Real Bull Market or Bear Rally? Still Unclear

Bear markets throw up head fakes before investors enjoy the real recovery. So while the current 20%-plus rally in global equities is the fourth and most significant since the bear market began in 2007, many are still questioning whether it is the real deal or just another one of these head fakes.

While it may not be the best indicator of sentiment, the CBOE Put/Call Ratio surged as high as 1.31 on Wednesday morning. This indicates excessive pessimism, but the surge in bearish sentiment comes without a major market correction.

“Clearly, pessimism remains extreme,” says veteran technical analyst Leon Tuey, pointing out that this type of scenario is typical of major market bottoms.

As investors continue to worry about the economy, the financial system, credit card and commercial real estate loan defaults, deflation, inflation, and much more, they forget about both the U.S. Federal Reserve Board and the U.S. administration, he writes. “These institutions are far more aware of the problems than any economist.”

Mr. Tuey points out that with the world’s central banks drowning the system with liquidity, recent data shows the economy improving. He also reminds us that since the market is a discounting mechanism, it always bottoms months before the end of a recession, not after.

He said:

Short-term corrections notwithstanding, investors should focus on the important factors that drive the market – monetary, economic, valuation, sentiment, and supply/demand. They continue to give bullish readings.

Mr. Tuey insists we are not witnessing a bear market rally, but a bull market, the magnitude and duration of which will surprise everyone. As a result, he views the short-term weakness as an outstanding buying opportunity, not something to be feared.

Peter Gibson, vice chairman at Desjardins Securities said in a recent note:

Although the S&P 500 has rallied 26% off its March 9 low, this rally feels different, with strong leadership from the financials, a lower VIX and a breakdown of the pattern of lower highs.

He pointed out that the longer stocks are able to maintain 20% gains, the more distance in time and points will be gained from the bottom. Investors will also move from looking down to looking up, seeing average gains of more than 40% off of market bottoms.

Mr. Gibson also highlighted the strong leadership coming from stocks in China as a result of its huge stimulus package, exploding bank lending and a manufacturing sector that expanded again in March.

Citigroup’s global investment strategist Robert Buckland thinks the current rally exhibits more of the hallmarks of “the real deal.” But he suggested that we need to progress further through the earnings downturn and see better news from the real economy and credit to be sure that it is not a head fake.

Where is the macro recovery progressing, if anywhere? Citigroup surveyed its economists, strategists and sector analysts and found that the Asia Pacific regions seems to be furthest into a recovery, followed by the U.S. and Europe. Japan appears to be lagging.

Mr. Buckland said:

To confirm a recovery, our economists, strategists and analysts need to see the pace of earnings declines subside, easier credit conditions, better news from housing markets, and a stabilization in global savings ratios.

During the last bear market from 2000 to 2003, global equities declined 52%. During that time, investors experienced four rallies of more than 10% before stock prices eventually turned higher in March 2003, kicking off the next bull run. One of these bear market rallies lasted from Sept. 2001 to March 2002. The Asian banking crisis of the late 1990s and the brutal U.S. bear market in the early 1970s saw similar cases of head fakes.

For a rally to be the "real deal," Mr. Buckland said we should see positive readings on most of the following measures: economy, valuation, policy, earnings, credit, market and sentiment. This scorecard would have kept investors well away during the first two rallies and was relatively lukewarm towards the rally late in 2008. But the current rally, while scoring best of all, still does not present a “full house” as it did in early 2003. “The economy, earnings and credit are still saying not yet.”

Comments

[TheFounder:]

It is obviously a bear market rally. That does not mean it can not go higher, much higher. High enough to cause the bears and shorts very significant losses before re testing the March 09 lows again.

Apr 17 08:01 AM

[prudentinve...:]

The rally has been big and long, but many up-days have had moderate volumes and signs of hedge fund program driven trades. Lately, we also hear brokers reporting that small individual investors are jumping in on the momentum as well.

Personally, I doubt its sustainability; and since I did most of my buying in the downslide, averaged-in at much lower than current levels, I am taking the opportunity to take some profits and cut back some positions that have risen above what is warranted by reality.

Apr 17 08:06 AM

[William Cowie:]

There is one factor we've never seen before: our government throwing our tax dollars directly at banks, boosting their earnings through PPIP and the changed accounting rules. These higher earnings cause banks' stock prices to rise. Some of them are (still) Dow components. Therefore, their stock price increases cause the Dow to rise, which causes program trading to kick in. That, in turns pushes the Dow higher again. At some point, individual investors say, "Hey,, this bull is passing me by," and they get in.

All because of PPIP. Billions (trillions?) worth of PPIP. That's a hard force to fight, no matter how sound your fundamentals or techinicals.

Apr 17 08:28 AM

[Lilguy:]

We are clearly in a bear market rally with the MSM and investors hyping "good" news and discounting the bad news as "priced in." As Mr. Cowie suggests above, the good news from the banks is especially misleading. They has so played around with their balance sheets, aided by direct and indirect (via AIG) taxpayer contributions, that they really don't know (and wouldn't want to say) what their real value is.

This economic downturn will continue, possibly with a bump up in the fourth quarter as households try to have a joyous holiday season, well into next year. Joblessness will continue to increase, home and commercial real estate values (& the assets built on them) will continue to deteriorate, at least one US auto company will go bankrupt--and maybe even a major US bank (despite efforts to bail them out), foreign countries will buy less US goods & services (because the US is buying less of theirs!), and some major Asian (Japanese) and East European banks and major corporations will go bankrupt (& impact their US brethren).

While the trajectory of the downturn may be turning from vertical to some less, we're not even on a controlled glide path, much less making steps towards recovery, at this time. We'll be lucky to hit the economic bottom by mid-2010 and the economic recovery, like the market recovery, will be virtually L-shaped for some time to come.

Apr 17 09:56 AM

[sarkanda:]

I don't agree with the pessimism in most of the posts. Eventually if the markets continue to go up for whatever reasons sound or otherwise, it will follow that consumers will start buying again because they feel more optimistic seeing these numbers, and thus increased employment will follow. I know it's unpopular these days to be feeling up about the economy, but that's what I believe will happen.

Apr 17 10:10 AM

[Larry House:]

I have been long since early March, but your cautionary tone is absolutely right. We can't know now. Everyone has an opinion, but we can't yet know.

Apr 17 11:22 AM

[Mad Hedge F...:]

The last five weeks have been too painless.Will someone please help me out here? Q1 is widely expected to be the quarter from hell, with earnings expected to plummet by 38%, and the market rockets 26%, the biggest hyperbolic move since 1930. 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 (my professor didn’t understand his subject and hated me for it). 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 17 11:40 AM

[drbob66:]

Spring is in the air...

www.ritholtz.com/blog/.../

Apr 17 11:56 AM

[wdhalgren:]

"He also reminds us that since the market is a discounting mechanism, it always bottoms months before the end of a recession, not after."

The market's discounting mechanism is broken. NBER says the current recession started in Dec 2007 and the federal reserve was obviously anticipating a recession well before that date. Oct 07, Two months before the start of the worst downturn in 80 years, the S&P was making new all-time highs. Even after this vicious slowdown was in full swing (large banks were imploding, fed in crisis mode), the market rallied back to within about 8% of those all time highs in mid 08. In fact, the stock market did not begin to really respond to this obviously horrible recession until late 08, fully 9 months after the official start, and nearly 2 years after the federal reserve began moderating their stance. Why the long delay from the market?

Here's how the market works in this age of managed money. Investment managers will not sell until home players ask for their money back. Most managers get a large chunk of their income from assets under management. If they try to trim holdings in the face of economic weakeness, investors see the losses and ask for the return of their money. Thus managers' incomes drop due to less assets under management, both due to lower stock prices and redemptions.

Asset managers know that it is in their collective interests to stay fully invested, so they all collaborate like a big cartel. You don't sell, I won't sell. If the market crashes again, everyone was "caught off guard" and there can be no liability for individual managers. Just like the late 08 crash, hoocudanode?

On the flip side, the market goes up quickly on any potential good economic news, at this point it starts going up just because the rate of decline has improved. Same reasons as above apply. Send us your money, home players. Don't miss the boat. CNBC is a 24 hour infomercial for this mentality. So, what we have is a one way discounting mechanism, which strongly contributes to the repeat boom bust cycle.

Apr 17 12:29 PM

[The Geoffster:]

Pump and dump.
www.cnbc.com//id/30263011

Apr 17 12:33 PM

[Mark Bern:]

Well, I'm going to go out on a limb again. I'm starting to get comfortable out here.

For some time now I have been puzzled as to what sort of magic could be holding up the markets. I have also wondered what the banks are doing with all the money they have received from TARP since there is still a major liquidity problem. Again, I wonder if the Fed is really buying the types of securities it says it is buying with it grossly expanded balance sheet. This last one seems implausible to me, but my wife has been telling me for months that she thinks Bernanke is trying to prop up the stock market through direct intervention. That would be hard for me to swallow.

However, an attempted coordinated effort to manipulate the market by a few very large, well connected banks and hedge funds until retail investors start to join in would not shock me in the least. It's all about driving perceptions anyway, isn't it? And this sort of create the momentum move and get out on the backs of the retail investor is what they do. It's just never seemed to be so well coordinated before.

I'm probably blowing smoke and I know it. But how else can we explain the disconnect between expected earnings and the market rally? As Mad Hedge Funder Trader pointed out, this looks like a bungee cord market recovery in the midst of an earnings season that is expected to fall off a cliff.

Stay with me for a moment longer as we try to piece together a little mosaic of scattered eveidence. Have you noticed the timing of headlines from different segments of the Administration and certain banks (C, WFC, BofA, GS, MS, JPM) and how each one seems to take a turn spewing "good" news at critical points. Each time the market has started to weaken since March 9th, one of the afformentioned has made an announcement to boost market confidence. If the first announcement didn't keep the rally going, another party sent out another booster announcement. When the rally seems to be doing well under its own momentum, the headlines thin out and things get quiet.

I realize that the Administration is still in campaign mode trying to convince American consumers that it's okay to come out again. They need us to believe. They need us to spend. If they can just make us believe that the economy has bottomed and the recovery has begun and if they can continue to manage to keep flooding the media with enough positive spin, they really believe that they can turn the ship around. They have to believe this because they also believe that it is their job to convince us to believe in them.

Well, I'm just not buying it. My real concern here is that what if all the public oratory and coordinated press releases are not enough? What might they do then? Have they already put plan B into action secretly? Who really is buying stocks and proping up the market?

I'm sure I don't know and I'm not sure if I want to, either.

Apr 17 12:38 PM

[wdhalgren:]

Mark, I'm not trying to belittle you post, because it was quite well stated, but this has been going on for a long, long time. Sometimes openly, sometimes not, depending on the circumstances. There's a reason that Obama is bailing out the banking oligarchs and allowing them to feast at the public trough to the great irritation of his corp political base. He needs them to sustain the illusion of the US economy and equity markets.

Our economy has been hollowed out by decades of increasing regulation, litigation, and policy unfriendly to real (non-financial) businesses. At this point, we're a shell, which is why we run a massive current account deficit (except when the economy's imploding like now). The illusion of retirement savings is the only thing keeping us afloat and it's a pretty thin veneer. Obama needs all the help he can get.


On Apr 17 12:38 PM Mark Bern wrote:

> Well, I'm going to go out on a limb again. I'm starting to get comfortable
> out here.
>
> For some time now I have been puzzled as to what sort of magic could
> be holding up the markets. I have also wondered what the banks are
> doing with all the money they have received from TARP since there
> is still a major liquidity problem. Again, I wonder if the Fed is
> really buying the types of securities it says it is buying with it
> grossly expanded balance sheet. This last one seems implausible to
> me, but my wife has been telling me for months that she thinks Bernanke
> is trying to prop up the stock market through direct intervention.
> That would be hard for me to swallow.
>
> However, an attempted coordinated effort to manipulate the market
> by a few very large, well connected banks and hedge funds until retail
> investors start to join in would not shock me in the least. It's
> all about driving perceptions anyway, isn't it? And this sort of
> create the momentum move and get out on the backs of the retail investor
> is what they do. It's just never seemed to be so well coordinated
> before.
>
> I'm probably blowing smoke and I know it. But how else can we explain
> the disconnect between expected earnings and the market rally? As
> Mad Hedge Funder Trader pointed out, this looks like a bungee cord
> market recovery in the midst of an earnings season that is expected
> to fall off a cliff.
>
> Stay with me for a moment longer as we try to piece together a little
> mosaic of scattered eveidence. Have you noticed the timing of headlines
> from different segments of the Administration and certain banks (C,
> WFC, BofA, GS, MS, JPM) and how each one seems to take a turn spewing
> "good" news at critical points. Each time the market has started
> to weaken since March 9th, one of the afformentioned has made an
> announcement to boost market confidence. If the first announcement
> didn't keep the rally going, another party sent out another booster
> announcement. When the rally seems to be doing well under its own
> momentum, the headlines thin out and things get quiet.
>
> I realize that the Administration is still in campaign mode trying
> to convince American consumers that it's okay to come out again.
> They need us to believe. They need us to spend. If they can just
> make us believe that the economy has bottomed and the recovery has
> begun and if they can continue to manage to keep flooding the media
> with enough positive spin, they really believe that they can turn
> the ship around. They have to believe this because they also believe
> that it is their job to convince us to believe in them.
>
> Well, I'm just not buying it. My real concern here is that what if
> all the public oratory and coordinated press releases are not enough?
> What might they do then? Have they already put plan B into action
> secretly? Who really is buying stocks and proping up the market?
>
>
> I'm sure I don't know and I'm not sure if I want to, either.

Apr 17 01:10 PM

[Maxe Paul:]

I would suggest My Tuey take a good, long hard look at retirement, being a "veteran technical analyst" and all. Because every technical analyst i have seen points to this being a wave two bear market rally in a three wave bear market downtrend.

Apr 17 01:36 PM

[Allan Frain:]

What is unclear is whether, for example, the DOW will next see 7000 or 9000, or whether either will happen within a week or several months from now.

What is clear is that the crash following the misallocations that arose out of the biggest credit bubble in human history was met with the greatest market intervention in human history. It is also clear that the classic role of a downturn--to clear the market of said resource misallocations--has not even begun.

Apr 17 01:56 PM

[AndrewBaker:]

The market is being pumped one way or another by so many self-interested parties, including politicans, bankers, fund managers and others who want a rising market to boost either their own credibility, reputation or bank balance. Asset managers are putting money in knowing that they won't personally be blamed when the next fall happens, and in the meantime the combined action is pushing up stocks despite no real underlying improvement, resulting in other investors deciding to get in before they miss the boat. If you're participating and getting on board, wear a life-jacket at all times!

Apr 17 02:19 PM

[HardwoodFlo...:]

MADHedgeFundBoneHead- markets don't care about your "I only got a magna cum laude in math in college, not the summa cum laude I deserved (my professor didn’t understand his subject and hated me for it)." You see it's what led up to the fall in the market that matters. For months the markets couldn't keep up to the bad news. So the market dropped 60% until it did. Now the economic informaiton is coming out (these are called data points) and they are mixed so the market responds. We are currently oscilating. Whenthe data get's consistent we will go up.

I'm just a dumb wood guy but I at least understand that. I read your posts and the only thin I can imagine you were " cum laude" in was watching spanktravision and telling yourself what a genius you are while you get everything wrong.

Apr 17 03:56 PM

[Alex Filonov:]

I know one thing: this rally is OK while it runs over 13 day MA. So far Dow broke over Nov 20 low, 50 day MA and 8000. I don't think it breaches 200 day MA without significant correction, it it's a bull market. No matter, I'm not selling anything while Dow is over MA13.

Apr 17 08:08 PM

[allforone:]

Bear, bull, buy and hold, short and hold your breath, go long, gold, forex, bla bla bla....
There are 1000 opinions going around on 1000 directions of what the market is going to do the next minute, hour, day, week, month, year, decade.... One of them have to be right - for a while.
The only way to tell if a bear market is over is when it's long over and the shorts have lost everything they gained in the down side. Almost every American is long one way or another in a brokerage account directly, a 401(k) or an employers retirement account. What the shorters don't understand is that they are destroying people's retirements by violently driving down stock prices. Do the shorters care? It doesn't appear they are anything but SELFISH. I wonder if they see their parents, grandparents, uncles, kids futures disappearing for the shorter's cash stealing addictions.
Make the downtick rule more strict or better yet tax short sales profits at 90%. Make it economically unfeasable to destroy the stock market again.

Apr 17 09:52 PM

[allforone:]

I have yet to see a 'rich' stockbroker who got rich off buying and selling in their own account.

Apr 17 10:40 PM

[InvestBaboo:]

Real deal or not those that follow the trend (till the bend at the end!) would have gotten on board and enjoyed a 20% plus return in just a handful of weeks! I picked high beta stocks the moment when they showed multiple buy signals towards end of March so I have enjoyed a near 50% rate of return in just one month. I strictly enter stop loss on every security that I buy. I believe this is the only sane way to partcipate in this market. I somehow can't shake the feeling that we may be looking at a reverse black swan event and that in a year or two most of the distressed securities would perhaps retest their 2007-2008 52 week highs. If that is so you can create generational wealth by taking measured risks (weekly updated stop losses) today that will have a huge payback just a handful of years down the road.

Apr 18 04:25 AM

[Sober Realist:]

Don't let reality get in the way of some short term trading profits on Wall Street. The stock market isn't rational, it is emotional.

Apr 18 08:28 PM

[HardwoodFlo...:]

I'm not a "trader" but there is this facinating guy who does these charts on a site called "afraid to trade" I think it's called. i ended up on the site when i googled 1938 versus 2009 dow. He had done a comparison overlay of the markets- pretty interesting.

It's interesting to check these guys who are chart freaks to see what they think about the market. According to some of them the the S & P will drop to 850 then go back up? I don't know what these charts tell you. It kind of seems like you can see whatever you want to in them.

Basically the market is going to go up and down for a while while trending slightly higher. Eventually, the economic data will gives a clear picture of where we are going then it will either be up or straight down to the abyss. So either you believe we will pull out or we will death spiral.

It's too bad we can't get back to the days when the "dumb" money, like myself, believed we could buy stock in a good company (say McDonalds) think, wow, I own a peice of that company and whatch the stock and invest int he company and believe in it. Instead, we are told by jerks on CNBC to "buy the dips and sell the rips". What kind of "investment" strategy is that?

Can we get back to believing in and investing in American companies for the long haul? Or is that just some romantic notion?

If i think the WII is a great prodcut can i buy Nintendo or should I just stop and buy a spider ETF of some garbage. This is the kind of question and decision this country needs to come to grips with.

Apr 18 11:19 PM

[HardwoodFlo...:]

The whole ETF thing seems like investing for idiots.

Apr 18 11:20 PM

[HardwoodFlo...:]

Allforone- right on! I like what you're saying.

Apr 18 11:21 PM

[Ebi:]

Common sense will prevail in the end.

Apr 19 05:14 AM

[Mutual Fund...:]

It's no wonder that for Mad Hedge Fund Trader and every other investor, pessimisim remains extreme. Certainly investment advisors and the like don't have the answers.

For realistic investment strategies that work and more, see my mutual fund wealth web page...

Doug T.......The mutual fund guy
www.mutualfundwealth.com/


On Apr 17 11:40 AM Mad Hedge Fund Trader wrote:

> The last five weeks have been too painless.Will someone please help
> me out here? Q1 is widely expected to be the quarter from hell, with
> earnings expected to plummet by 38%, and the market rockets 26%,
> the biggest hyperbolic move since 1930. 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 (my professor didn’t understand his subject
> and hated me for it). 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 23 09:24 AM