Death of a Rally

OK. I said it. The Rally is over. What a rally it was. While it may live on a little longer, I think that its days are numbered. It's easier to call the economy than stocks, and the economy has been experiencing a dead-cat bounce. I have some charts that I looked at recently, and I think that the likelihood of a normal post-recession bounce is very low. Take a look if you disagree.

Stocks, though, they are much harder to call. This market has advanced much further than I expected, but I am starting to see some divergences. Emerging markets and High Yield failed to make new highs in the middle of August and closed below the 10dma this past week. The NASDAQ is looking tired - three "distribution" days (per Investors Business Daily) in the past eight.

Here is what I am seeing that makes me confident that the days of this rally are numbered (besides the divergences):

• Massive collapse in short-interest
• Equity offering floodgates are about to open
• Insiders are selling
• Even the strongest companies financially aren't repurchasing

I don't know how much further this thing rides on fumes, but I expect the action late in the year to be negative. Hedge funds, the "at the margin" players, will be looking to lock in profits (collect fees) as we sprint to the finish of this wild year. My guess is that they will be selling, as most are up year-to-date. They may be "underweight" but they are long.

I am sticking to my initial call of "down 15-20% for the year", though perhaps I was a bit too pessimistic. Finishing the year down 10% would imply a return to S&P 500 to 812. This would be a 58% retracement of the "Big Rally". Maybe that's too aggresive, but I believe it is directionally correct.

Disclosure: No securities mentioned

Comments

[Roger Knights:]

You're off to a good start, if the NYSE futures this morning are a sign. They're down about 2%.

Aug 17 04:59 AM

[Alan Brochs...:]

Hey, unfortunately I "started" too early! Usually when I take a stand on the market in public, it is in my face immediately, so this is rather odd...

Aug 17 06:25 AM

[prudentinve...:]

I fully agree with all you said. In a rational market, I would have expected a year end S&P in the low 700's, reflective of intrinsic value and prospects in the forseeable future; as well as historically consistent if you discount the last 15 bubble years. However, this market is far from rational, decoupled from fundamentals, and driven by liquidity from the printing presses.

Aug 17 08:08 AM

[ArtfulDodger:]

AB:

Are you drinking from the steamy cups of Doug Cass and Robert Precther?

Markets down 15-20% for the year?

Do you realize what kind of crash that would be from here?

I think the only thing that could cause such a thing is investors finding out what bad shape GE is in, with $550b in debt and about $11b in assets.

Except for the fact that GE does have some business, sounds like an Enron or World.com to me. Have you noticed this?

Sorry, you may be right, but I can't see this type of pessimism until central banks start to make drastic changes in monetary policy.

Aug 17 01:52 PM

[Alan Brochs...:]

Hey, good to hear from you AD. Remember, I was the one who said "Sell in May, Go Away" wouldn't work so well.

Your negative view on GE is one I share.

Don't get lulled into thinking that the markets can't move just because they haven't been volatile lately. A move towards 800 would simply put the market close to the middle of the annual trading range.

The terrible moves down (and back up recently) have been driven by the credit markets - the next move may be more related to a dismal earnings outlook for 2010. Some may call it a "double-dip" - I call it a long a "L"....

Aug 17 05:24 PM

[Alan Brochs...:]

By the way, my forecast in January was that the markets would end down 15-20%. Now I am thinking closer to 10%...


On Aug 17 01:52 PM ArtfulDodger wrote:

> AB:
>
> Are you drinking from the steamy cups of Doug Cass and Robert Precther?
>
>
> Markets down 15-20% for the year?
>
> Do you realize what kind of crash that would be from here?
>
> I think the only thing that could cause such a thing is investors
> finding out what bad shape GE is in, with $550b in debt and about
> $11b in assets.
>
> Except for the fact that GE does have some business, sounds like
> an Enron or World.com to me. Have you noticed this?
>
> Sorry, you may be right, but I can't see this type of pessimism until
> central banks start to make drastic changes in monetary policy.

Aug 17 05:25 PM

[ArtfulDodger:]

AB:

Thanks for the comment. I'm mostly off right now, cooling it in Santa Barbara --- eating too much. So perhaps my brain has been lulled into deceit.

My investing style has been not to try to pick moves in markets, and it's worked for many years.

That, of course, does not by any means mean that I am a buy and holder.

For me to move out en mass, as I did last summer, the either the Fed or the government has to make a drastic change in policy.

I don't see anywhere I'm invested such negative acts.

Have you sold all your holdings? A call like this one would surely call for a run to the hinterlands. Eh?

Hey AB, you don't take vacations? You simply work night and day year after year?

Aug 17 07:27 PM

[Alan Brochs...:]

I am at a low exposure and in conservative stocks presently. I don't think that the decline will be so across-the-board. It will be in stocks like GE, which you mentioned, or CAT. Large-cap, weak balance sheets...

I spent 9 days in Israel earlier this year, but, you are right, that I do work a lot! I had hoped to take my kids away for a few days as I usually do in the late summer, but I had surgery in June and just wasn't up to it.

Aug 17 09:44 PM

[ArtfulDodger:]

AB:

I hope your surgery went well.

Yes, except for last year when I sold every stock I had and went short (which was the first time in my life I'd ever done that), I think that most pull backs are selective.

I impress on the small group I have so they don't panic is that "bulls run and bears dive." Gravity wins out in speed, of course. But that is never the end.

I'm concerned about the US Fed and its micro-managing one week, then slinging fiat paper all over the place the next, and then boosting rates up non-stop until they see negative results, or snatching them down until they see positive ones.

These willy nilly money supply tactics can't go on forever. The end result seems not to end well.

My trading friends in Chi & NY all have wondered and have asked Geithner in the past, Is there a back up plan?

No has been the answer; or, no answer.

Take a break and enjoy the kids before they have to go back to prison, er ahem, school.

Thank you for your work and your kind replies. AD

Aug 18 12:35 AM

[Mad Hedge F...:]

yui. Wow! One triple digit move down in the Dow, and all of a sudden, everyone is bearish. Once invisible falling home prices, soaring deficits, bogus corporate earnings, catatonic consumers, a crashing Shanghai market, and a suicidal Baltic Dry Shipping Index are now staring nervous stock owners in the face, eyeball to eyeball, and the picture is not pretty. Expect a run at Walmart on the Imodium and Kaopectate supplies. Even Robert Prector, of Elliot Wave fame, was on the tube proclaiming an end to a bear market rally. Did all the BSD bears just come back from family vacations to find the short selling opportunity of the year? Technical analysts think so.

Aug 18 01:07 AM

[H. T. Love:]

Alan,

You omitted the best bearish indication of all: the constant yammering by all the "important and knowledgeable" talking heads and their guests that the S&P500 will end up the year around 1100. "Of course there will be some corrections along the way, but the market teend ..."

I'm mostly cash now (since June) and getting in and out at a profit on shorter term trades of small amounts for now. I find it much more gratifying sitting on cash watching the market go up than sitting on piles of equities and feeling that "sinking feeling".

HardToLove

Aug 18 08:53 AM

[Alan Brochs...:]

You make a great point - there seems to have been a capitulation from the "test the lows" crowd.


On Aug 18 08:53 AM H. T. Love wrote:

> Alan,
>
> You omitted the best bearish indication of all: the constant yammering
> by all the "important and knowledgeable" talking heads and their
> guests that the S&P500 will end up the year around 1100. "Of
> course there will be some corrections along the way, but the market
> teend ..."
>
> I'm mostly cash now (since June) and getting in and out at a profit
> on shorter term trades of small amounts for now. I find it much more
> gratifying sitting on cash watching the market go up than sitting
> on piles of equities and feeling that "sinking feeling".
>
> HardToLove

Aug 18 09:53 PM

[Ricard:]

Great stuff, good to hear from you again. I think retail is going to be the big ball that drops this winter, but certainly everything else you mentioned is valid as well, if not interrelated.

I can fully understand not taking a vacation this year...the time to do that was probably 2005-2007...or maybe during your 2015 'happily ever after' economy :)

Aug 18 11:33 PM