Rally May Last Longer than Expected

The economy has seen quite a ride in the past 12 months here in the USA. We've come a long way, maybe.

With the market up over 50% since March lows, many are calling for a 10%+ pullback and advising caution. It may be a good time indeed to take some money off the table.

But according to GreenLightAdvisor.com, others like Laszlo Birinyi, founder, Birinyi Associates, and Barry Ritholtz, CEO, FusionIQ, and prolific author of The Big Picture blog, believe that the market has the capacity to surprise.

BIrinyi says the recovery in the economy and earnings could far exceed expectations, and the market is pricing in the upside surprise.

Here are some recent Bloomberg headlines to ponder.

From Birinyi Says Stocks Rally Signals Economic Rebound (August 24, 2009, Bloomberg.com):

Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 66 percent gain from its current level. The index has rallied 14 percent since his forecast. The benchmark for U.S. stocks may rise 6 percent to 1,087 within the next three months “if it continues to progress at the rate it’s been progressing,” he said.

From Waiting for Economy Roubini Can Believe In Means Missing Rally (August 26, 2009, Bloomberg.com):

Anyone attempting to apply Roubini’s wisdom to stocks may be forgiven for missing the biggest rally since the 1930s as the Standard & Poor’s 500 Index climbed 52 percent in six months. While Roubini said in March the advance was a “dead-cat bounce,” that it may “fizzle” in May and warned in July that the economy’s “not out of the woods,” the MSCI World Index was posting a 58 percent gain, the largest since it began in 1970.

“We’re looking at a bull cycle in phase one,” Laszlo Birinyi said in a telephone interview yesterday. Birinyi was the top-ranked Dow Jones Industrial Average forecaster for most of the 1990s on PBS’s “Wall Street Week with Louis Rukeyser.” “No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term,” he said.

Barry Ritholtz says the market has the strength and capacity to surprise us higher, now that fund managers are buying this rally, according to the Merrill Lynch Survey of Fund Managers. Ritholtz reminds us that in 1973-74, the market fell 44%, then rallied 78%. He says he is not calling the forecast this time that tightly, but says that before this is all over, the market which is up over 50% currently, may see 60, 70, or 80% before topping out.

The melt-up in the market has caused professional investors a great deal of performance angst over whether or not to re-enter the market more willfully, given the underlying concerns about the economy’s recovery and sustainability of earnings forecasts. Ritholtz says that fund managers are buying the rally, and this is reason to believe the market melt-up can extend higher.

Professional money managers are buying into the rally in a big way, according to a Merrill Lynch Survey of Fund Managers:

• 75% believe the world economy will improve in the next 12 months. That’s the highest level in nearly six years and up from 63% in July.
• Average cash balances have fallen to 3.5%, the lowest since July 2007.
• 34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.
• Risk appetite is also increasing, to the highest levels in two years.

From Reuters (August 19, 2009):

Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.

A net 75% of survey respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63% in July.

Confidence about corporate health is at its highest since January 2004. A net 70% of the panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.

August’s survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007.

Equity allocations have risen sharply month-over-month with a net 34% of respondents overweight the asset class, up from a net 7% in July. Merrill Lynch’s Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.

“Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,” said Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research. “The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks.”

Bloomberg.com also reported the following on August 27th concerning the U.S. economy:

The U.S. economy took a first step toward recovering from the worst recession since the 1930s in the second quarter as companies reduced inventories, spending started to climb and profits grew.

Gross domestic product shrank at a 1 percent annual rate from April to June, less than the 1.5 percent decline projected by economists in a Bloomberg News survey, a Commerce Department report showed today in Washington. Corporate earnings rose by the most in four years, the department also said.

Government programs, including the “cash-for-clunkers” and first-time homebuyer incentives, are boosting manufacturing and housing, indicating the gain in sales that began last quarter will be sustained in the second half of the year. Another report showed unemployment may jeopardize the strength of the economic rebound.

“We’re on a pretty decent recovery path,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “There was a better mix last quarter with almost every major component of final demand being revised up and inventories being revised down. That puts us in a pretty decent position going into the third quarter.”

So the stage is being set for one of two things: First, a surprisingly buoyant follow-through on this remarkable "recovery rally" that started back in March, or, Secondly, a "two more steps forward and then three steps backward" scenario that will bring even those more fearful investors off the sidelines.

This will allow stocks to go up a couple of more "stories", allow a wonderful "shorting opportunity" to unfold, followed by a "quick and nasty" reversal so that those big players who shorted stocks at the top can buy to both cover their short positions and refill their inventories that became depleted when they were selling while everyone else was buying.

Nadeem Walayat at The Market Oracle had some interesting thoughts on this topic:

"The perma bears having missed the whole bull market as each minor dip was THE end of the mistakenly labeled "bear market rally" for the rules are clear, pick up any reputable technical analysis book and you will read that a bull market is confirmed when an stock indices rallies by 20%, similarly a bear market is confirmed when an indices falls by 20% from a high, therefore regardless of the perma views of this being a bear market rally, whilst under the basis of technical analysis this rally has long since been confirmed as a bull market more than 30% ago! So much for the claims of following the basic tenants of Dow theory!

"The stock market's powerful advance of 50%+ may soon give an opportunity for the perma bears to crow loudly as the market heads into the seasonally weakest period of the year i.e. Sept to October, especially as an technically overbought rally is well primed to achieve the anticipated 'significant' correction, perhaps even a crashette, where readers need to remember that the bull market would still remain intact as long as the Dow does not fall by more than 20% from the peak.

"Rules exist for a reason, and that is to arrive at a FIRM TRADEABLE CONCLUSION, rather the deluded fixation that is indicative of a perma attitude that are perpetually fixated to one side regardless of the actual price action i.e. the whole rally has been supported by the crash is coming mantra for the past 6 months! A totally useless repetitive statement when it comes to the monetizing of analysis. There is no point in catching a say 15% drop if one fought against the 50% rally, as the net position is still for a 35% LOSS!"

My friend Richard Wendling at BearFactsSpecialistReport.com has mentioned there there is a possibility of a pullback coming over the next week or so:

"Remember the next two weeks are sandwiched around the Labor Day holiday. A great many traders and investors will be out of town enjoying their last fling of summer.

"Thus there will be less enthusiasm in the market place and it could decline on very light volume, allowing sepcialists to contine accumulating stock beefore making their final push higher."

Richard's web site and monthly DJIA reports can teach a great deal about the timeframes of both rallies and declines. The media and the most-listened to commentators want people to believe that the stock market rally has a long way to go.

They are talking up stocks like Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), Alcoa (NYSE:AA),Freeport McMoRan Copper & Gold (NYSE:FCX), Boeing (NYSE:BA), Chevron (NYSE:CVX), Apple (Nasdaq:AAPL), Intel (Nasdaq:INTC), Cisco Systems (Nasdaq:CSCO) and Research in Motion (Nasdaq:RIMM).

Sounds like a familiar, historically relevant way for the stock exchanges to do what they do best. I can hear the echos from Warren Buffett's cave, "Be greedy when everyone is fearful and be fearful [a.k.a. "go short"] when everyone is greedy." It doesn't seem like "everyone" is greedy quite yet.

DISCLOSURE: I'm long JPM, AA, and CSCO

Comments

[Dave Wrixon:]

"BIrinyi says the recovery in the economy and earnings could far exceed expectations, and the market is pricing in the upside surprise."

Sounds like Bullshit to me!

Aug 31 03:31 AM

[Dave Wrixon:]

It seems to me the large investment banks are trying to rebuild their balance sheets on the back of a sucker rally engineered specifically for that purpose. Fraud by any other name.

Aug 31 03:36 AM

[Gary A:]

It all depends on whether the central banks pull the plug. China obviously fears a pulling of the plug. Their markets are down. Only the Fed, Goldman Sachs and God know when the Fed will pull the plug.

That is why investing right now without a hedge seems to me to be foolhardy.

Aug 31 03:52 AM

[Michael Clark:]

I think you're right, Gary. In other words, this rally has been funded by taxpayer money all the world over (maybe in China, the term 'tax-payer' money is not appropriate). Government money has been spent in the hopes of avoiding what just happened in Japan (the standing government getting thrown out), and in Germany (the standing government being punished in state elections), or even worse.

We're going to see a lot more of this. Moderate center-party politics will lose power -- and the extreme right and extreme left will again begin vying for power. Yeats writes: 'the center will not hold'...that's what he was talking about.

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: a waste of desert sand;
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Wind shadows of the indignant desert birds.
The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?


On Aug 31 03:52 AM Gary A wrote:

> It all depends on whether the central banks pull the plug. China
> obviously fears a pulling of the plug. Their markets are down. Only
> the Fed, Goldman Sachs and God know when the Fed will pull the plug.
>
>
> That is why investing right now without a hedge seems to me to be
> foolhardy.

Aug 31 05:03 AM

[bartpr:]

bear in mind the rally off the 2002 low lasted for 72 weeks before a correction occurred. check out the numbers on the spy. i am with
birinyi.

Aug 31 08:04 AM

[Chuck Anthony:]

No one wants to come out and say it (Bull Market) because "it's" a fraud; the stock market rally that is. As long as banks and brokers continue to make money and as long as Benny & the Feds keep printing it in such a manner as they are, it's no surprise that the market rally would be "extended" as you put it.

My question is: Who carries more weight right now, the professional money managers buying into the rally or, the corporate insider selling?

Aug 31 08:44 AM

[inthemoney:]

> Average cash balances have fallen to 3.5%, the lowest since July 2007.
34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.

Well, if the fund managers are already in then who is left to buy the stocks? With China selling off, they now have an excuse to be casutios.

Aug 31 09:11 AM

[Old Trader:]

"Average cash balances have fallen to 3.5%, the lowest since July 2007."

This is not terribly confidence inspiring, given what started a few months later. This also puts paid to the argument about "lots of money on the sidelines". With 96.5% of cash balances "in" the market, it sounds like "everybody" IS greedy.

Aug 31 09:16 AM

[enigmaman:]

All the reasons you point to indicating why markets go higher is why they will not, Wall Street believes Mainstreet has a short memory and they are banking on it, but guess what this time they are wrong, Consumers have a long memory for Wall Street carnage the past decade, as one baby boomer who saw his best times end the end of 1999 and nothing but angst since I can tell you the word on Mainstreet is extreme caution, measure twice cut once, look before you leap, trust but verify, crushed in the dot come bubble, crushed in the 08 housing bubble, and then crushed in the second wave market meltdown and then the economy cratered. Anyone that thinks going forward its business as usual for the consumer they are delusional, 70% of our economy depends on the US consumer, India, China, Japan also depend on the US consumer to continually spend like drunken sailors but guess what its not going to happen no matter how many charts or Wall street geniuses say differently, Mark Twain said it best " If a cat sits on a hot stove it wont sit on a hot stove again, but it wont sit on a cold one either because it has over learned from its experience" Consumers may be dumb but they are not stupid they will not play with fire for a long long while, dont believe it then do as Peter Lynch suggests ask your neighbors, friends and relatives, it may not be scientific enough for some but sometimes simply is best, like they say " dont make a straight line crooked"

Aug 31 09:33 AM

[enigmaman:]

people believe what backs up their point of view, pointing to why you have faith makes the point because for every reason you find to stay a believer their is another just as valid reason to not believe, but that is what makes the market for GS, without all the confusion and noise from the human factor the market would be like watching grass grow, maybe not so bad because it does grow.


On Aug 31 08:04 AM bartpr wrote:

> bear in mind the rally off the 2002 low lasted for 72 weeks before
> a correction occurred. check out the numbers on the spy. i am with
>
> birinyi.

Aug 31 09:40 AM

[Mad Hedge F...:]

gj. I have successfully avoided bears of a different sort this summer, those of the stock market kind (see my July 15 warning not to sell to soon by clicking here at www.madhedgefundtrader...). Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

Aug 31 10:09 AM

[Sreeni:]

I agree with the article. That is what happens when there is too much money in the system than is needed, especially that excess money is at the investment firms and wall street banks and the rich people, and not with the ordinary citizen. Also if all those people with excess money cohesively act and take risk, the Fed is there to save them on the name of "System Risk".

Every body including the President Obama is cheer leading that we avoided the Depression, but to me it seems that we merely patched up the earlier Bubble and continuing to blow it, so it will blow up in the near future as it has already over stretched, and surely it will even surpass the Depression of the 1930s.

Aug 31 10:35 AM

[Marc Courtenay:]

I encourage each of you to become thoroughly acquainted with, (and I mean invest some time and effort) at Richard Wendling's free site at BearFactsSpecialistRep...
Richard's web site and his monthly DJIA reports can teach a great deal about the time-frames of both rallies and declines. The media and the most-listened to commentators want people to believe that the stock market rally has a long way to go. Why? Discover who and what makes the major stocks on the NYSE and Nasdaq go up and down. The facts on this topic are the best kept secrets on Wall Street today. Do your homework and find out how the "Exchanges" operate, what a "Specialist" and a "Market Maker" are, and where the mass media derives their "headlines", their daily emotional themes, and why CNBC, Bloomberg, and every other US financial channel follows the same script in concert with each other. This isn't "conspiracy" talk, this is "reality" talk, and it's high time we wake up and get to the bottom of what makes many of the large cap stocks go up and down. There is much to learn, and it will help us all know more about when to buy and when to sell. If you're willing to dig, ask questions, do your "due diligence" and open your mind to realities that others don't want to see, you'll become a much better investor and you'll seldom loose much money.

Aug 31 10:27 PM

[harammph:]

Great Synopsis Mark.

The Market Manipulation Theory isn't wrong but the Characters believed to be doing the Manipulating is wrong.

History will teach you that the Specialists, Market Makers, NYSE membership, Program traders, Hedge Funds and Even Mutual Fund managers are involved in the Process.

They have been around for decades and will continue to be around for decades more, learning how the system works is more Important than crying "Market Manipulation". Once the fact is accepted, one can learn how to benefit from it.

Sep 06 07:28 AM