The Rally That Never Was 15 comments
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Since March, the Wall Street talking heads have been having a pep rally. “Rah! Rah! Rah!” Shake the pom poms. Have you popped the bubble yet?
Don’t bother. I looked at the S&P 500 index a little closer yesterday just to see what was going on. If we follow the index back to 1990, we see we have had two large bull markets.
Both bull markets were strong multi-month advances in equities. But what of the current rally everyone is talking about? What I am about to cover may be a bit technical for a general business audience, but it underpins several measures as used in technical analysis of stocks (particularly the MACD measure). If we look at the 100 day and 200 exponential moving average plotted over the same index, an interesting pattern emerges.
For every single long term rally going back the last 19 years the 100 day EMA (i.e. exponential moving average) exceeds the 200 day EMA. When the market has topped and started a long decline, the 100 day EMA crosses and then slips below the 200 day EMA. This has been the pattern for almost 20 years. So what of the current “rally”?
Well, let’s look at the chart. We can see where the S&P topped out around mid 2007 and then started its long decline. At the same time, particularly starting from late last year, the 100 day EMA has been far below the 200 day EMA. As of yet, the 100 day EMA has yet to converge on the 200 day EMA which indicates from a technical analysis perspective that a real rally is not in the works. At least not yet.
Two additional points deserve mention. Compared to the long market decline from the tech bubble in 2000/2001, this market decline has been more of a collapse particularly from October 2008 to March 2009. Second, the economic fundamentals are simply not there to support a real recovery. Banks are just now starting a two year or longer process of realizing credit losses from credit cards, HELOCs, and CRE. Unemployment will continue to rise for at least the next year and may exceed 12% (based on my forecasts) by year’s end. And no one is lending in this current environment (and rightfully so).
So, what does all this mean? I think what we have on our hands is a typical bear market rally. But you don’t have to take my word for it. Just ask why executives have been dumping their shares at the fastest pace in two years (courtesy of Bloomberg). Obviously, it seems that these guys know something we don’t. My advice is this: don’t be a sucker in a sucker’s rally. You stick your money into the market at your own peril.
Disclosure: no positions
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Until the market can purge the bad debt and misallocated resources of the last 10 years it will be hard to make headway. Delaying this process only increases the chance that we get back to back recessions or never get out of the one we are in. Look at Japan's bout with QE and government meddling. When QE fails (there has never been a case where it succeeded) it isn't pretty at all.
On Jun 25 06:13 AM Moon Kil Woong wrote:
> The only recent positive I have seen marketwise supporting a real
> rally is that techs have been leading the market. A true sign that
> there is hope for real fundamental growth and progress. However,
> I am uncertain if they can counter the strong downward forces this
> time since the market is still experiencing funadamental slow correction
> thanks to government meddling.
>
> Until the market can purge the bad debt and misallocated resources
> of the last 10 years it will be hard to make headway. Delaying this
> process only increases the chance that we get back to back recessions
> or never get out of the one we are in. Look at Japan's bout with
> QE and government meddling. When QE fails (there has never been a
> case where it succeeded) it isn't pretty at all.
Hey, I'm as bearish as the next guy (and probably a lot more so), but to call a 40%+ move off the lows "not real" strikes me as kind of silly. If you put $100 in the SPY in early March and sold the shares for $140, was the money "real"? And if you shorted $100 worth at the March lows and you now have $60, are the losses not "real"? If you want to call it an unsustainable, "bear-market rally" (which, in fairness, you do say in the article), that's fine. But if you're playing for "real money" then it (was) certainly a "real rally".
On Jun 25 08:40 AM Mad Hedge Fund Trader wrote:
> Exactly. Now that we are solidly into a correction, I have been flooded
> with requests from readers to call the next bottom in the S&P
> 500. Well here it is. Brace yourself. Put it on a Post-it-Note on
> your computer. It is without a doubt and unquestionably going to
> be 880, 850, 830, 800, 750, 666, or 320. That last number works out
> to be 90% of the book value of the S&P 500, which was the low
> seen in the 1930s depression. Yes, that depression, not this one.
> You are really asking me to solve a one billion variable equation,
> because that is the number of direct and indirect participants in
> global stock markets. If the few green shoots out there start to
> die off, the meltdown in commercial real estate accelerates, the
> Fed missteps by draining liquidity too soon, or there is another
> unforeseen shock to the system, then you can go with the lower of
> these numbers. If we are distracted by the health care debate, emerging
> market economies continue to perk up, and this strength helps our
> technology stocks stay alive, then sleepy narrow trading ranges will
> dominate, and the higher support levels will hold. But no matter
> what happens, I will be able to come back to you in three months
> and claim that I was right.
I certainly understand your logic. A 40% move is clearly impressive. However, the bigger question is whether the rally is truly sustainable. Even during the Great Depression, there were short term rallies in the stock market only to see the indicies go back down again. The only point I am trying to make is to be careful. I certainly wouldn't be putting all of my liquid assets into the market as part of a big upside bet. If you have some money to gamble with, by all means have at it. The market is all about risk tolerance. Just don't be a gambler. The upside is that whatever direction the market decides to head in, there is certain to be movement volatility. That is probably where your real opportunity is, even if the market only trades sideways for awhile.
On Jun 25 07:14 AM logicalthought wrote:
> >>a real rally is not in the works<<
>
> Hey, I'm as bearish as the next guy (and probably a lot more so),
> but to call a 40%+ move off the lows "not real" strikes me as kind
> of silly. If you put $100 in the SPY in early March and sold the
> shares for $140, was the money "real"? And if you shorted $100 worth
> at the March lows and you now have $60, are the losses not "real"?
> If you want to call it an unsustainable, "bear-market rally" (which,
> in fairness, you do say in the article), that's fine. But if you're
> playing for "real money" then it (was) certainly a "real rally".
Corporate Leaders are heading for the hills.
They'll hang onto their Paychecks as long as possible while getting ready for the "XXXX To Hit The Fan"!
I'd do the same thing if I wasn"t allready on the street looking for another Gig.
Hell, at least my Tax Liabilities will be almost "0" for 2009!
How did the Bear Stearns bailout work?
How did the AIG bailout work?
How did the Fannie and Freddie bailout work?
How did all those government foreclosure avoidance programs like HOPE NOW work out?
How did TARP work?
How will the PPIP work?
How successful was Bernanke with his market manipulations?
How have all the forced mergers like BAC Countrywide and Merrill worked out?
How helpful was the stress test?
Were all the toxic assets fixed just by changing mark-to-market or announcing PPIP?
How did the first stimulus plan work out?
How did the recent stimulus plan work out?
How cheap is the market based upon the crappy estimates we are supposed to believe?
Do you have good expectations for interest rates?
Do you have good expectations for taxes being lower?
Do you have good expectations for budget deficits declining?
Do you have good expectations for lowered government spending?
Do you have good expectations for house appreciation?
Do you have good expectations for lowered foreclosures?
Do you have good expectations for low unemployment?
Do you have good expectations for wage rates increasing?
Do you have good expectations for private equity deals getting refinanced?
Do you have good expectations for credit card debt reductions?
Do you have good expectations for commercial real estate, aka CMBS?
If the US has bottomed, has Europe?
Do you expect the dollar to stabilize or not crumble?
How did the Bear Stearns bailout work?
We paid JPMorgan Chase to take them over (and prevent a collapse of that bank)
How did the AIG bailout work?
We bailed out all of the counter parties holding CDS's with AIG by paying full face value on the loss.
How did the Fannie and Freddie bailout work?
We bailed them out to cover the losses of the various sovereign wealth funds so they would keep buying U.S. Treasury debt.
How did all those government foreclosure avoidance programs like HOPE NOW work out?
There's a government program that works?
How did TARP work?
Get Congress to give you lots of money that you then pass along to all of your bankster buddies.
How will the PPIP work?
If this is the Geithner plan, I don't think it does work. My understanding is that no one is ponying up any money (or hardly anyone).
How successful was Bernanke with his market manipulations?
Very nice. Bernanke has helped his bank buddies sell additional shares at inflated prices to make up for self inflicted wounds.
How have all the forced mergers like BAC Countrywide and Merrill worked out?
Can anyone say "Zombie Bank?"
How helpful was the stress test?
Just helped to confirm that the chips are still stacked against the individual investor. Bought the banks a little additional time to try and earn their way out of this mess. Best of luck with that one.
Were all the toxic assets fixed just by changing mark-to-market or announcing PPIP?
Hahahahahahahahahahaha...
How did the first stimulus plan work out?
The vote is still out on that one. Need more $$$ for infrastructure (failing bridges, roads, and electrical grid).
How did the recent stimulus plan work out?
Same.
How cheap is the market based upon the crappy estimates we are supposed to believe?
Market is still overvalued relative to earnings. Of course, the market stopped listening to things like earnings and balance sheets a long time ago. Everything is liquidity driven.
Do you have good expectations for interest rates?
Up, up, and away...
Do you have good expectations for taxes being lower?
Federal maybe. Not state and local however. Too many budget shortfalls. Watch out for voters with torches and pitchforks.
Do you have good expectations for budget deficits declining?
Hahahahahaha! Well, actually we may get some budget cuts at the state and local levels since they cant' print money like Uncle Sam can.
Do you have good expectations for lowered government spending?
Not at the federal level.
Do you have good expectations for house appreciation?
Jesus. It'll take 5 for housing prices to begin to stabilize.
Do you have good expectations for lowered foreclosures?
Have you seen the coming tsunami of option ARM resets in the next two years? After you've looked at it, get back to me.
Do you have good expectations for low unemployment?
No. Only going higher.
Do you have good expectations for wage rates increasing?
Can we all say "wage deflation?"
Do you have good expectations for private equity deals getting refinanced?
Of course, when the vulture capitalists smell blood and a good deal.
Do you have good expectations for credit card debt reductions?
Yes, I do. When the banks finish taking all of their charge-offs because people cannot afford to pay.
Do you have good expectations for commercial real estate, aka CMBS?
In Seattle and Bellevue Washington near where I live, 75% of recently constructed condos are still unsold...and no one is buying...in new, expensive high rise buildings. Can anyone guess how this will turn out?
If the US has bottomed, has Europe?
The US has not bottomed. Europe is screwed more than we are.
Do you expect the dollar to stabilize or not crumble?
The dollar will be fine despite everyone's bitching. It's a race to the bottom for everyone because of borrowing and quantitative easing. Want to know how the Chinese maintain their peg to the dollar? They have to print money just as fast as we do.
On Jun 26 12:36 AM Rokjok777 wrote:
> lengthy list on HedgeFolios asks some great questions:
>
> How did the Bear Stearns bailout work?
>
> How did the AIG bailout work?
>
> How did the Fannie and Freddie bailout work?
>
> How did all those government foreclosure avoidance programs like
> HOPE NOW work out?
>
> How did TARP work?
>
> How will the PPIP work?
>
> How successful was Bernanke with his market manipulations?
>
> How have all the forced mergers like BAC Countrywide and Merrill
> worked out?
>
> How helpful was the stress test?
>
> Were all the toxic assets fixed just by changing mark-to-market or
> announcing PPIP?
>
> How did the first stimulus plan work out?
>
> How did the recent stimulus plan work out?
>
> How cheap is the market based upon the crappy estimates we are supposed
> to believe?
>
> Do you have good expectations for interest rates?
>
> Do you have good expectations for taxes being lower?
>
> Do you have good expectations for budget deficits declining?
>
> Do you have good expectations for lowered government spending?<br/>
>
> Do you have good expectations for house appreciation?
>
> Do you have good expectations for lowered foreclosures?
>
> Do you have good expectations for low unemployment?
>
> Do you have good expectations for wage rates increasing?
>
> Do you have good expectations for private equity deals getting refinanced?
>
>
> Do you have good expectations for credit card debt reductions?<br/>
>
> Do you have good expectations for commercial real estate, aka CMBS?
>
>
> If the US has bottomed, has Europe?
>
> Do you expect the dollar to stabilize or not crumble?
Commercial real estate consists of residential/office/war... Banks with manageable NPLs will be able to juggle their balance sheets. Any recommendations on which ones?
On Jun 26 05:09 PM Bill Cassill wrote:
>
> How did the Bear Stearns bailout work?
> We paid JPMorgan Chase to take them over (and prevent a collapse
> of that bank)
>
> How did the AIG bailout work?
> We bailed out all of the counter parties holding CDS's with AIG by
> paying full face value on the loss.
>
> How did the Fannie and Freddie bailout work?
> We bailed them out to cover the losses of the various sovereign wealth
> funds so they would keep buying U.S. Treasury debt.
>
> How did all those government foreclosure avoidance programs like
> HOPE NOW work out?
> There's a government program that works?
>
> How did TARP work?
> Get Congress to give you lots of money that you then pass along to
> all of your bankster buddies.
>
> How will the PPIP work?
> If this is the Geithner plan, I don't think it does work. My understanding
> is that no one is ponying up any money (or hardly anyone).
>
> How successful was Bernanke with his market manipulations?
> Very nice. Bernanke has helped his bank buddies sell additional
> shares at inflated prices to make up for self inflicted wounds.<br/>
>
> How have all the forced mergers like BAC Countrywide and Merrill
> worked out?
> Can anyone say "Zombie Bank?"
>
> How helpful was the stress test?
> Just helped to confirm that the chips are still stacked against the
> individual investor. Bought the banks a little additional time to
> try and earn their way out of this mess. Best of luck with that
> one.
>
> Were all the toxic assets fixed just by changing mark-to-market or
> announcing PPIP?
> Hahahahahahahahahahaha...
>
> How did the first stimulus plan work out?
> The vote is still out on that one. Need more $$$ for infrastructure
> (failing bridges, roads, and electrical grid).
>
> How did the recent stimulus plan work out?
> Same.
>
> How cheap is the market based upon the crappy estimates we are supposed
> to believe?
> Market is still overvalued relative to earnings. Of course, the
> market stopped listening to things like earnings and balance sheets
> a long time ago. Everything is liquidity driven.
>
> Do you have good expectations for interest rates?
> Up, up, and away...
>
> Do you have good expectations for taxes being lower?
> Federal maybe. Not state and local however. Too many budget shortfalls.
> Watch out for voters with torches and pitchforks.
>
> Do you have good expectations for budget deficits declining?
> Hahahahahaha! Well, actually we may get some budget cuts at the state
> and local levels since they cant' print money like Uncle Sam can.
>
>
> Do you have good expectations for lowered government spending?<br/>Not
> at the federal level.
>
> Do you have good expectations for house appreciation?
> Jesus. It'll take 5 for housing prices to begin to stabilize.<br/>
>
> Do you have good expectations for lowered foreclosures?
> Have you seen the coming tsunami of option ARM resets in the next
> two years? After you've looked at it, get back to me.
>
> Do you have good expectations for low unemployment?
> No. Only going higher.
>
> Do you have good expectations for wage rates increasing?
> Can we all say "wage deflation?"
>
> Do you have good expectations for private equity deals getting refinanced?
>
> Of course, when the vulture capitalists smell blood and a good deal.
>
>
> Do you have good expectations for credit card debt reductions?<br/>...
> I do. When the banks finish taking all of their charge-offs because
> people cannot afford to pay.
>
> Do you have good expectations for commercial real estate, aka CMBS?
>
> In Seattle and Bellevue Washington near where I live, 75% of recently
> constructed condos are still unsold...and no one is buying...in new,
> expensive high rise buildings. Can anyone guess how this will turn
> out?
>
> If the US has bottomed, has Europe?
> The US has not bottomed. Europe is screwed more than we are.
>
> Do you expect the dollar to stabilize or not crumble?
> The dollar will be fine despite everyone's bitching. It's a race
> to the bottom for everyone because of borrowing and quantitative
> easing. Want to know how the Chinese maintain their peg to the dollar?
> They have to print money just as fast as we do.
>
> On Jun 26 12:36 AM Rokjok777 wrote: