009 and collapsing trade flows (but, come on, these are all lagging indicators), the market continues its exercises in anticipating where the next good news will come from in a market in which the bulk of companies have now pulled all guidance, and are praying to have some good preannouncements to push their stocks higher by 50% in one day.

Comments

[nobby73:]

I suspect the hand of the PPT in the rally yesterday. The Wells Fargo results were good, but frankly, this was expectated and people should learn the lessons of profit statements from newly merged companies. There are lots of tricks around pro-forma accounting, goodwill, reserves, loan-loss adjustments, maybe some nice money via AIG? Anyway, as long as the news isn't terrible, it's ok, but given it was Thursday before the Easter weekend, trading would otherwise have been very thin. Perfect time for the PPT to come in, push things up and make everyone feel good about themselves over the holiday period - "Honey, maybe we could get a new car this year after all...."

In fact, it is probably a more efficient use of tax-payer money than bail-outs to zombie banks.

So, let's remember it's just a game and stop complaining about the rules. For me, I will stick to stocks with solid assets behind and the type of revenues that won't collapse in the face of higher inflation, unemployment and taxes in the US. It may be a bear market rally, but not for the right names.

"I think you should look up The Presidents Working Group On Financial Markets and the SEC Red Book.

Their Existence and Mandate by nature means that the markets are not totally "Free".

I assume that you did not know anything about this by your statement."

Apr 10 06:56 AM

[asteroids:]

Almost 4% up on one. JUST ONE company pre-announcing? And doing so on a low volume Thurs. into a holiday invites a jump. History show the market is almost always down the following week. History also show you lose money when you buy during earnings season.

Apr 10 07:53 AM

[guitoon:]

the WFC preannouncement is something strange...looks like some pumping stocks before the stress test results...but anyway we will not know the results as transparency seems annoying for now.
I am very curious to see the real numbers...wachovia stuff should have hurt them...fasb ??

Apr 10 10:03 AM

[Don Smith -...:]

No mark-to-market means WFC was able to take $3B less in loan loss reserves. They also had a huge buildup of fee income from mortgage originations from the January drop in rates when the gov't announced it would buy MBS to drive rates down. They also, like all of the banks, have had very high spreads, meaning more profit per transaction, across loan product classes due to the low cost of funds.

Wells took a lot of WB-related losses in the 4th quarter, and are able to punt on substantially impaired assets until the PPIP starts its auctions.

I made a highly leveraged bet on Wednesday that we would see precisely the type of pullback Tyler is anticipating - I bought SDSEV at 6.50 (oops) - expecting a fizzle. It will triple if we get a drop even to around 790 on the S&P by May 17. So I'm clearly bearish.

That said, I'm terrified of what the last month was brought. 3 bad news items and one, well-timed press release from Geithner, Obama, C, BAC, or WFC, every few days. Horrible jobs report + uptick rule announcement = stock market surges 2%. WTF?

Bad real news + hopeful-sounding speculative press release = surge.

Apr 10 12:19 PM

[Veneratio:]

Does anyone else notice how blatantly biased Durden is? I appreciate your analysis and you are a great writer... but you are allowing your biased to cloud your judgment. In essence, making you worthless as an analyst. You have to learn how to analyze the market... not the economy. Because if the last few months have showed us anything, they do NOT always move in correlation. Quite the contrary in fact. Those who understand this can position themselves to make a killing. Those who don't... No offense, but like yourself... may in fact be right long term, but they will not make nearly as much.

Flame away.

Apr 10 02:00 PM

[t.o.:]

While a pullback to the 750-775 range seems logical,the problem is that many people are waiting for that magic range before jumping into stocks "hand over fist".That is the game plan for many,but usually the market does not do what everybody expects it to do.As the above poster said,trade the market that is,and not the one you want it to be.

Apr 10 02:19 PM

[PainfullyAware:]

I guess the implications of this comment were too scary for many based upon the negatives it received.

Safety Is A Function Of Awareness.

Reality Will Be Reality Whether Believed In Or Not.

When "Possible" and "Probable" converge - Events Happen. Just because something is "Improbable" does not necessarily mean it is "Impossible".

Reality Is Stranger Than Fiction Because Fiction Must Make Sense.

Let History Be Your Guide. Human Behavior Is Constant; Tools And Environment Are The Only Things That Change.


On Apr 09 02:32 PM PainfullyAware wrote:

> Maybe we should jump on board- It is blatantly apparent that "The
> Masters Of Finance" have much greeter influence than the actual "Producers/People".
>
>
> Repair The Curtain - Stay The Course - OZ Is Just As Great Today
> As IT Ever Was..
>
> When You Can Create Money Out Of Thin Air You Can Buy Governments.
>
>
> The Complexity Of Corruption Is Vast.
>
> When the Tax Rates Spike - Things Will Be Different. The Government
> is preparing for the result - Are You?
> online.wsj.com/article...
>
> Finance And The Economy Are The Focus, But Other Nefarious Legislation
> IS Being Passed Out Of The Limelight.
>
> The government is doing the "End Around" on Ammo. Keep Your Guns
> - You Will Have Nothing To Use In Them.
> www.shootingwire.com/a...
>
>
> Do Not Look Too Long At "One Hand" Of The Government; You May Be
> Slapped By The Other.
>

Apr 10 02:35 PM

[Minlita:]

Any rally, it has to be backed by investor confidence.
- Deepening of a global recession
- Fragile financial system
- Small first-quarter earnings season (the key isn’t earnings, but the meaning that investors attribute to them)
This could cause a pullback and it takes time for investor confidence to come back.

Apr 10 04:44 PM

[David White:]

I too am expecting a strong pullback. In fact one author has recently suggested strong historical data indicate that we should retest the recent lows by the end of May. That said, we may still see some upside to this market due to the bankers reporting this week. I at first thought that the mark to market changes would have no effect on banks' results for this reporting season as they don't go into effect until Q2. However, WFC has already proved me wrong. It is obvious that WFC is basing their forecasts on the new mark to market accounting changes. As a result WFC reduced its loan loss reserves. This significantly added to its profitability. The bank also did do better than expected in Q1. Paul Miller's (FBR Capital Markets) estimates for loan loss provisions were $6.3B. WFC only allocated $4.6B. Subtract that $1.7B from the approx. $3B in earnings by WFC. Then you get a dimmer picture. In addition WFC has only taken $177M in charges against the Wachovia merger. Initially WFC had said they expected charges to be less than $10B. Even if you estimate total charges at half of the $10B, WFC still has a lot of merger related charges to take. The $10B number did originate from WFC.

I expect other banks to be able to take advantage of this new change to make themselves immediately more profitable. From Ken Lewis's comments recently, BAC may be able to accomplish much the same thing. The question everyone has to ask themselves is how real do you believe this is??? Between the trade deficit ($10B lower than expected) and the WFC announcement, the equities markets may have another 5%-10% upside from the approx. $82.50 ta which the SPY started the day on Thursday. Optimists have topped even this estimate with a high estimate of $94 to $95 on the SPY for this rally. Currently the SPY sits at $85.64.

Friday after the close, CVX announced their Q1 profits were down drastically. Other oil companies are likely in the same or worse condition. The oil and oil service sector may move downward soon. This will tend to bring the S&P500, which is oil heavy, down with it.

Don't get too carried away with the uptrend. It may not last much longer.

Apr 10 04:56 PM

[Mad Hedge F...:]

Will someone please help me out here? Q1 corporate earnings are expected to drop by 38%, and the market rockets 26%. Is there a disconnect here? I know I only got a magna cum laude in math in college, not the summa cum laude I deserved. But is it possible that the market has gotten ahead of itself? Just a tad? Is the economy really going to have the massive bungee cord type recovery that the market is discounting here? Could we be setting up for the perfect sell in May and go away scenario, like we saw last year? I don’t get this. I await your comments in earnest.

Apr 10 05:11 PM

[t.o.:]

David White

While cvx announced poor earnings and was down after hours,look what happened with mos and aa after their tuesday reports.Down sharply in after hours and premarket wednesday,but once the market opened they climbed straight up and ended well into the green.Short squezze/bad news priced in???
5-10% higher from here is still a nice move if it happens;long or short,in the near term being net long seems to be the prudent position

Apr 10 06:44 PM

[guitoon:]

market has gotten ahead of itself ?? well no, everybody predicting a recovery in 6 months because financial toxic assets will be bought by tax payers, real estate free falling is slowing down or even "bottomed', stimulus package will create 5M jobs and so on...

it's like when you are in love...everything is rosy..the reverse is valid too...you see only the bad

optimism on the market is very strong right now...bad news are good news...i will not bet anything right now..the question is which bad news will turn around the market or will it ??

I am very scared about the outrageous pumping by analysts, gov, fed, funds, tv morons..."depression is over...go all in"...small investors should be protected..they don't deserve to be fooled by ignorants that just want to see the market up to make money...market should go up if there is a reason to, not because traders need to cash out to buy a new ferrari

Apr 10 07:00 PM

[anarchist:]

Everyone has an opinion but no one really knows where the market is going. In the above comments, assuming people are investing the way they are commenting, there will be about equal winners and losers. The thing that is apparently driving this market is perception and the perception is that the worst is over. I think the worst is yet to come but I also think there is enough investors jumping in here "not to miss the bottom" that this rally has momentum and worth a play. This is not a buy and hold rally IMHO but a get on board for the ride knowing is will end. Post Easter holiday volume my give us an indication if I am correct, if it doesn't pick up for the bulls then be nimble and ready to get out.
Maybe that sounds like a trader and not an investor but investors are getting killed these days,

Apr 10 10:37 PM

[Bill S. Friend:]

Nobody knows what effect throwing a few trillion dollars at our financial problems will have. Thats the huge variable, and it changes everything.
Perhaps the market will just continnue at a 20% per month clip right into oblivion. I hear talk of inflation post WWI Germany style, nothing suprises me anymore.

Apr 11 07:11 AM

[Michael Jahr:]

The market needs some good positive push behind it, something that doesn't come from the shorts until they scramble to cover. I hope you don't lose your Shorts but at the same time I hope this dead cat doesn't bounce too badley before it continues to rise.

Apr 11 09:31 AM

[moneynevers...:]

Sentiment seems to be arguing for a short term pullback based on this chart:

moneyneversleepsblog.b...

Apr 11 10:23 AM

[Steve W fro...:]

Many commenters, along with Tyler Durden, seem to think the recent rally and in particular the fast rise in the financials following WFC announcement is unjustified. Some have said the WFC profit guidance was expected by "everybody".
This is wishful thinking. I have followed the bank stocks over the last 3 months intensively and I can tell you that while some "expected" good earnings this quarter many many did not. Do you not remember that LAST WEEK Mike Mayo was saying the banks were dead meat walking? At least half of all analysts seem to think the banks will fail while the other half think they are undervalued. Certainly no consensus there.
The WFC announcement is the first REAL evidence the big banks will survive and actually may prosper in the current environment and THAT is big news and justifies a big run up.
When you have the financials go from possibly being zombie banks to earnings stars in one week I'd say that justifies quite a run up in the market. One can argue that the earnings are fictional or won't last or that other banks will report much worse earnings but you can't argue there is nothing behind the rally led by financials.
When your bank goes from being possibly on the brink of failure to looking solid it is good for most any company and removes quite a lot of uncertainty from the market.

Apr 11 10:41 AM

[Alex Filonov:]

You won't find any similarities in the last 30+ years. Maybe in the last 70 years. This bull run reminds me of 1932 and 1937, when Dow Jones runs for couple of months over 13 days moving average. This is the main technical support right now. While Dow (and S&P) is above 13 days MA, it's a bull run. Once it gets below 13 days MA, sell and wait for a next run.

Apr 12 12:44 AM

[jse17:]

“I know of no investor that consistently made money applying technical analysis,” Sir John Templeton.

Apr 13 11:43 PM

[Jeez:]

Key phrase is "SO FAR" - good luck to you!


On Apr 09 03:30 PM SteadfastMason wrote:

> I do not believe there is anything but smoke an mirrors behind this
> rally.
>
> Therefore, I continue to add to my short positions (cost-averaging
> down) as this rally continues. I also hold a few ETF Bulls that I
> will sell, shortly, saving that money untill the this rally's gains
> are at least zeroed out by the next leg down. I never use margin.
> I never fully invest the money I have to invest. I can wait for this
> rally to turn.
>
> Assuming the Gov't manipulators reach a point where they can't pump
> this market with more false data and threats of anti-shorting regulations
> I am certain this rally will make a significant reversal - within
> the next few weeks.
>
> This approach has worked pretty well for me, so far.

Apr 15 12:01 AM