Meltdowns, Meltups: One Extreme Begets Another

Despite the recent upsurge in prices, the market remains in its seasonal (summer) doldrums; that is, the market continues to oscillate within its base.

Yes, base. I realize most market commentators call repeatedly for a resumption of the bear market -- a plunge back to the lows, if not a sustained breakdown beneath those lows. But the bears have been wrong for 10 months now, as the market increasingly betrays its true direction, its winning hand.

Understand: Much of the selling that occurred during 2008, especially late-September through early-November, happened for many reasons, but its net result was a portfolio blowout: a forced liquidation in the frenzied quest to raise cash during a liquidity crisis. That melt-down, amid the twin crises of liquidity and (lack of) confidence, is followed today by a melt-up as a sense of normalcy returns; stocks oscillate on individual fundamentals, valuation, and/or technicals. And, of course, the swings of the general market.

Can you feel or sense it? The decline of Fall 2008 (Ha!) had become so emotional that our skin would horripilate at the mere thought of the markets -- and another disastrous down day. The market's resolute advance since then is one the bears repeatedly decry and declaim, as though the current up trend is, in and of itself, sufficient reason for the market to resume its decline, if not plummet. Perhaps, yes, typically -- price is risk -- but the markets traded atypically during the decline of 2008. And so one extreme begets another.

In essence, the market bounced off the lower boundary of its high level consolidation; moreover, I believe the market climbs its clichéd Wall of Worry. Bad economic and fundamental news no longer propagates a resumption of the selling pressure, and individual groups and sectors begin to rise to the fore as they climb to all time highs. In the process, these groups and sectors become the market's leaders. Can you see them (rise)?

[Click on chart to enlarge]

So this is how it works:
1) Recognize that markets and individual stocks oscillate always;
2) Recognize those oscillations occur within trends -- up, down, or sideways;
3) The market has traded sideways for many weeks, about 8-10 weeks, as it builds power for another upward thrust;
4) The market averages and indices remain in their 12 years' long high level consolidations;
5) Individual sectors begin to out-perform on the upside;
6) Individual groups begin to lead higher;
7) Individual stocks within those groups and sectors bifurcate into those that trade higher, or base;
8) Many of those stocks in bases within leading groups within leading sectors should break out (up) soon, and lead higher the general market.

All trends die eventually, but until this one does, I want to own the leading sectors, groups, stocks; the market's leaders. You do as well. Especially because the market provides every hint that its up trend is nowhere near complete.

Comments

[Roger Knights:]

"The market's resolute advance since then is one the bears repeatedly decry and declaim, as though the current up trend is, in and of itself, sufficient reason for the market to resume its decline, ..."

The Slinky's rising, but it's going downstairs. See you later, oscillator.

Sep 14 06:57 AM

[Roger Knights:]

"The market's resolute advance since then is one the bears repeatedly decry and declaim, as though the current up trend is, in and of itself, sufficient reason for the market to resume its decline, ..."

The Slinky's rising, but it's going downstairs. See you later, oscillator.

Sep 14 06:57 AM

[Mad Hedge F...:]

kkj The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Sep 14 11:27 AM

[Graham and ...:]

Meltdowns, meltups. One begetting another. The resulting volatility benefits the likes of Goldman Sachs, and not too many other parties.

Sep 14 11:57 AM