If You Missed the Rally, Don't Get Trapped Now

I underestimated the bulls' resolve to buy when everything looked its worst. And for as right as I was to be a bear on the way down, I’ve been equally wrong to remain bearish during this recent rally. But when I look back over the last 5 weeks, I do feel as though I’ve learned what to look for in a bear market rally (and to be clear I’m still in that camp) and will be better prepared next time to take advantage of a move such as we’ve seen as of late.

If I had to pin my folly on any one thing it would be not following my market timing system that gave me a buy on the markets on March 11. At that time I remember blogging about getting a buy signal on the markets and how every time over the past few months when I got that signal, days later it would reverse and turn lower. I guess I was trying to outsmart my own system, anticipating a reversal which didn’t come. This was a classic “this time it’s different” mistake that I surely will not make next time I get a buy/sell signal on the markets.

Now, having said that, let's assume I had gone long and stayed long for the duration of this rally, as I have yet to receive a sell signal on the markets. Where would I be right now aside from considerably wealthier.

From bear market lows: Dow up 25% Nasdaq up 31% S&P up 29%

We know from studying past bear market rallies from the '29-'32 years that the average bear market rally is 33%. So you can see that today’s rally really isn’t anything special, it just feels special because it’s been awhile since we’ve seen so much green on our watchlists. Secondly, if you’ve missed out on much of it like myself, then your mind can add even more significance to it. And lastly, if you are somebody who watches CNBC or any other media out there you’re probably fully invested right now because they’ve pointed out every reason out there why this is a new bull market.

But if you step back and look at the recent gains, I would think the risk of the markets pulling soon is significant and the bulls are pushing their luck holding onto longs. So with as special as this rally has been, it still isn’t higher than the average bear market rally from the Great Depression era.

“It is what it is till it isn’t”

Many chartists will agree that the bulls live above the 200 ma and bears live below it. So right now, technically we are still in a bear market, and recent gains should be properly classified a bear market rally, until we cross that 200 ma. Given the rally we saw on Friday it’s surprising that we barely broke through the resistance seen below. It’s looking more tired to me than anything.

10 Min chart

Now the Nasdaq has been the shining star as of late and is up 31% from its lows, but as you can see is sitting right at resistance. There are going to be a lot of investors who have been sitting on the sidelines, reading this weekend's financial section feel like they are missing out. They’ll probably call their broker and want to get in Monday morning, and that could be a huge trap.

And while I remain in the bear camp, there is one bullish scenario above I want to point out is that we could be forming a head/shoulders bottom on the Nasdaq with the right shoulder yet to be formed. But notice, both scenarios of mine involve the market moving lower over the next few weeks, so be careful not to get too over-exuberant on the long side next week.

Comments

[zorro6204:]

"I do feel as though I’ve learned what to look for in a bear market rally . . ."

Everyone says that. Next time I won't miss it! The problem is that hindsight is worthless in the present. When you're in the moment, watching a 300 point up or down day, how can you possibly know it's the beginning of something or the end? You can't, it's not possible.

Apr 11 05:15 PM

[William Cowie:]

The increased volatility has become a problem. I got lucky - I bought into most of my positions around that time. No market timing expertise, though - I simply had more time at work to finish my research and pull the triggers I wanted to. Call it luck, if you will. I'm still nervous, but being up over 20%, I tell myself I have a little buffer if the market should turn back down.

There is a new reason I think it won't. It has nothing to do with technical analysis or fundamentals, and all with the new thinking in Washington. Whereas TARP aimed at injecting capital into the banks, it did require repayment, and it came with limitations on how well the execs could pay themselves. So they got hold of their buddy, Mr.. Geithner and told him to come up with a different plan. PPIP was the result. The bottom line is now the government is giving the banks capital in the form of extra profits. The mechanics are spelled out here:

seekingalpha.com/insta...

The banks no longer have to repay any money, and the administration looks like heroes, because they're winning the war on the bears.

And that brings us to the reason I believe the bear market is behind us: taxpayer money now goes to the banks as extra profits (hello, WFC) which boosts the market. The government has now figured out that simply handing the banks money will boost earnings and stock prices. The administration looks like heroes, the banks pocket nice bonuses, who in the world is going to stop this boondoggle?

That is the new dynamic of the market.

Apr 11 05:44 PM

[Respirate:]

Thanks to the author - it's nice to hear a contributor admit to mistakes that "regular guys" make . Mr Pierce, I agree that investors who jump in now at the urging of the CNBC blind cheerleading squad will be trapped underwater.

Just an individual point of view, and I'm no chartist, just a long time investor. In my view the recent rally has been a correction of a grossly oversold condition driven by fear, coupled with a little news that supports the many of us who want to believe the economic recovery's underway. I look for another significant drop in the next 4-8 months as more bad news filters out and the reality of the recovery disappoints. The dip should stay just above the March lows as investors who missed this rally will jump in to avoid missing the next, lending price support.

There are still many fabulous buys out there whenever the economy makes even a slow recovery and the employment numbers slow their stone-like fall. I agree with William Cowie in that the federal government has a lot at stake in propping up the economy until it becomes self sustaining. Another reason for longer term optimism.

Not trying to make predictions - just sharing some thoughts.

--R

Apr 11 06:48 PM

[Nathaniel C:]

My goal is to be bearish in a bear market and bullish in a bull market. Since we are in a bear market I do not even try to buy stocks on the long side (bear market rallies began on nothing but hope that things cannot get any worse). They are too hard to predit. Remember the Nov rally based on Geithner being elected for Treasury. Talk about bulls grasping at straws. I am using this opprotunity to ease into some short positions in HOG, commerical real estate, and commodities like FCX. When the S&P goes above its 200 day moving average I will be reborn as a bull, until then I am a bear.

Apr 11 07:58 PM

[Rick Urban:]

Charts are absolutely useless. There is no information about the future. Only the past. That is the reason you missed 20% run up. If you believe that this is only bear market rally, then short everything!!! You may get lucky. Or maybe not. The only sure thing is that the bear market and the recession won't last forever. So anybody who bought right companies at the March lows will make good money within next 2-3 years. Rather then spending time analyzing charts, analyze companies and invest in them and you will make money.

Apr 11 09:15 PM

[Drew Arnold:]

Definitely don't get trapped now, but it's a lot safer to buy on a pullback now than it was a month ago. On the behavioral side of things, investors are looking to buy and they're not quite as concerned about big moves to the downside (see the VIX). We're less likely to see panic selling now, so the market should be relatively stable where it is currently. The move from here is to wait for a pullback off of the resistance that the market has reached and then jump in on the long side.

Apr 11 09:22 PM

[Mistrofan:]

Agree - let's wait another 4 weeks and than the water should be clear.

Apr 11 10:31 PM

[joethebull:]

The bear market rally is not over, but there will be a slight pull back from current resistence levels. I recommend averaging your way into long positions during this pullback to set yourself up for the next surge that will break out of current resistence.

The rally still has legs and will continue for a few months (with minor corrections along the way, of course). But, the economy still has yet to consume the looming commercial real estate and credit card default issues. This no doubt will throw the market back into a tailspin and there is a good chance of taking out the prior lows. Only until after these issues are dealt with will the market bottom out, only to be confronted with inflation.

Hold your nose and buy on the pullbacks, but be prepared to abandon ship when the market starts to tank. You'll know it's about to happen when the VIX starts to drop and the media starts saying that we're in the clear.

Apr 11 11:51 PM

[dcb:]

you've got it. but they aint hero's they are thiefs


On Apr 11 05:44 PM William Cowie wrote:

> The increased volatility has become a problem. I got lucky - I bought
> into most of my positions around that time. No market timing expertise,
> though - I simply had more time at work to finish my research and
> pull the triggers I wanted to. Call it luck, if you will. I'm still
> nervous, but being up over 20%, I tell myself I have a little buffer
> if the market should turn back down.
>
> There is a new reason I think it won't. It has nothing to do with
> technical analysis or fundamentals, and all with the new thinking
> in Washington. Whereas TARP aimed at injecting capital into the banks,
> it did require repayment, and it came with limitations on how well
> the execs could pay themselves. So they got hold of their buddy,
> Mr.. Geithner and told him to come up with a different plan. PPIP
> was the result. The bottom line is now the government is giving the
> banks capital in the form of extra profits. The mechanics are spelled
> out here:
>
> seekingalpha.com/insta...
>
>
> The banks no longer have to repay any money, and the administration
> looks like heroes, because they're winning the war on the bears.
>
>
> And that brings us to the reason I believe the bear market is behind
> us: taxpayer money now goes to the banks as extra profits (hello,
> WFC) which boosts the market. The government has now figured out
> that simply handing the banks money will boost earnings and stock
> prices. The administration looks like heroes, the banks pocket nice
> bonuses, who in the world is going to stop this boondoggle?
>
> That is the new dynamic of the market.

Apr 12 12:24 AM

[investor88:]

Agree don't get trapped now. The next week or two critical to see if this rally has legs. By all means trade the trend up or down with stop loss.

Apr 12 08:07 AM

[Maxe Paul:]

"I do feel as though I’ve learned what to look for in a bear market rally "

One word, GUTS. Thats what i used and it served me well. I fail to see how selling into a falling market that everyone is selling into can make you money. Or now buying into a market eveyone is buying.

The biggest gains are always made being a contrarian IMO.

Apr 12 08:56 AM

[Old Trader:]

Jeff,

Like you, I missed the current run-up, but refuse to get sucked into "chasing" this particular rally. I don't know whether or not we'll see another retest of 666, but a pull back is all but inevitable, imho, which will give people like myself a chance to atone for past "mistakes" ;-) and add to longs (carefully), albeit perhaps not quite at previous lows.

Apr 12 03:11 PM

[PeteK:]

maxe,
Agree with you 100%.
yes, it takes guts.
Ross Perot once said that,
"Never seen an economist got rich !!"
Because they calculate too much.
There's no such thing as "Perfect timing."

Apr 12 03:53 PM

[NickyCee:]

Wow - what a load. This guys uses "charts" to tell him when to buy and sell. And then does not follow them. And this guys is financial writer? Wow. You CANNOT compare modern day bear rally to 1929 to 1932 bear rally. We have TV, internet, instant access for anyone in the world to get instant info and buy and sell themselves. We have hit bottom or there may be a tiny pull back but we are going up. I have my calls (and a few puts just in case) set for tomorrow.

Apr 12 09:01 PM

[wobatus:]

I don't get this and never will. CNBC's regulars mention possibility of bear market rally all the time. It has all kinds of permabears on all the time. I'd say it is fairly even-handed. The bear hasn't killed its ratings. Personally, I wouldn't tell anyone to just "jump in now." I'd buy a stock if you think the price is reasonable for your expected return (not easy I know-I'd tend to stick with dividend payers) or dollar cost average into an index.


On Apr 11 06:48 PM Respirate wrote:

> Thanks to the author - it's nice to hear a contributor admit to mistakes
> that "regular guys" make . Mr Pierce, I agree that investors who
> jump in now at the urging of the CNBC blind cheerleading squad will
> be trapped underwater.
>
> Just an individual point of view, and I'm no chartist, just a long
> time investor. In my view the recent rally has been a correction
> of a grossly oversold condition driven by fear, coupled with a little
> news that supports the many of us who want to believe the economic
> recovery's underway. I look for another significant drop in the
> next 4-8 months as more bad news filters out and the reality of the
> recovery disappoints. The dip should stay just above the March lows
> as investors who missed this rally will jump in to avoid missing
> the next, lending price support.
>
> There are still many fabulous buys out there whenever the economy
> makes even a slow recovery and the employment numbers slow their
> stone-like fall. I agree with William Cowie in that the federal
> government has a lot at stake in propping up the economy until it
> becomes self sustaining. Another reason for longer term optimism.
>
>
> Not trying to make predictions - just sharing some thoughts.
>
> --R

Apr 12 10:42 PM

[Hmm?!:]

Thanks Old Trader. Agreed.

But I would also add there are some big hits remaining and the Wells Fargo influence on this one may be questionable. See below......

(from Mortgage du jour by Credit Suisse)
in 2006 Wells Fargo was #1 with 13% of the total sub prime market. The next closest banks were at an 8% market share.

For Alt-A (usually a half cut above subprime), in 2006 Wells Fargo was #3 with a 10% market share. In addition, a staggering 81% of all the Alt-A originations in America in 2006 were "liar loans".

On Apr 12 03:11 PM old trader wrote:

> Jeff,
>
> Like you, I missed the current run-up, but refuse to get sucked into
> "chasing" this particular rally. I don't know whether or not we'll
> see another retest of 666, but a pull back is all but inevitable,
> imho, which will give people like myself a chance to atone for past
> "mistakes" ;-) and add to longs (carefully), albeit perhaps not quite
> at previous lows.

Apr 12 11:32 PM