This Rally Is Sustainable

There have been many articles and posts in the past few weeks that emphatically make the case that the current rally is not sustainable. It’s a “sucker’s rally” they say, a secondary trend within a primary bear market. Opinions run hot. Conspiracy theories abound.

Somebody needs to make the case for the other side. Let’s say that you’ve been appointed to advocate for the other side. You have to make the case that this rally is sustainable, and that in fact the March 9 lows are the lowest lows we will see for a long time. What would your arguments be?

Framing the Issue

To declare the bear market is over (that it ended on March 9), you must show that it has reversed and been replaced by a bull market.

What time frame is required for a bull market? Surprisingly, this question is often ignored, even though it is a core issue. The two sides talk right past each other as they assume everyone is using the same durational requirement.

We do not want to get hung up on semantics, but duration is key. The important question is not whether the current trend is secular, primary, or secondary. Rather, the question is whether the rally is “investable.” That is, can an attentive, sensible investor, without frenetic trading, profit from it because of its length and magnitude?

Most of us require a rally to last more than a day or a week to qualify as an investable trend. Most of us would also accept a rally such as the one between October, 2002, and October, 2007, a five-year period during which the S&P 500 rose by 101%, as investable and as a bull market. (Not everyone does—some see that as a bear-market rally in the midst of a secular bear market that began in 2000 and continues to the present day.)

The popular notion of a bull market is a 20% rise in the general market over some extended period of time. We must get more specific. The well-respected Ned David Research organization uses two definitions: A bull market occurs (1) whenever there is a 30% rise in the stock market over a 50-calendar-day period, or (2) a 13% rise after 155 calendar days.

Under their first standard, we’ve already had a bull market. On March 9, 2009, the S&P 500 closed at 677. On Friday, May 8, the S&P closed at 929. That’s a 37% increase over 62 calendar days (counting the weekend of May 9-10). So the current rally has already met both parts of Davis’ first definition (30% rise over 50 calendar days).

The second definition has not been achieved: That requires 155 calendar days. But it also requires only a 13% increase. So the S&P 500 could fall to 765 (or 18% from where it stood at the open on Monday, May 11) and still meet the requirements of the second definition.

We can’t use the second definition as a benchmark, since our subject of interest is the sustainability of the current rally going forward. But if we tack Davis’ second definition onto what has already been achieved--that is, require an additional 13% rise in the next 155 calendar days--we have an issue that can be debated intelligently.

If we do that, we can frame the question thus: Will the current bull market extend itself, beginning May 11, 2009, such that the market is up at least 13% more over 155 calendar days? That is, will the S&P 500 reach at least 1050 by October 12, 2009? That would certainly be a useful, investable rally. It would comprise a total increase of 55% since the March 9 low and a total duration of about seven months.

Making the Case

The best argument that the current rally is sustainable is that rallies such as the current one have been sustained before, repeatedly. Historically, the stock market has begun its recovery several months before the end of a recession.

Check out these diagrams from the past nine recessions. In every one except the recession of 2001, the market started back up while the recession was still going on. The average from those eight is that the market began its rally about six to seven months before the recession ended.

These diagrams illustrate why the market itself is considered a leading, not coincident or lagging, indicator. (The S&P 500 is one of the components of the Conference Board’s Index of Leading Economic Indicators.)

The “unsustainable" camp argues that the current rally is unsustainable, because the economy is still getting worse. But that is almost always true when the market turns up during a recession. For example, take unemployment, one of the strongest components of a recession, as shown on the diagrams. Again with the exception of 2001, unemployment continued to get worse for several months after the market reached its bottom. In fact unemployment is a well-known lagging indicator of the stock market. For the Conference Board, “average duration of unemployment” is a component of what they call their Lagging Economic Index.

So, if the first leg of our argument is that the market typically starts upward about six months before the end of a recession, the next leg of the argument is to back that up with evidence that the recession may already be in its last few months.

And, in fact, there is some evidence to this effect. While the “unsustainable" camp ridicules this “green shoots” evidence, there are several data points that suggest that the economy may be bottoming out, and that the recession may be over in about six months.

In the May 8, 2009 edition of the Vanguard Economic Week in Review, they stated that “While we're still mired in the recession, there are signs the economic downturn has diminished in intensity. Jobless claims are easing, there is more business activity in the service sector, and construction spending is on the rise. Consumer confidence is still not what it used to be, but consumers are spending slightly more, while still reducing their credit card debts.”

In an article “Spying the Green Shoots,” published May 9, Morningstar’s Robert Johnson (CFA), associate director of economic analysis, stated that he expects the economy to bottom sometime in the second or third quarter of 2009, with unemployment to peak later this year or early 2010. Calling the early positive signs “still fragile” and the current situation “bad,” Johnson wrote, “[W]e must strengthen our financial system and avoid a catastrophic auto industry shutdown for things to continue to improve.” However, he noted that:

• The Institute for Supply Management monthly survey of new orders bottomed in December, with a clearly positive trend since then.
• Initial unemployment claims may have peaked (while the total number of unemployed still rises).
• We are seeing stable to improving commodity prices, with oil up more than 40% from its low and copper up more than 50%, both indicative of an improved demand environment.
• Housing was the key area that drove the economy into recession. Although housing data remain mixed, there are signs of hope: The inventory of unsold single-family homes peaked last summer at 4.5 million units and has subsequently declined to 3.7 million. (A more typical inventory level is 2 million units.) The combination of increasing affordability (median house payments to median income) and the $8,000 first-time homebuyer tax credit are beginning to impact the market.
• In the first quarter of 2009, corporations raised more than $840 billion in the global bond market, more than double Q1 2008. A number of the bond issues were used to retire bank debt.
• Consumer spending rose 2.2% in Q1 2009, following sharp drops of 3.8% and 4.3% in the Q3 and Q4 2008 (seasonally adjusted annual rates). The Q1 increase was not enough to offset bad investment spending numbers, so Q1 GDP showed a 6.1% decline. That said, in seven of the last nine recessions, consumer spending led investment spending by one quarter.
• The University of Michigan Consumer Sentiment Index, which fell to a low of 55.3 in November 2008, has risen in March to 57.3 and again in April to 65.

Many of these same points were also mentioned by Fed Chairman Ben Bernanke in his testimony on economic outlook before the Joint Economic Committee on May 5. Bernanke said:

We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.

The mentions of confidence levels lead to the next leg of the argument that the current rally is sustainable. A bear market is ended by a reversal of the things that caused it. An improving economy bolsters corporate earnings. Investors realize that stocks of good companies have become bargains, and they move in to buy the under-priced stocks. Confidence begins to return, the desire to get back into stocks grows, multiples go up, and the bear market is over. Bull markets are characterized by optimism, investor confidence, and expectations that strong results will continue. The items listed above all suggest that such a turn in investor and consumer confidence may be taking place, despite the continued troubled state of the economy at the moment.

And speaking of valuations, there is still room to run for many stocks. Turning again to Morningstar, they maintain a clever Market Valuation Graph that compares actual current stock prices to what they compute (using discounted cash-flow techniques) are the current “fair values” of the same stocks. For all the stocks they cover, that current ratio is 91%, meaning that they believe that all the stocks they cover (about 2000) are about 9% undervalued. For stocks they consider to have a “low” uncertainty in fair value, the ratio is 78%, meaning by their calculations, those stocks are 22% undervalued. P/E multiples have been rising during the current rally, which is another characteristic of bull markets.

A fourth argument can be made based on simple technical concepts. During the current rally, the S&P 500 Index has climbed up through its 20-day and 50-day simple moving averages (SMAs). It is approaching its 200-day SMA. The 20-day SMA made a “golden cross” upward through the 50-day, generally a bullish sign. This happened about five weeks ago. While the 200-day SMA can be (and is) seen as a barrier (“resistance") by the “unsustainable" camp to further upward movement of the index, it is certainly possible that the index itself, and then the shorter SMAs, will cross upwards through the 200-day SMA. If they do this, it will be a powerful technical signal that a long-lasting rally—a bull market—is taking place.

Final Summary

While the bearish point of view certainly has strong adherents and plenty of evidence, the bullish point of view has growing evidence too. To repeat, the strongest argument that this rally is sustainable is the historical pattern that bull markets start about 6 months before the end of recessions, backed up by growing evidence that the current recession is in its final months.

Anybody who claims to know whether this is a bear-market rally or the end of the bear market is blowing smoke. Nobody knows at the time it is happening. The best anyone can do is make educated guesses, based on technical analysis, fundamental analysis, or whatever.

Disclosure: The author cautiously believes that the current rally is sustainable. He is long SPY, with fairly tight sell-stops.

Comments

[iknoknot:]

thanks for an interesting read. i like the change of tone from this year's usual, and appreciate the substance behind it.

but as this market goes, i don't trust it as being much other than TARP/TALF money being laundered into the market via the recipient institutions, so they can issue inflated shares to cover their mistakes...

If this were a fundamentals based rally, where the values seemed like 'deals' based on quarterlies and systemic indications, i'd be more inclined to believe that this run is more like the other recoveries, but i don't see it that way at all. not only are the indicators still horrid, but the momentum is still way too strong in the wrong direction.

To be sure, your indicators are the right ones to watch - but i don't think 'less bad' is good enough to bet on. yet.

best wishes,

--ikk

May 13 06:25 AM

[Moon Kil Woong:]

I am with iknotknot on the belief this rally is mostly money looking for a home in light of signals of future inflation. That means people who invested in long term bonds are looking for a way out.

I am skeptical that the economy is bolooming again. We all knows what a boost low interest rates were to preventing the economy from sliding down further. The reverse is a drag on the economy of an equal or greater magnitude when inflation and interest rates start rising.

If I was a holder of long term bonds, I'd be sweating profusely. Especially, if they were US Treasury bonds.

Thanks for the article. It is much more thought provoking than others I have read recently. I agree that the stock market can rise devoid of an economic recovery, either in expectation of one or simply because of money flows to it relative to other investment vehicles. After all, it's all about how much money is going into or leaving it and how many new shares are being added. Keep your eyes on supply and demand.

May 13 07:03 AM

[socrateazz:]

The movement of the market should have a strong correlation to the amount of new available cash to invest and the number of people who have changed their view and in what direction the market will move over the past Hour, day, week . . . If you know that, you know what tghe market will do. The Low market was marked by most people believing the economy was terrible. Even a very little opposite evidence will cause a reversal at that point. I think this is a propaganda ralley. As I believe most of the drop in January and febuary were propaganda induced drops. Ironically caused by the same group of people. Momentum is currently up. sentiment is not extreme. And there is wealth waiting to get in. All indicate a raise from this level. On the negative side Less bad does not mean better except for propagandist. There is no real incentive for businesses other than to survive. That will not create any jobs. squeezing more wealth out of businesses who have already been squeezed for wealth for twenty years does not help the overall economy. I expect the current Leaders to blame everybody and anybody for the future economy. Next I expect that leadership to increase control of the economy thinking the problem is because of some arbitrary other group or person. I doubt the leadership will realize they themselves are the problem at all. Hitler did not believe it! Castro does not believe it! Chavez is still trying to solve the problems he has helped create. They all found their people or groups to blame. Ironically, Blaming wealth creators still will not work. If I am right abouit Obama (and I hope I am wrong) controling groups like media and wealth distributors (banks) is their goal currently. When that does not work as expected, Additional control like car companies and insures is the next target. When that fails, then the need would be to control dissidents. You know who does that. Obama could surprise me, but I think I am right. Time will tell.

May 13 07:32 AM

[One Eyed Guide:]

Good analysis but it lacks discussion of fundimental valuations of stocks. When corporate earning start growing (actually, 6 months before this as a leading indicator) the market will start to go up in a sustatinable rally. Until earns turn we should see PE valuation declines which will make the rally unsustainable. (PE declines when the expecation is profits are declining and expands when the expectaiton is earnings growth. The higher the growth expectation, the higher the PE, more or less.)

There is a chart of the S&P500 PE bottoms at seekingalpha.com/insta... which might be a bit pessimistic but does show that we are far from a historical bottom.

May 13 07:48 AM

[djc:]

When the you say the numbers getting less bad, and therefore bottomming, I think the picture needs still more context.

Getting better than what ?

So in a complete stall, the numbers were going /straight down/ in a panic due to the credit crisis -- how can they /not/ get better than straight down ?

Im of the opinion that the various numbers getting better doesnt mean anything other than the fact that business isnt going to completely /stop/, as the trajectory indicated in the beginning of this crisis.

The numbers are still very bad, and destined to have encouraging 'blips' -- but overall, with no income replacement for consumers (no job replacement), the overall trajectory of this economy is down. With no one to buy up the real estate overhang (both commercial and residential), then we are going to end up levelling off (relatively), and then continue down in a slow grind.

With taxes, inflation, government spending, entitlement programs and governmental business controls all going up, how can we make an argument that the market has anywhere to go in at least the medium term -- especially when stocks are probably a little overvalued in a murky earnings environment which is most likely to contract yet further ?

Further, with the mistrust of wall street and its oversight (if the common man/woman knew half the shit that goes on in the markets theyd be scared away for life), why would an aged boomer population have anywhere near the risk tolerance required to trust their hard-earned savings to this contrived market ?

Grind. Down.

May 13 09:15 AM

[HiSpeed:]

We'll see how much more the market goes with 500k-600k folks joining ranks of the unemployed every month. Unemployed folks are more likely to sell stocks and pull funds out of their IRAs just to make ends meet. Not a pretty situation.

May 13 09:24 AM

[Maxe Paul:]

If i ever did murder 5 people, rape several women, burn a families house down while they were asleep or swindel investors out of billions of dollars.................. WOULD BE MY LAWYER!

You ALMOST had me believing your argument!

May 13 09:41 AM

[Maxe Paul:]

If i ever did murder 5 people, rape several women, burn a families house down while they were asleep or swindel investors out of billions of dollars.................. YOU WOULD BE MY LAWYER!

You ALMOST had me believing your argument!

May 13 09:42 AM

[David Van K...:]

Thanks for the comments. A couple of observations:
1. I'm making a case here. The investing public is the jury. That said, I'm buying the case cautiously. I am about 30% invested now after having been all cash for many months.
2. I agree this is not a fundamentals-based rally. It is an anticipatory rally by investors who think (or just hope) that the economy will get better in the next few months. If you don't think that, it is hard to justify buying stocks at the current time, unless you have a very long-term outlook and can afford to withstand some losses in the meantime.
3. Knot, I think the momentum (I'm talking price momentum here) is in the right direction over the past 8 weeks. If you're referring to earnings momentum or some other "fundamental" measure that might drive a rally, the data is mixed at best.
4. One-Eye, thanks for the great chart. I encourage everybody to look at it. I agree that the current P/E level does not touch the bottoms reached in 1921,1932, and 1981. But there have been many more investable bull markets than three in the last 120 years. For example, from your chart, the bull market mentioned in my article (2002-2007, 101%) was preceded by a low P/E of about 21. And the S&P 500's P/E ratio has been steadily rising. I track that on my own Timing Outlook (sensiblestocksblog.blo.../
). During this rally, the P/E has risen from about 12 to about 17 (per Morningstar).

May 13 09:51 AM

[David Van K...:]

Maxe,

Thanks. I felt like someone ought to take the other side, I just got tired of reading all the negative stuff. Consider me a court-appointed attorney for what may be a lost cause. And if you do all those things, yours will be a lost cause.


On May 13 09:42 AM maxe wrote:

> If i ever did murder 5 people, rape several women, burn a families
> house down while they were asleep or swindel investors out of billions
> of dollars.................. YOU WOULD BE MY LAWYER!
>
> You ALMOST had me believing your argument!

May 13 09:57 AM

[Henrique Si...:]

I think to be long here is insane, but with tight stops even more so.

Markets are being pushed up by hope and when fear reappers, and we can already see some fear back in the market, your longs positions will obviously be stopped. Probably they have been stopped already by now.

Regards

May 13 10:13 AM

[Harry Tuttle:]

While it is true that the market tries to discount the future there is no evidence that it has any ability to accurately do so. The market is the aggregate sum of the beliefs of the managers, most of whom are under pressure to "not underperform their peers" and are bullish by nature.

If the market correctly discounted the future, it would have gone down in the period July-Oct 2007. Instead, it made new highs.

May 13 10:16 AM

[Canbyte:]

His disclosure tells you what he really thinks! Just another momo player trying to get YOU to be the next sucker.

May 13 10:25 AM

[Jeff Nielson:]

Sorry, but this "rally" is 50% propaganda, and 50% Plunge Protection Team. It sounds like you could use a large dose of REALITY.

I recommend John Williams' site: shadowstats.com. Take a look at REAL numbers - and that should be all it takes to bring you back to Earth.

The U.S. housing collapse isn't half-over, and forget about ridiculously fabricated employment "statistics", the U.S. is actually on course to lose 20 MILLION jobs, this year alone.

Finally, the U.S. government cannot AFFORD for this "rally" to continue - as it would result in the Treasuries "bubble" deflating - as people move out of bonds into equities.

The U.S. government CANNOT prop up the USD, the bond market, AND equities all at once.

May 13 10:27 AM

[American in...:]

David,

The problem is that this is not an ordinary recession. In particular, it is difficult to believe the banks have so rapidly returned to health. In fact, given the culture of denial, it is much more easy to believe that banks will announce more losses (not anticipated by the vast majority of stock investors) and that this will push the economy down again.

You cannot understand this recession without looking Japan's Lost Decade.




On May 13 09:57 AM David Van Knapp wrote:

> Maxe,
>
> Thanks. I felt like someone ought to take the other side, I just
> got tired of reading all the negative stuff. Consider me a court-appointed
> attorney for what may be a lost cause. And if you do all those things,
> yours will be a lost cause.

May 13 10:45 AM

[Glen L.:]

Economic fundamentals always trump bull and bear markets, which are always lagging economic reality. We are in deep recession, with the housing, auto, and banking sectors - the 3 biggest in the private economy - in depression. Government debt is out of control and private debt is not far behind. The Fed is frantically - really, Bernanke is panicking, in spite of his outward calm demeanor - trying to blow another bubble to forestall the ultimate collapse for a few more years. What's to be bullish about?

Sure, you can make some money through intelligent day-trading and market timing (i.e. pure luck), but reality is what it is, and for the time being, it sucks.

May 13 10:57 AM

[Sasha B:]

I like the article and for the most part I agree with the analysis. The part I disagree with lies here "backed up by growing evidence that the current recession is in its final months". There are signs of it, but no evidence yet; and because there is no hard evidence all rallies are speculative and not sustainable.

May 13 11:19 AM

[Missing_Link:]

David, good article, but I think the weight of the evidence is clearly against your argument.

On May 13 09:51 AM David Van Knapp wrote:
> 2. I agree this is not a fundamentals-based rally. It is an anticipatory
> rally by investors who think (or just hope) that the economy will
> get better in the next few months. If you don't think that, it is
> hard to justify buying stocks at the current time, unless you have
> a very long-term outlook and can afford to withstand some losses
> in the meantime.

All the evidence I see is that the decline of this depression (I don't think we can use the 'R' word any more) is not losing steam; it's accelerating in almost every category.

A big part of the decision about how to invest needs to be about risk. I think the risks, both for the economy and the stock market, have grown dramatically since the start of the 2008 decline, and this continue will further impact the market as investors realize how much risk still remains.

This recession has been a series of bubble-shaped rally-and-decline patterns -- April '08-July '08, July '08-October '08, October '08-November '08, November '08-March '09. The pattern is pretty obvious in retrospect.

www.google.com/finance...

Everything between March '09 and today looks exactly like the left half of one of those 5 other bubbles. If that's the case, then last Friday was likely the peak, and the right half of the bubble can't be far behind.

May 13 11:31 AM

[Steven Vincent:]

I think that those making a bearish case may be fighting the tape. Like Jesse Livermore said, "Don't argue with the tape". It has also been said that the market can remain irrational a lot longer than you can remain solvent. It may not seem to make any sense that the markets are going up, yet they are. Livermore also said that the reason for a market move would reveal itself in due time. And let us not forget his most important advice..."There is only one side to the market...not the bull side or the bear side but the right side". The trend is your friend, just follow it where it leads. Check out my recent article for another view on why the bullish side may in fact be the right side. Click on my Instablog.

May 13 11:40 AM

[jambo:]

All of the charts and well reasoned words- alas it all comes to one sad fact; for the 'rally' to continue there must be an infinite number of small to medium players who drink the kool-aid and invest in an economy operating on a tiny fraction of it's manufacturing base. One that is shipping progressively fewer goods and laying off ever more workers. One that has an amount of financial (subprime lending) carnage waiting that is as great as that which has passed. One whose government subscribes to the 'bootstrap theory' of printing ever greater sums of money in the absence of buyers for their bonds, a policy KNOWN to destroy a currency.
They print fiat cash as a supposed avoidance of a bit of deflationary pain. Its like taking financial heroin! We dont need a rally here, we need a detox program.
That does not appear to be sustainable to reasonable folks, no matter how much we wish it to be so.

May 13 12:10 PM

[Archman Inv...:]

<<In an article “Spying the Green Shoots,” published May 9, Morningstar’s Robert Johnson (CFA), associate director of economic analysis, stated that he expects the economy to bottom sometime in the second or third quarter of 2009>>

Yes the same Morningstar that had 5 star ratings on all the banks (yes even Countrywide) as they were falling 95%, out of the sky.

The same Morningstar, where it's all star statesman Pat Dorsey, back in 2007 said the builders (housing market) were never going to be in trouble. He stated "It just aint gonna happen. They are very well diversified geographically, etc, etc"

I think we need to move away from this bull market / bear market system of trying to judge where the overall market is going, and just stick with individual companies. Especially now that the market has evolved over the past 25 years from being a somewhat free market, to being a market run by hedge funds, the Treasury and the Fed w/ all it's partner trading desks (GS MS BAC C ETC)

The market is pretty much where it was a decade ago. Sure, it could run up again during this decade, then reach it's old highs. However it would be a shame if it feel apart again and came right back down to these levels. Then you would have 20 years of zero return for the markets.

May 13 12:53 PM

[Radardoc:]

Thanks for the well presented piece David.

Back in school, I had a statistics professor that always warned us youngsters as follows:
“Pick a topic, tell me what side I represent, and after some reasonable research time, I’ll “prove” that argument with a blizzard of numbers and charts.”

We see the truth in that observation every day from arguments on global warming, politics, and most of all in economics. My basic observation, albeit a pessimistic view, still remains valid (in my humble opinion). Skyrocketing unemployment, artificially solvent banks (if their assets were valued at market price, they’d be gone.), the media putting the spin on any bad numbers (“We only lost a half-a-million jobs this month, what great news!” “Median housing prices off by only 13% YoY!” etc. etc. etc.). If this rally is so strong, why do I see so many SEC filings by corporate officers cashing out their stock options? Where is the confidence?

This rally is (IMHO) a suckers rally. There is money to be made, so if you have the huevos and expertise, go fleece them sheep! I lack both, so I’ll watch the carnage from the sidelines.

Please, God, let me be wrong.

May 13 12:55 PM

[Market Sniper:]

Good piece, David. Every bear market has its rallies and this one is historical, no doubt about that. Picking bottoms and tops is a fool's exercise and on that exercise, no money should be placed. Bottoms, like tops are a process, not an event. Personally feel that this has been a "sucker's" rally as they say. Bear market rally until proven otherwise.

May 13 01:19 PM

[Missing_Link:]

On May 13 11:40 AM Steven Vincent wrote:
> I think that those making a bearish case may be fighting the tape.
> Like Jesse Livermore said, "Don't argue with the tape". It has also
> been said that the market can remain irrational a lot longer than
> you can remain solvent. It may not seem to make any sense that the
> markets are going up, yet they are. Livermore also said that the
> reason for a market move would reveal itself in due time. And let
> us not forget his most important advice..."There is only one side
> to the market...not the bull side or the bear side but the right
> side". The trend is your friend, just follow it where it leads.
> Check out my recent article for another view on why the bullish side
> may in fact be the right side. Click on my Instablog.

Yes, but the tape has changed direction since Friday.

Since the decline started in '08 we haven't seen the market move in straight lines in the short term; we've seen 1-3 month bounces in the shape of an overall decline. The 'trend' that I can identify is an overall downward trend comprised of bubbles, with the current "rally" looking like nothing more than the left side and center of a bubble-shaped bounce.

May 13 02:14 PM

[Yoon Kim:]

>Author's Disclosure: The author cautiously believes that the current
>rally is sustainable. He is long SPY, with fairly tight sell-stops.

Did you hit your sell-stop today?

May 13 02:40 PM

[Missing_Link:]

On May 13 12:55 PM Radardoc wrote:
> Back in school, I had a statistics professor that always warned us
> youngsters as follows:
> “Pick a topic, tell me what side I represent, and after some reasonable
> research time, I’ll “prove” that argument with a blizzard of numbers
> and charts.”
>
> We see the truth in that observation every day from arguments on
> global warming, politics, and most of all in economics.

Recommended reading: Darrell Huff's "How to Lie with Statistics"

www.amazon.com/How-Lie...

May 13 03:18 PM

[David Van K...:]

Thanks to those of you who wrote thoughtful comments. Here are a few more thoughts triggered by yours:
1. Henrique, I'm confused by why you think being long with sell-stops is more insane than being long without them. I'd love to hear your reasoning.
2. There seems to be interest on whether my sell stops have been hit. They have not. Perhaps we differ on what a "fairly tight" sell stop is. I'm using 8%. (Normally when I'm long, I use 15%-20%.) I've made 8 smalll purchases of SPY beginning on April 2, with the last one today. Their results vary from being up 6.4% to down 2.7%. The first couple of purchases are already guaranteed to be profitable, the rest are not.
3. Paris, I agree that this is not an oridnary recession, and I'm not convinced either that the banks have suddenly returned to health. I think it's almost impossible to state exactly what the effect of all the government intervention has been and will be. That said, I think every recession has its unique characteristics. I was looking across the market "versus" recessions as a whole and extrapolating from there. Maybe this time it's waaay different. Time will tell, right?
4. Anyone who thinks I wrote the article believing I think I can move the market in my favor with a simple article on Seeking Alpha is intellectually challenged. I write in good faith and try to be fact-based. Personally, I put more, not less, credence in articles where the author's disclosure indicates that he has some money where his mouth is.
5. Sniper, a sucker's rally to some is a profitable opportunity for others. As stated in the article, it all depends on your time frame. You say it's a sucker's rally until proven otherwise. For you, what would "prove otherwise"? I stated my parameters. What are yours? Five months? Nine months? Five years? A decade?
6. Those of you who think March 9 to the last Friday looks like the left side of previous short-lived rallies, I agree completely. And they all will, until the one that doesn't, i.e., the one that keeps going.

May 13 03:33 PM

[Thinkr:]

i think all the negative commentary about this rally here and elsewhere signifies is that there is an incredible amount of latent fear in investors. Fear of (1) losing out on an historic investment opportunity if this rally turns out to be the real deal (which is what causes and thereafter drives it) and (2) fear that it is not the real deal. Point being, the market is being driven by fear, and the propensity of investors to "spook" at any opportunity, including this down week, should not be underestimated.

Buyer beware.

May 13 03:59 PM

[Andrew Butter:]

Would you like to take care of this darn cat that has been round my place that was supposed to be dead?

I suppose next thing you are going to say gold's going down?

May 13 04:03 PM

[Socialism c...:]

Right. Good luck with that!

1) Retail took a dive in April.
2) AIG CEO comes out today saying they are still loaded with all kinds of "toxic assets"...basically, will need much more $$$, or we all face the consequences.
3) Real estate is NOWHERE near the bottom, for either residential or commercial.
4) The "tax & spend" policies of the Democrat-Socialist party have hit hyper-drive since January -- this is debt that will drag the U.S. down for decades. (And no, I do NOT condone Bush's deficit spending...but the last 2 years of his admin were Pelosi-Reid budgets, and Obama has QUADRUPLED the Bush deficit in just 4 months!)
5) Demographics -- boomer population nearing retirement; where's the earning (and therefore tax-paying) base?

We are in some SERIOUS dunghole here.

May 13 04:45 PM

[msgtb:]

Using Bernake as a profit of what is to come is a complete failure to monitor history. He has been 100% wrong since the start of this disaster, why should anyone believe him now?

May 13 05:35 PM

[Tony Petroski:]

The bears always ridicule the "sheepul" and "lemmings rushing over a cliff," but when I read these (admittedly few) bullish articles, the bears always outnumber the bulls by at least 10-1. Who is running with the crowd?

May 13 05:37 PM

[mrmillergd:]

"The best argument that the current rally is sustainable is that rallies such as the current one have been sustained before, repeatedly. "

My rebuttal, sir:

"Past performance may not be indicative of future results."

May 13 06:42 PM

[Old Trader:]

I agree with the author's contention ( also made by many others in different places at different times) that market can turn upward while the economy is still in recession, but the key, imo, is trying to discern just how protracted this slump (using a charitable term) might be. While some economists are calling for a positive GDP number by Q3, there are at least as many, if not more, calling for that to occur in Q4, or even Q1-10.

I'm definitely "trading" this rally, both up and down.

May 13 07:08 PM

[jgbooker:]

My own investigation using statistical analysis of technical data shows this definitely to be a bear rally. You want to be nimble in order to protect the gift that spring has given you.

May 13 07:39 PM

[aarc:]

Hold off guys.

He is right. This "crisis of the 21st century" is investible. Actually much more investible (for me at least) than the numerous recessions of the past outside of the 1929 to 1932 meltdown.

How many times in the 20th century did a "crisis of the century" happen similar to that of 1929 to 1932?

How many times in the 21st century will there be "crisis of the 21st century"?

The biggest problem is timing in order to be able to maximize the potential profit if the markets recover and/or minimize the potential loss just in case this crisis turned out to be Japan Part II or Great Depression Part II.

If the fundamental problems have not been so great, we will not have this kind of stock market meltdown. If the stock market did not collapse as it did last year, consumers will not go into a massive spending crunchdown and we will not have this 600,000+ monthly unemployment rate. There will always be domino effects during recessions, deflations, or depressions. The difference is how big were the dominos in each occation? The bigger the dominos, the harder they fall and the harder to put them right back up again and the more resources needed to repair them and to support them in order for them not to fall again in the future.

Then there is a big problem with those statisticians.

They simply put 30 chickens, 10 pigs, 10 dogs, 1 elephant and 2 girraffes into a big weighing scale and say the average weight is 30 lbs and the average height and lenght are this and this. Then they average how fast they can run too or how tall they can jump and develope some kind of metrics and say if any of those animals can jump "?" feet it is healthy, if not it is unhealthy. If any of those animals can run for "?" hours, it is healthy, otherwise it is not.

There must be something wrong with those metrics. Can you believe those metrics when they say the average weight is 30 lbs and any able bodied person can carry that load on his/her back?

Try first with the giraffe and and see how you fare. How about the elephant? 30 lbs they say. Do it!

Also, are you going to build a holding pen based on the average height and lenght of those specimens? What is the probability you will be able to fit the elephant into your holding pen?

May 13 10:31 PM

[VP of Commo...:]

Back to cash at the open this morning... Reading all the bearish comments makes me feel all warm and fuzzy inside... Or maybe it's the beer...

May 13 11:07 PM

[ramblingtwreck:]

Good read. And, many of the comments are dead on. The fundamentals are absolutely all twisted up, right now. Cooked bank books. Puppet politicians. Corporate America on the dole. Smoke and mirrors reign. The whole thing is nuts. But this is our reality. Better get used to it.

The bottom line is this: what we 'think' doesn't matter. Price is always right. And, more importantly, perception is the new reality.

Time to wake up to Al's specially brewed age of turbulence.

It is very interesting to note that the author's maximum allowable retracement for a bull to stay intact also coincides with the Nov 2008 low (~750).

From a charting perspective the most relevant reference is the 1974-1975 time period when the S&P dipped well below it's 200sma on the monthly chart. Then it turned around, headed north and never looked back. Might happen again, too. Might not. We'll see.

On a Daily timeframe, the last time the 50sma crossed up over the 100sma was one year ago (week of May 19, 2008). At that time the 100sma was still angled down pretty sharply, though, and when price bumped it's head on the 200sma it went comatose and broke down from there. This year, the main difference is that the 100sma has already flattened out and is actually beginning to turn up a little. So, the rally may be taking a little breather while it thinks about making a fresh run at the 200sma. Again, we shall see. Meanwhile, let's look at what price does when it meets up with the 50 crossing up over the the 100. Will the 50 kick and shove price up through the 200 in the coming days, or not? That's the whole key to the bull / bear debate.

Until then, the fate of the world hangs by a few threads; or in this case a few squiggly lines.

May 14 12:17 AM

[Fighting Yoda:]

This is (rather was now) suckers rally. We are in a structural downturn - everything will reset to much lower level - auto sales, housing, consumption, household debt delevaraging,....

Krugman Says Global Economy Facing Japanese-Style ‘Lost Decade’ - Krugman form Beijing
"...The world economy may face near- stagnation for 10 years similar to Japan’s “lost decade” in the 1990s.
In some ways, the global recession is “worse than Japan in its lost decade” because the initial slump was deeper and, unlike Japan, the world can’t trade its way out, Krugman said. “If the world as a whole is going to run a large trade surplus, we have to find another planet to trade with....”

We are not going to see home ATMs likely ever again, or 10-12 Mi car sales for a very long time. Looking at technicals and historical patterns will not provide a good forecast. Most importantly if this rally fails (it is likely failing as I write) - investors will throw in the towel - total stock aversion risk aversion will set in.

We will retest the lows and go well below them.

May 14 03:08 AM

[User 305589:]

Good artcile, well written, even though I disagree with the conclusions drawn
I am getting more and more convinced that this rally will have more legs and last longer than most people imagine and could - with corrections along the way - carry well into 2010. A year or more after the march09 lows and 60 - 100% higher than where the indexes stood back then it must be the real thing, no? or so the thinking might go next year in May. But then, when the economy fails to continue to recover and the govts 'stimulus' and banking subsidies along with crashing tax receipts suck up tons of money and savings the bulls' house of cards will come down, finally. The 'tons of money' sitting on the sidelines may not be as big as people want to believe - certainly not in relation to the govt's financing needs and the asset destruction that occurred and to the continued deleveraging that is going on.

May 14 07:53 AM

[bartpr:]

during the depression in 1933 fdr had a new deal of gov spending to kick start the economy. stock bottomed before the economy started growth in 1934, 35 ,and 36. could it be that this stimilus(3X the fdr, adjusted for inflation) will also lift the market more.

remember the market was up in 1934,5,and 6 by some 100%.
gov spending has proven to lift the economy.

May 14 08:15 AM

[Johan Axelsson:]

Very good article. I'm still a bear but this was well written and researched. The problem I see is that the current prices are inflated by the actions taken by the US Government (changing accounting rules, buying "toxic" assets and hindering bankruptcy of auto makers to name a few) and I think this will dawn on the general populace soon enough (of course the Fed and the financial elite at Wall Street already know).

May 14 09:26 AM

[dhatfield:]

I'm not one by nature, but I hope the long-term bears are right. I have a 40-50 year investment horizon to think about and I need time to make money to invest. Sadly for me, the boomers will wake up and realise that investing at 3-5% above inflation for the 10-20 year span of their retirement beats sticking it in the mattress, but I hope not.

That said, I'm long stocks with yields and/or heavy international exposure. All bets are off regarding the dollar. If your personal geographic horizon stops when it hits the sea, or your investment time horizon < 5 years, panic. Please.

May 14 04:23 PM

[consumerons...:]

I hope the majority of you are right. Down we go? Wow, I hope so! Ready to buy a lot more. Let's do it!

May 14 10:32 PM

[consumerons...:]

Remember when you were little and your big brother used to scare you after the lights were out so he could take your candy while you were hiding your head under you pillow? You guys are scared of the monster in the closet and some of us are lovin' it.

May 14 11:05 PM

[cayman:]

Well now in November you were spot on with your unbiased look at things. Care to do a follow up regarding the sustainability from here on in upup and away or a double dip.

The employment situation this time is different fom the previous recessions, 10 % adn the time unemployed is longer too. surely this must have some effect ???

Nov 11 03:02 PM