What's Behind This Bear Market Rally 12 comments
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Bear market rallys are difficult to understand for unprofessional investors, and even for some professional investors. I've been studying the action and reaction of the bear market for the past few months and have some thoughts to share.
Bear market action is a primary down trend (sell-off). By contrast, reaction is a reversal of a down trend (rally). Novice investors asked how is it possible that we have a rally in a bear market? There's no single explanation to that answer but I've come up with some qualitative reasoning behind the rally.
Primary Sell-off
During the market sell-off, economic and earning data are bad. Often times the data accelerate downward, creating momentum selling to occur, creating primary sell-off.
Secondary Rally
At some point, that acceleration has to stop or slow down. Those who have been shorting the market cover their shorts by buying back the stocks, creating buying pressure. The key catalyst is the deceleration in bad data. Statistically, nothing accelerates at a constant or faster pace forever, thus, any slowing may be perceived as a "better" situation. Traders and investors sense that things can't get worse and as a result, they buy. This creates a secondary rally.
Resume Sell-off
The next question you should ask yourselves is, will the economic data continue to improve? Will the data level-off or contract again? Stocks can move rather quickly in both directions so you have to make a judgment call whether the stocks overshoot the real economic growth or not. If the economic activity levels-off, that catalyst of growth is taken away and selling may resume.
Current situation
Things appear to be less bad. The unemployment rate is slowing, and yet still rising. Foreclosure rate is slowing, and yet still rising. Could we be in a secondary reactions stage where things appear to be less bad? We won't know until after the fact. The next few quarters will be a true testimony to the bull because we are going to see if economic data can continue to improve.
Traders trade based on statistics by comparing downside risk to upside risk. Economic data are just statistics. Investors buy based on value. So don't let statistics play tricks on you.Disclosure: No Positions
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This article has 12 comments:
"Something strange happened during the last 7 or 8 weeks. Doreen you probably can concur on this -- there was a power underneath the market that kept holding it up and trading the futures. I watch the futures every day and every tick, and a tremendous amount of volume came in a several points during the last few weeks, when the market was just about ready to break and shot right up again. Usually toward the end of the day – it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes. That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?
On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary – they issues stock – they raised capital into this rally. It was perfect text book setup of controlling the markets – now that the stock has been issued…”
Foreclosure rate is growing, but at a slower pace - due in large part to the fact that banks were too preoccupied with the prospects for their own survival to bother with the work required to start foreclosing.
As for "who has the money to move the market at that rate" - my guess: several banks. As soon as they ink the TARP/TALF arrangements, take on leverage at extremely low rates and then make some major purchases. Part 1 of the rally was a synchronized set of closures of short positions by hedgers; Part 2 was an unsynchronized set of purchases by funds; Part 3 was money coming back in from the sidelines and flowing into ETFs. None strikes me as sustainable. (Disclosure: I sold out most of my long positions 3 weeks ago and went 20% into inverse ETFs in the last week, though this rally could easily last for a month or three...)
The only green shoots coming up are weeds growing in the cracks of the closed down empty factory parking lots.
"Capitalism without failure is like religion without sin"
When you are seeing conspiracies, you are probably wrong and behind the curve.
Scary.
It's hard to see stuff like that and not think market manipulation. Makes me wonder about that our government is directly involved in inflating the markets. At this point propaganda has become the big game in the market place.
It's more and more about how image and marketing psychologically affects the markets.
Of course I'm left wondering just how long that will work.
On May 19 07:12 AM CautiousInvestor wrote:
> Zero Hedge has posted a video of a Fox News interview with Doreen
> Morgavero and two other players. It's worth the trop over to ZH to
> watch this video which offers some shocking revelations and insight
> about recent market activity. From the transcript of the video:<br/>
>
> "Something strange happened during the last 7 or 8 weeks. Doreen
> you probably can concur on this -- there was a power underneath the
> market that kept holding it up and trading the futures. I watch the
> futures every day and every tick, and a tremendous amount of volume
> came in a several points during the last few weeks, when the market
> was just about ready to break and shot right up again. Usually toward
> the end of the day – it happened a week ago Friday, at 7 minutes
> to 4 o’clock, almost 100,000 S&P futures contracts were traded,
> and then in the last 5 minutes, up to 4 o’clock, another 100,000
> contracts were traded, and lifted the Dow from being down 18 to up
> over 44 or 50 points in 7 minutes. That is 10 to 20 billion dollars
> to be able to move the market in such a way. Who has that kind of
> money to move this market?
>
> On top of that, the market has rallied up during the stress test
> uncertainty and moved the bank stocks up, and the bank stocks issues
> secondary – they issues stock – they raised capital into this rally.
> It was perfect text book setup of controlling the markets – now that
> the stock has been issued…”
Being invested in best performing sectors of the global market place, I could care less whether analyst's call any rally a "bull or bear"
In any economic climate there are always sectors that do well, and that's where I stay invested.
I do have position in MO, VIVO, HNZ, and CSL. I didn't mention any stock about this rally and thus "no position"
It is a basic article, no argument.
Here is something to consider about the rally, watch the volume. When volume dried up (dull market) the buying is likely over. This rally probably take Dow to 10k that is my projection, but I'll call it bear market rally. It'll turn down and trade sides way much like 70's for a long time. Take a look at 42-49, it could look something like that.
Don't ask me why, because I don't know why.
Thanks for the comment.
On May 19 11:53 AM mikesa69 wrote:
> Interesting musings from a person with "no positions". Very basic
> article indeed, with no real argument being advanced; only rudimentary
> questions. The responses here show more wisdom than the author does.
On May 19 11:59 AM user41653 wrote:
> Only Thing I want to Know is Why GS is not required to Pay back the
> $180 Billion they got through the "Back Door" from AIG got when they
> got that bailout. GS Got $180 Billion FREE US Taxpayer Dollars ,
> Dilan Radigan was about to investigate this , when he was suddenly
> fired from CNBC . In early Apr , write Your Senator or Congress man
> and ask him where that $180 BILLION went ???