Bear Market Rally, or New Bull Market?

That the market would eventually pull back after rallying 40% off the lows was the easy trade. However, in the coming weeks investors will need to decide if this is indeed the start of a new bull market or a bear market rally.

I am in no rush to make a decision as I believe that even if this is a new bull market that this correction has further to go. After a two month 40% run, I would expect a correction that lasts at least a few weeks.

In the past two weeks we have seen companies issuing shares at a record pace. The flood of equity issuance is set to continue in the coming weeks, albeit at a slower pace. This supply should keep a lid on the market. Given that I believe that the upside is limited in the short term, there is little harm in waiting a few weeks to see where this correction will take us.

While a bull market from these levels would not likely go very far, I don't want to rule it out. The Obama stimulus should start hitting the economy this summer, while the Federal Reserve is printing money. There is no precedent for such action. At the same time I don't want to rule out revisiting the lows. For now, I am biding my time and keeping an open mind.

Disclosure: Short SPY.

Comments

[Fighting Yoda:]

Fundamental news on the economy is all bad, the greenshoots are all yellow and qucikly dying. You can trade the market on technicals only- if you believe in stuff like that.

Currently S&P @ 882 is still above 50d ma and 20d ma - clearly a bullish sign. Close below 881 (20d ma) would be short trem bearish, close below 832 (50d ma) medium term bearish. At this point we are trending down (we could not berach or reach the Jan 5 high of 835), so reversal is what you have to watch for- RSI in 30s would be a good sign.

May 18 03:20 AM

[jeandit75:]

Forget the technicals buddy, the economy is so bad that the market can't keep on rallying. That's that simple.

May 18 03:32 AM

[donfm:]

We've been in a bear market rally this entire decade. Along way to go to reach the highs of the late '90's. With inflation looming on the horizon, look for a sideways market for the next several years.

May 18 03:48 AM

[ecoco:]

All depends, if you are a long termer it is time to buy and wait, records will always be broken, in 1,2,4,8 years you will see DOW 14000 and S&P 1500.
Recovery is coming and the present recession is part of the economic cycle to weed the bad out of business and set better and more stringent rules.
The previous lows assumed a failing economy; the previous 40% rally is presently at 20% and is technically establishing a base. You will see SPY 100 by year end; presently the SPY @PE 12.00 and 3% yield is a bargain considering many factors including bad earnings and interest rates.
You can't afford to sit on the sidelines; there is plenty of cash earning close to nothing waiting for the first hint to move the market up by another 40%

May 18 04:46 AM

[Prudent Man...:]

The question is: Where is the growth?

Unless a company is showing growth there is no reason to buy there stock. Dividend? Maybe until competition comes in and cleans their clock - see Automobile Sector.

If we are in a period of diminishing economic declines is that a reason to invest in equities especially when we have an anti-business Administration and Congress? Another maybe. Possibly there will be a few companies (the best will be private not public for obvious reasons) that will be able to grow but the "market", doubt it. Too much risk: financial, political, credit, secular economic, etc.

Sidelines only risk is missing a move. But, you still have your money and can get a reasonably good nights sleep.

"You can't afford to sit on the sidelines" is irrational. Sounds as though one must always be in stocks which is one of the biggest losers game outside of Vegas. Only a naive lemming would believe that. Missing a market move is like missing a bus; another one will come along.

May 18 09:58 AM

[ecoco:]

I agree with every word you said if we are at SPY 150.

The world is full irrational investors that took 4 years to realize Greenspan’s irrational exuberance. The present valuation levels are for a highly discounted failing economy, and any recovery will exhibit the required growth.

Recession will weed the bad out, meaning less companies, less manufacturers, less banks and LESS COMPETITION, leading to a higher efficiency, better margins and growth potential for the remaining good.

We have been through this before and sooner than later it will be over. The Recession will not last forever, only a naive lemming would believe it will.



On May 18 09:58 AM Prudent Man CFA wrote:

> The question is: Where is the growth?
>
> Unless a company is showing growth there is no reason to buy there
> stock. Dividend? Maybe until competition comes in and cleans their
> clock - see Automobile Sector.
>
> If we are in a period of diminishing economic declines is that a
> reason to invest in equities especially when we have an anti-business
> Administration and Congress? Another maybe. Possibly there will be
> a few companies (the best will be private not public for obvious
> reasons) that will be able to grow but the "market", doubt it. Too
> much risk: financial, political, credit, secular economic, etc.<br/>
>
> Sidelines only risk is missing a move. But, you still have your money
> and can get a reasonably good nights sleep.
>
> "You can't afford to sit on the sidelines" is irrational. Sounds
> as though one must always be in stocks which is one of the biggest
> losers game outside of Vegas. Only a naive lemming would believe
> that. Missing a market move is like missing a bus; another one will
> come along.

May 18 12:03 PM

[thiazole:]

Which fundamentals are you talking about? All the important fundamentals (like retail sales, industrial production, durable goods, etc) have shown month over month improvements since they reached their peak contraction point during the Q4 2008 and Q1 2009. There is no way based on the data that the quarterly GDP contraction will be anywhere near as bad as it was during the past 2 quarters. Q2 2009 will almost certainly still show contraction, but it will be much smaller - maybe 2 or 3%. Based ont that trajectory Q3 2009 will be 0%, but keep in mind there will be the equivalent of 2.8% of the GDP in stimulus that will be included in Q3, so we will actually likely see significant GDP growth in Q3. Since the market almost always bottoms 6 to 9 months before the end of the recession, and Q3 will be called the end of the recession, a March bottom makes a lot of sense.

Now whether this correction will last longer or not is debatible.


On May 18 03:20 AM Fighting Yoda wrote:

> Fundamental news on the economy is all bad, the greenshoots are all
> yellow and qucikly dying. You can trade the market on technicals
> only- if you believe in stuff like that.
>
> Currently S&amp;P @ 882 is still above 50d ma and 20d ma - clearly
> a bullish sign. Close below 881 (20d ma) would be short trem bearish,
> close below 832 (50d ma) medium term bearish. At this point we are
> trending down (we could not berach or reach the Jan 5 high of 835),
> so reversal is what you have to watch for- RSI in 30s would be a
> good sign.

May 18 12:19 PM

[thiazole:]

Very true. You'll find that most of the people here drink the "this one is different" Kool-Aid and won't respond to reasoning that applied to every other recession in the history of the US.


On May 18 12:03 PM ecoco wrote:

> I agree with every word you said if we are at SPY 150.
>
> The world is full irrational investors that took 4 years to realize
> Greenspan’s irrational exuberance. The present valuation levels are
> for a highly discounted failing economy, and any recovery will exhibit
> the required growth.
>
> Recession will weed the bad out, meaning less companies, less manufacturers,
> less banks and LESS COMPETITION, leading to a higher efficiency,
> better margins and growth potential for the remaining good.
>
> We have been through this before and sooner than later it will be
> over. The Recession will not last forever, only a naive lemming would
> believe it will.
>

May 18 12:22 PM

[AndrewBaker:]

This time it is bad.

May 18 04:09 PM

[Fred Voetsch:]

"The Obama stimulus should start hitting the economy this summer, while the Federal Reserve is printing money. There is no precedent for such action."


Actually there is: in the early days of the Great Depression the government did everything it could and managed to accomplish nothing. As we have seen now the government actions have only succeded in moving private debt to public and in bailing out massive failures so that those with sound business models will not have the opportunity they otherwise would.

Here is a quote from a White Paper by Martin D. Weiss, Ph.D.

www.moneyandmarkets.co...

"In the 1930s, I was tracking the facts and the numbers as they were being released — to figure out what might happen next. I was an analyst, and that was my job. So I remember them well.

“Years later, economists like Milton Friedman and my young friend Alan Greenspan looked back at those days to decipher what went wrong. They concluded that it was mostly the government’s fault, especially the Federal Reserve’s. They developed the theory that the next time we’re on the brink of a depression, the government can nip it in the bud simply by acting sooner and more aggressively.

“Bah! Those guys weren’t there back then. When I first went to Wall Street, Friedman was in junior high and Greenspan was in diapers."


Once again we see bad data as well as opinions based on ignorance passed around as gospel. We are doomed to repeat history because we do not understand what really happened and therefore, how to avoid making the same mistakes.

May 18 04:58 PM

[thiazole:]

Instead of making us spend the next 6 hrs reading that document, just tell us what stimulus was used during the Great Depression and when it was employed. It is pretty well documented that the government was being run by liquidationists who thought we needed to fight inflation during the first part of the Depression (when it was only a recession) and therefore tightened monetary and fiscal policy, but if this guy has evidence to the contrary, I'd like to see it. The conventional argument was that by the time any real stimulus was passed, it was years too late to do any good.


On May 18 04:58 PM Fred Voetsch wrote:

> "The Obama stimulus should start hitting the economy this summer,
> while the Federal Reserve is printing money. There is no precedent
> for such action."
>
>
> Actually there is: in the early days of the Great Depression the
> government did everything it could and managed to accomplish nothing.
> As we have seen now the government actions have only succeded in
> moving private debt to public and in bailing out massive failures
> so that those with sound business models will not have the opportunity
> they otherwise would.
>
> Here is a quote from a White Paper by Martin D. Weiss, Ph.D.
>
> www.moneyandmarkets.co...
>
>
> "In the 1930s, I was tracking the facts and the numbers as they were
> being released — to figure out what might happen next. I was an analyst,
> and that was my job. So I remember them well.
>
> “Years later, economists like Milton Friedman and my young friend
> Alan Greenspan looked back at those days to decipher what went wrong.
> They concluded that it was mostly the government’s fault, especially
> the Federal Reserve’s. They developed the theory that the next time
> we’re on the brink of a depression, the government can nip it in
> the bud simply by acting sooner and more aggressively.
>
> “Bah! Those guys weren’t there back then. When I first went to Wall
> Street, Friedman was in junior high and Greenspan was in diapers."
>

May 18 05:24 PM

[E Nuff Sed:]

Grantham's theory is that we are in a for VL scenerio and this rally is the last hurrah for a long time. We can go up to S&P 1100 from here to the end of the year but that is it. Then the market will decline (or plunge) again and then work itself along at the foot of the L for 7 long years.

The stimulus is not to be messed with - it is the most massive globally coordinated stimulus in the history of the world. Therefore it would not surprise me if we are up another 25% from here when all the bulls will be dancing again.
According to Grantham, "In 1932 the stimulus in the U.S. was on-again/off-again,on a trial and error basis, and usually with some elements offsetting others so that the stimulus program is judged
to have been a partial or even substantial failure."
He adds "In this respect, George Soros’ reflexivity can come into
play: a false dawn can alter the eventual outcome as it
chews up time. For example, in June 1932 market players
saw illusory light at the end of the tunnel. In two months,
the market rose almost vertically, climbing 110%! For
four more months it held the gain and then, confronted
with continued unrelieved bad news, sank steadily for
six months so that one year after the rally began it was
up only 35%. But this is the key: by then – a year later
– there really was light at the end of the tunnel and the
market rose again, 130% in eight months. And this time
it did not give it back. If investors had jumped into a
time machine back in June of 1932 and had been able
to see how bad things would look in 9 to 12 months, it
seems nearly certain the market would have gone lower."

May 18 10:58 PM

[thiazole:]

I'm the house bull, and I agree with you for the most part. I think the market could get a little higher than you predict, but probably around the middle of 2010, as everyone realizes just how much inflation we are going to get, the market will erode - and it won't be a quick drop - it will be over years. On the other hand, I don't think we will ever see the March 9 lows again. I think more in terms of the Dow than the S&P, but I could see the Dow going all the way back to 12000 - even 14000 if things happen right. Then over the next 5+ years the Dow will slowly sink back down to 8-9000. When you figure the loss in value due to inflation, it will be the biggest market crash of our nation over that period of time.
I'm very bearish long term, but I just don't get into this whole bear contest of who can predict the grimmest scenario, ie:

Poster A: This is the next 100 year cycle Great Depression! 20 thumbs up
Poster B: No, this is a 200 year cycle mega great depression! This is the one where P/E ratios to to 2! 30 thumbs up
Poster C: No, no, didn't you guys hear? My "buy gold" advisor told me it is the 500 year super duper mega great depression! You can own any company you want for free because they will all be doing so bad that no one will want them. 50 thumbs up
Poster D: Dude, my snake handling pastor told me that this is the 1 million year ultra super duper mega great depression and it will be so bad that everyone just kills themselves! 100 thumbs up


On May 18 10:58 PM E Nuff Sed wrote:

> Grantham's theory is that we are in a for VL scenerio and this rally
> is the last hurrah for a long time. We can go up to S&amp;P 1100
> from here to the end of the year but that is it. Then the market
> will decline (or plunge) again and then work itself along at the
> foot of the L for 7 long years.
>
> The stimulus is not to be messed with - it is the most massive globally
> coordinated stimulus in the history of the world. Therefore it would
> not surprise me if we are up another 25% from here when all the bulls
> will be dancing again.
> According to Grantham, "In 1932 the stimulus in the U.S. was on-again/off-again,on
> a trial and error basis, and usually with some elements offsetting
> others so that the stimulus program is judged
> to have been a partial or even substantial failure."
> He adds "In this respect, George Soros’ reflexivity can come into
>
> play: a false dawn can alter the eventual outcome as it
> chews up time. For example, in June 1932 market players
> saw illusory light at the end of the tunnel. In two months,
> the market rose almost vertically, climbing 110%! For
> four more months it held the gain and then, confronted
> with continued unrelieved bad news, sank steadily for
> six months so that one year after the rally began it was
> up only 35%. But this is the key: by then – a year later
> – there really was light at the end of the tunnel and the
> market rose again, 130% in eight months. And this time
> it did not give it back. If investors had jumped into a
> time machine back in June of 1932 and had been able
> to see how bad things would look in 9 to 12 months, it
> seems nearly certain the market would have gone lower."

May 19 10:17 AM

[ecoco:]

I don't understand you guys, how can you compare 1930 to 2009, the world is different now, markets are dynamic, global, exposed and correlated to so many factors that didn’t exist in the early days of investment. We now have 1000's ETF's countless options and investing instruments and most importantly easy access to trading and information that made investing a common household affair.
The time frame has changed and we count months not years for market recovery. V shape is the name of the game and L shape is only for academics, looking at past data you may find one or two depending on your time frame and eventually they all end up to be U shaped recoveries. Those who are not on this BUS are missing a ride that comes once every 5 year, the next bus will be the one going south when every rational investor thinks things are great. Remember we trade the future and sell the past.

May 19 04:08 PM