Final Spike in the Bear Market Rally?

Traders with long experience of bear market rallies inform me that it is usual to see a final spike at the end of a long rally like the one we have had since the lows of March.

Is that what we are now seeing in US stocks? This is summertime and trading is very thin but the sudden upward moves in the S&P look like a last hurrah.

Goldman Sachs

The immediate cause was banking guru Meredith Whitney’s bullish note on Goldman Sachs (GS) and then the actual profits from the original masters-of-the-universe. Well, if they can’t coordinate a rally on the back of their own results who can?

When market volumes are low just a little buying has an exaggerated impact, and that seems to be what is happening this week. Throw in a nice number like the 20 per cent upturn in Singapore’s GDP and a few brave souls might think the good times are here to stay.

The obvious flaw in this argument is that the good times are far from back. And anybody who thinks the kind of structural downturn in trade that has occurred this year will be quickly put right ought to look at the rising US savings rate and ask when the consumer will be coming back to spend.

In Asia, the Chinese banks are lending at five-times the level of last year and this has helped to offset the loss of one quarter of Chinese exports over the past eight months. But the slump in GDP around the rest of the world has been dramatic.

Reality Check

To say that stock markets have gotten ahead of reality is just to state the blindingly obvious, and older hands have already begun to exit this market.

Some hedge funds have been stocking up on gold and silver as a hedge against inflation or further financial chaos this autumn. For it will not take very much to prick the bubble that this amazing rally has become.

The winners will surely be those who take their long profits and go short in the market. But it is strange how many talk about doing this versus the number who actually do it.

Comments

[Moon Kil Woong:]

As long as people are fleeing Treasuries, there is always hope some will slosh back into the stock market rather than be all siphoned off into commodities. It has nothing to do with rosier prospects for companies or recovery per see. It's all about the money flows. If you are buying to hedge against inflation that's all good and fine. If your buying because you think that we are entering into a new age of milk and honey you are gravely mistaken.

Jul 16 05:49 AM

[Carlos Lam:]

On Jul 16 05:49 AM Moon Kil Woong wrote:

> As long as people are fleeing Treasuries, there is always hope some
> will slosh back into the stock market rather than be all siphoned
> off into commodities. It has nothing to do with rosier prospects
> for companies or recovery per see. It's all about the money flows.
> If you are buying to hedge against inflation that's all good and
> fine. If your buying because you think that we are entering into
> a new age of milk and honey you are gravely mistaken.

Long-term, I have to disagree. India and China have a combined 3 billion people. They save, work hard, and have a growing number entering the middle class. Eventually these 3 billion souls will need more oil, coal, iron, rare earths, and food. That's why buying healthy producers and servicers of these commodities is a good play.

For the short-term, who the hell knows what's going on with commodities, what with huge quant trading and sovereign buying? I'm not a trader, but I've learned a lot from you traders here on SA.

Jul 16 07:44 AM

[stonedinvestor:]

What a silly article Peter. Older hands aren't leaving the market they are breaking down the door to get in. Far ahead of ourselves? Are you serious, the whole breakdown from 10,000 was based on a great depression scenario and fear based selling combined with naked shorting of banks. We can at least get back to 10,000 for goodness sakes before you see any super spike. When you lift off an absolute puke low that's no spike, that's a reversion to the mean and that will take some time to play out. For now we have incredibly lean companies and big earnings and a jobless recover ahead of us.~ stoney

Jul 16 07:53 AM

[DavidDC:]

Personally, I have noticed that most of the laid off people in this country seem to have relatives who are willing to give them tons of money. As evidence that this is true do you see any angry people out there? Trust me, when you don't have any money to live on you will get extremely angry, indeed. There are no angry crowds anywhere to be found here so, obviously, nobody is reaching rock bottom. Americans seem like a very passive group of people, contrary to the image they like to portray of themselves.

Jul 16 08:36 AM

[BPYHO:]

This Bear Market ralley will last until around 9500, and shorting before the market hits at least 9200 will cost you some money...

Jul 16 08:59 AM

[marketoperator:]

Stoney is greatly mistaken. Big earnings based on what valuations. The second quarter for finanicals seems to be great, but think of all the secondary offerings, debt to stock deals and bond offerings that flooded the market from March to late June. If that can continue throughout the year banks and bank holding companies could push the DJIA to 10000. But you have states laying off and giving furloughs. If government cannot hire and retain employees then there is a problem.

Jul 16 09:01 AM

[pokernut:]

stonedinvestor = clueless investor = bagholder


On Jul 16 07:53 AM stonedinvestor wrote:

> What a silly article Peter. Older hands aren't leaving the market
> they are breaking down the door to get in. Far ahead of ourselves?
> Are you serious, the whole breakdown from 10,000 was based on a great
> depression scenario and fear based selling combined with naked shorting
> of banks. We can at least get back to 10,000 for goodness sakes before
> you see any super spike. When you lift off an absolute puke low that's
> no spike, that's a reversion to the mean and that will take some
> time to play out. For now we have incredibly lean companies and big
> earnings and a jobless recover ahead of us.~ stoney

Jul 16 09:14 AM

[Snitzer:]

One man's Master Plan: Enter the markets early April (one month late!), upon due diligence buy everything affordable, don't sell anything, going into 2010 develop trading strategies (?), until then read, study, learn and hone BS detection abilities to sharp edge, hence my presence here @ SA and other trader/investor groupie hangouts.

Jul 16 09:24 AM

[theobannion:]

The rally will last until the FOP's* have to pull their fingers out of the holes in the dyke because there are more holes than they have fingers. To move the NDX and the COMPQ, it only takes co-ordinated buying in whichever laggards are taking the index down toward support - maybe two or three at a time. Same six stocks dominate both indices. To defend support for the S&P 500, the logic is similar - you certainly don't have to buy all five hundred stocks!

The FOP's have to support the mkt to protect their financial interests & political power and, in their view bide time for the economy to recover and catch up to the mkt. Also, banks had to float stock to respond to the demands resulting from the stress tests (some stress test - a bank with a fulminating coronary infarct could have passed [oh, wait - that would imply that banks and bankers have hearts]): How could they float stock into a falling mkt?

This mkt has been a manipulated fraud since probably the end of March.

*FOP - Friends of Paulson, sometimes referred to as Champagne Shirlies, to differentiate them from Joe Sixpack. Unlike JS's well-worn work boots, CS's Gucci loafers are only worn at the heels, from being propped on mahogony desks, polished to a high shine by undocumented office cleaning crews. (Gee, I hope they got big bonuses for a brilliant job.)

By the way, congratulations on your crystal ball! Wish I had one.

Best,
SOB.
On Jul 16 08:59 AM BPYHO wrote:

> This Bear Market ralley will last until around 9500, and shorting
> before the market hits at least 9200 will cost you some money...

Jul 16 10:44 AM

[doubleshortetf:]

It's final blow off spike on the heels of GS (expected) and INTC (+ surprise but sustainable?).

Bulls are cheering in the beginning of Q2 earnings announcements but the economy stinks filled with chatter of green shoots and recession ending soon.

Remember volume proceeds price and yesterday's rally's volume was below norm.

How long this glass is half full and rationalizing negative news go on? IMHO it's just blow off rally.

Jul 16 12:06 PM

[DavyJ:]

Could Meredith Whitney be this year's Elaine Garzarelli? Made a great call once and then tried to outdo herself.

Just wondering.

Jul 16 08:00 PM

[TCK:]

I am thinking this is good time to pull out an old Will Rogers quote.

" I am not a trained economist, but I have as much right to guess as they do. "

It was somewhat amusing this week to hear the numerous pundits talking about the head and shoulders reversal signaling the top. Then, subsequently see the market closing at new highs on successive days. It would have been even more amusing if I had not followed some of that advice myself.

In the end nobody really knows, but some people are better guessers !

Jul 16 10:12 PM

[nmelendez:]

i'm just buying chinese and gold. 1.5 billion people can't be wrong!!!

Jul 16 11:18 PM

[djk!:]

Peter says:
"To say that stock markets have gotten ahead of reality is just to state the blindingly obvious, and older hands have already begun to exit this market."

what has happened in the markets *is* reality. and at the 90 day mark since your first call of a top and an end to the rally you once again repeat the mantra. none of the "old hands" seemingly listened to you back on 4/13/09 and I doubt many are listening to you now. I mean, how would you treat a fellow that talked you out of participating in the greatest rally of the last 18 months? and your lackluster gold has done *nothing* in the mean time. then again maybe it is time for your losing streak to end. who knows? certainly not you.

Jul 17 10:33 AM

[Seudo:]

On the ball as usual i see!

Jul 24 01:42 AM

[Peter Cooper:]

Yes I like dollars for the moment - a stock market correction would be good for the greenback - then it might be time to think again.

Aug 04 04:37 AM

[Peter Cooper:]

Well it hardly a losing streak when I have lost nothing - but having missed the rally I can surely have a view on its topping out. Spotting it starting is much harder than spotting the end - which is just a repetition of past bear market rallies? The best trades are usually the most obvious.


On Jul 17 10:33 AM djk! wrote:

> Peter says:
> "To say that stock markets have gotten ahead of reality is just to
> state the blindingly obvious, and older hands have already begun
> to exit this market."
>
> what has happened in the markets *is* reality. and at the 90 day
> mark since your first call of a top and an end to the rally you once
> again repeat the mantra. none of the "old hands" seemingly listened
> to you back on 4/13/09 and I doubt many are listening to you now.
> I mean, how would you treat a fellow that talked you out of participating
> in the greatest rally of the last 18 months? and your lackluster
> gold has done *nothing* in the mean time. then again maybe it is
> time for your losing streak to end. who knows? certainly not you.

Aug 04 04:40 AM