Has the Last Bear Died?

Has the last bear died?

With last week's decisive breakout to the upside on all the major indexes, it appears that indeed, at least for now, the bears have died and gone to "urus heaven."

Of course, this could just be a colossal head fake and bull trap but all indicators are that a sustained uptrend has started.

We returned to the “Green Flag Flying” mode after market close on Monday, July 20^th, as the markets broke through primary resistance at 950 on the S&P 500 and the Dow broke the psychologically important 9,000 level.We expect higher prices ahead with 1000 being the next level of serious resistance, just 2% from Friday’s close.

I'm sure that many trend followers have gone to "buy" signals as a result of last week's action, and even the venerable Dow Theory system, developed by Charles Dow himself, last week flashed a signal for the start of a new primary bull market.

However, in the immediate term, all sectors and indexes are vastly overbought and a correction is very much overdue.

So far this year we have seen that more than 50% of the trading days have had moves larger than 1% while 30% of market days have had moves of 2% or more. The major indexes haven’t seen volatility like this since the 1930s and what makes this particularly unusual is that the VIX, the “fear” gauge or volatility index, has actually been declining and is far below last autumn’s panic highs.

The View from 35,000 Feet

Earnings were the name of the game this week and the markets shook off bad news from Microsoft (MSFT), American Express (AXP) and Amazon (AMZN), powering higher on hopes for better future earnings.

UPS (UPS), considered a bellwether of future economic activity issued a dark outlook on their expected shipping activity and CIT (CIT) remains on the brink of bankruptcy as their liquidity situation worsens.

Bloomberg reported that “Dr. Doom,” Nouriel Roubini, sees a risk of a double dip recession next year or in 2011 due to the expanding unemployment rate which he thinks could top 11% and further declines in housing prices and consumer net worth along with a rise in oil prices.

Consumer confidence declined in July over June and the commercial real estate picture is making the news more often as over the next couple of years more and more loans come due for reset. Many analysts are calling this the next shoe to drop and suggest that it will come with a bigger thud than the sub prime debacle that started this whole crisis now two years ago.

Former Merrill Lynch Chief Economist David Rosenberg now with Gluskin Sheff in Toronto writes, “Too much growth-and hope- is priced in at this point.”

Everyone has an opinion, but in the end, it doesn’t matter why the markets go up or down and the only real truth is in the tape.

The Week Ahead

Monday: June New Home Sales

Tuesday: July Consumer Confidence, May Case/Shiller Home Price Index

Wednesday: June Durable Goods, Fed Beige Book Thursday: Initial Jobless Claims

Friday: Q2 GDP, July Chicago Purchasing Managers Index

Sector Spotlight

Leaders: Home Builders, Hong Kong, Basic Materials

Laggards: Treasury Bonds, Japanese Yen

Disclosure: None

Comments

[AndrewBaker:]

No I haven't and neither have my many friends on here and elsewhere. We've realised that we have to wait for the greedy and foolhardy to finish throwing their - and, worse, other people's - money at this market, before we move back in. I wonder how many in bull's clothing are making their money from others and not using their own?

Jul 27 09:43 AM

[Taylor Gray:]

John, for me its hard to know if we are in a bull or a bear. Everybody has their own time frame for defining a bull and bear.
However, the tape – or the price trend of the markets – is in the end the final arbiter. Perhaps one of the most important adages is “The trend is your friend.” Why is this? In a way it gets to animal spirits and the Adaptive Markets Hypothesis for at the end of the day the ultimate decision is a human act. In the 7/23/09 Financial Sense market wrap, Letting the Tape Talk, Quint Tatro relates “I often relay a famous trading quote to people in that there is no bull side, or bear side, there is merely the right side …” So how do we know what the right side is?
I think for now the market free fall is over. Zero short term interest rates are going to push money somewhere. Other currencies. Commodities. Equities. Housing maybe even. The Fed wants money to go elsewhere for now - and so equities will go up for now at least in the context of a monthly trend. However, once reflation turns to inflation, and the Fed decides to start fighting inflation, equities will again have a headwind. But as you say, the green flag is up, so I would agree that it is time to try to catch as much wind as possible, while keeping watch for "storm clouds" that might be (will be) forming down the road at some point.

Jul 27 10:14 AM

[Graham and ...:]

We are Big Bears (predictors of a three-handled Dow). And we are far from dead.

Jul 27 12:48 PM

[CurveTrader:]

Everyone is having that same trade on - S&P goes down now because of overbought conditions and then comes back to climb above 1,000. So that may not happen - either it goes straight up now or this will be the top

Jul 27 06:38 PM