It's a Rally and It Feels So Good

From the bottom to the top, the chart below (click to enlarge) shows a rally of 9.3% in about a month. That is an old chart with the date removed.

The current rally is a little over 10% from the low in mid-March.

The rally charted felt pretty good. The rally now feels pretty good.

A while back I started using the term feel-good rally (I may have made it up, not sure if I can take credit for it or not). The context for saying that is, if the market is in the bear that I think it is, we will have several feel-good rallies along the way.

Feel-good rallies are a normal part of the bear market landscape. This is either a run-of-the-mill feel-good rally or I am wrong and this whole financial crisis/housing price deflation/bond market distortion will turn out to be nowhere near as important as many people thought.

What do you think is more likely?

I am convinced this is a bear market rally, there is no convincing me otherwise. That does not guarantee I will be right, of course. I think what I think, but regardless of what I think, I will add a name or two or shave off some double short if the S&P 500 goes back above its 200 DMA. For me, re-equitizing would be gradual because it could obviously go above the 200 DMA for a few days and then go back under making for a real fakeout.

In the past some have posited that the 50 DMA crossing over the 200 DMA in either direction might be a more accurate trigger point for getting defensive or re-equitizing, depending on the direction. That might indeed be a better way to go. For this cycle I will stick with 200 DMA and between the end of the current bear, regardless of when that is, and the start of the next bear market I'll try to figure out if I think the crossover is the better mousetrap.

The bigger macro for me is having an objective point where to go on defense and then a point where to re-equitize. The goal has been simply to miss a big chunk of down a lot. If the specific tactic turns out to be the best strategy that's great but it far from the priority.

By the way, the chart covers the first quarter of 2002. The S&P 500 was about 34% lower four months later.

Comments

['70s stagflation survivor]

"Feel-good rallies are a normal part of the bear market landscape. This is either a run-of-the-mill feel-good rally or I am wrong and this whole financial crisis/housing price deflation/bond market distortion will turn out to be nowhere near as important as many people thought."

I think you're right and share your perspective. Here's a comparison of a 2000-2002 bear rally with the current advance -- the S&P 500 with a VIX overlay:

dshort.com/charts/SP500-VIX-2000-2008.gif

Perhaps we saw a long-term bottom in March. However, given the current economic climate, I remain wary.

[Malkiel]

I'm not making the connect between the behavior of us consumers, who are supposedly 70% of the economy and are deliberately pulling back our spending in anticipation of hard times, versus the good numbers that have popped up for some companies and some elements of the economy, versus soaring inflation. I don't trust good news right now, it rings untrue, so I'm with you...

[CloroxCowboy]

I am also 95% convinced that the current short-term rally will prove to be a normal correction in a larger downward trend. Despite the feeble increase in GDP - which I think is far too narrow an indicator to give a yes or no verdict on recessions, especially this one with negative sentiment coming from almost every corner of the economy - I'm not hearing the fundamental comments or numbers that would tell me the credit meltdown has been fully absorbed yet. What has changed recently (for the better) that is significant enough to justify a true reversal in the market?

This rally feels good if you're the kind of person who thinks stimulus checks and slashing interest rates are tricks that can be used over and over with no long-term side effects.

[edhaq$]

Yes I agree but also find a huge disconnect between negative sentiment ,earnings of S&P 500 (10% increase ex banks,financials etc over same quarter 2007 so far ), unemployment (down to 5.0% from 5.1% and 20,000 increase in jobless claims vs 80,000 estimated) reported today!Whats going on here!?Can anyone explain please!

[Roger Nusbaum]

edhaq$, the answer to your question likely pertains to the birth/death adjustment.

[icandoitdon]

i'm with roger but for one caveat.

if commodity prices...primarily food and energy....were to sustain a lasting reversal and push gas prices down to $2.50 or so we may have seen the lows. even then i don't see a runaway market because future earnings growth domestically will be hard to come by. multinationals might continue to perform but anemic retail and financial services take a big chunk out of earnings growth.

as for government stats, the fact that wall street pays any attention to them at all boggles my mind. i would trust the collective judgment of the man on the street who feels inflation, underemployment, unemployment, lack of wage growth, etc. far more than any bureaucrat who is paid to cook the books.

[GKM]

I will be very interested to see how the T-bill auction goes Monday. The Fed is already flooding the market with t-bills throw its various TAF et al. facilities. Why would anyone buy t-bills when you can go out and buy cheap sub-prime debt and turn it into t-bills.

The rally scenario I cotton to is that the US has built up a steam of inflation and is about to release it upon the world with a strengthening dollar. It will feel good for a while but the hang over will be hell to pay.

[BrucePile]

This is a very dangerous stock rally to buy into for several reasons. But let's look at just one, the Iran thing.

Everyone knows Bush and Iran have been threatening a major rumble for years now, but there are some serious signs it may be coming to a head in this merry month of May (when you really might want to sell and go away). Global intel analysts have been buzzing about this for over a month, but even the mainstream U.S. News & World Report had an eye opening article; go to usnew.com/blogs/news-desk/2008/3/11/6-si... us-may-be-headed-for-war-in-iran.html and you can read some of the analysts at analyst-network.com/article.php?art-id=1941 .

When you start connecting these 6 dots and several others, an picture starts to emerge.

The Israeli strike on a building in Syria in Sept. '07 was billed as a strike on a nuclear facility. But there is doubt on the photos presented as being that, some clumsy trumping up efforts some say similar to the WMD presentations in late '02 prior to the early '03 invasion of Iraq. The practical purpose may have been the cold war ploy of forcing the newly installed anti-aircraft electronics to be turned on so as to get an electronic signature for them under a likely invasion air route. And the political purpose may have been expressed by Bush last week commenting on the "strike" - "We have an interest in sending a message to Iran and the world for that matter, about just how destabilizing nuclear proliferation would be in the Middle East".

CENTCOM chief Fallon, who has been opposed to an Iran strike and would not carry it out has abruptly resigned for no apparent reason except some babble about creative differences. It is reported that Fallon got into dispute with Bush over orders to deploy a third aircraft corrier battle group to the Gulf to be on station in April. Fallon took the position that a third group was unnecessary unless a strike on Iran was in the offing, and refused to carry out the order. The third group is now there as "overlap" for a few days with the more normal two and in what they've called a "show of strength".

UK's Guardian newspaper 7/16/07 had an article "Cheney Pushes Bush To Act On Iran" where a well placed source stated a common observation about George Bush by those closest to him - "Bush is not going to leave office with Iran still in limbo".

It's been noted by several experts that if the strike on Iran happens, it would have to use the nuclear-tipped bunker busters to get the underground nuclear facilities. A development that has analysts worried is that Saudi Arabia reportedly started taking measures to prepare for nuclear fallout a day after Cheney met with Saudi officials on his attack planning tour last month. Okas, a government guided paper, said they started "national plans to deal with any sudden nuclear and radioactive hazards that may effect the Kingdom following expert warnings of possible attacks on Iran".

Bunker busters ordered by Bush many months ago had the stipulation on them that they be delivered by early April '08.

The topping of of the nation's SPR (Strategic Petroleum Reserve) ordered by Bush while Oil is $100+ also had the stipulation that it be done by early April (it's full now).

A major weather consideration for a strike involving the nuclear bunker busters is the monsoon prevaling winds that go from Iran over Pakistan and India starting in June and lasting through September. This would cause possible radiation problems, so a strike would preferably be done before June, which agrees with Bush's orders on the bunker busters and SPR being so concerned with "by April" fulfillment.

Israel has just completed in April the largest scale ever defense drills for simulation of Syrian and Iranian incoming missles. The shelters have bben put into the utmost state of readiness ever.

The last two Middle East invasions have been planned for execution on the dark of the new moon (the '03 version was launched a little early since they thought they knew where Saddam was). The next such date is May 5 and the only new moon left before June.

[globalmacro]

I think this entire discussion is hilarious. We have a negativity bubble on our hands plain and simple. Every single blogpost on seeking alpha in the last 6 months (with the exception of some great contrarians) has been bearish. There is absolutely no comparison between now and 2000-2002. From 2000-2002, you could not find a bearish pundit. Everyone was trying to explain how its different this time and earnings and profits don't matter. We had PEs of 2,000 and still you couldn't find a bear. This time the global growth story is absolutely driving the global economic picture. We didn't have the rest of the world to fall back on in 2000 because the emerging world was still recovering from the late 90s.

You're all insane. If you don't want to lose your shirt, do some hedging, but in general you should be net long for at least the next 12-18 months. Believe it or not, that is the contrarian play. I've been saying it since late January. Here's an example of a bunch of permabear lemmings being proven wrong: seekingalpha.com/article/64875-a-bet-aga...

[icandoitdon]

globalmacro....

maybe you should have imparted some of your wisedom on ben bernake. had he realized things were so great he wouldn't have had to chop interest rates to the bone, partner in the "buyout" of JPM, open the discount window to investment banks, trade good paper for bad or flood the country with money that banks refused to lend. and maybe major banks wouldn't have had to chop dividends and recapitalize, maybe bond insurers and mortgage companies wouldn't be near-insolvent. and maybe home prices wouldn't have collapsed, gutting the primary asset of the public, robbing them of the ability to use it to help finance their lifestyle. and maybe the dollar would have maintained it's value over the last few years and instead of paying $115 and $3.50 for gas we'd be paying $70 and $2.00.

and just maybe.....maybe the market can ignore the long-term fallout from these events and just keep marching north because that's what investors like you want it to do.

i'm less certain. after taking the most extreme actions in its short history to prevent a complete financial collapse, i'm not ready to sound the "all clear." the fed has solved nothing...they've kicked the can down the road. we still have a financial house of cards patched together with easy credit for anyone liquid enough to use it. some are....many aren't. i know most consumers aren't.

the game has changed without easy credit and i'm not convinced that any fed-induced rally can be lasting. the u.s. consumer is 70% of the nation's economy and the u.s. is still the biggest economic player on the planet. what happens here matters to the rest of the world.

i'd take your own advise and hedge your bets.

[gordon]

Bruce- Fallon apparently resigned because he stopped the order for the Navy to FIRE ON IRAN BOATS. This, on the eve of new Hampshire, when McCain needed a "win" to derail the Dems momentum.>>>
www.counterpunch.org/andrew05022008.html

The building in Syria was an ammunition storage, the photos were doctered, you don't put a nuke reactor within concrete block walls!

A carrier group left from here in San Diego EARLY for the Persian Gulf.
Do NOT for a minute think the Neocon Madmen are finished ruining the world and out economy. McCain is their "keep you safe guy."

[globalmacro]

There won't be an "all clear" bell that will tell you it's safe to get back in the pool, icandoitdon. But trust me, you will. Just at much higher prices. I picked up a boatload of Google at 435 because it was pretty obvious to me that all your doomsday scenarios aside, the company is worth alot more. I'll be selling to you in 2010. See you then.

[Silver-Bullet]

I've got good news and bad news:

First the good - yes, the stock market will be going higher, in fact it will be making new highs!

The bad news - The reason for this is because Mr. Ben B. in collusion with our government is printing lots and lots of money (eg - Investment Banks bail outs, stimulus checks to you and me etc.). Some of this excess cash will find its way into the stock market.

I lament that our stock market is starting to look like that of Zimbabwe. The rise in stock market is not always equal to wealth creation - especially when there is inflation and the currency is continually and deliberately debased by people we put in office.

[BrucePile]

Some follow up thoughts on my post on Iran above: First, I apologize for the spelling; I was away from my own PC and they closed the computer center before I could proofread.

It should also be kept in mind that any predicting about an Iran strike means crying wolf since signs have been in the rumor mills since '04. Scott Ritter, the former Iraqi arms inspector, has been credited as predicting 6 out of the last 6 Iran invasions (none of which happened). Actually, he has predicted preparations for strikes, not actual strikes. From what I gather, such a strike seems to be an on again/off again thing with Bush. He is said to have been preparing to strike in late '04 just before the elections (when he didn't know if he would have a second term to do it in) and again in early '06. He changed his mind each time, seemingly caught in the middle of the dove (Rice, Fallon) vs hawk (Cheney, Petraeus) fight that has raged in the group.

The boat shuffling thing probably isn't a good indicator for any strike. I mentioned above that a third aircraft carrier group was in the Gulf area. The dispute between Fallon and Bush over the third group was about a year ago, and I think for awhile there were four groups in the area; but they only keep one actually in the Gulf rotating it every 6 months or so. Anyway, they probably juggle these boats around with no perceptable pattern with actual strikes because they are such an easy thing for everyone to monitor. CBS News reported in late April that a second carrier went into the Gulf with two more going from the South China Sea to the Gulf. I think the second one in the Gulf has left, but that would still leave the 3 in the area that Fallon said was unnecessary unless a strike were in the offing.

Gordon - in January, some Iranian boats like the ones that attacked the Cole, approached some U.S. ships in the Gulf and actually radioed them telling them they were going to sink them! We were nearly at war then with the U.S. ships preparing to fire. Fallon stopped this personally and White House staff were reportedly "furious" with Fallon over this. They may have wanted such an incident as a gift triggering mechanism for a strike buildup.

The triggering mechanism Bush has in mind may be the ultimatum to Iran the State Department is drafting now that, according to CBS, will center on Iran fighting U.S. troops in Iraq. This probably would be covered in all the signed agreements between Bush and the Congress allowing him to do what is needed in the Iraq war. The ultimatum "will demand Iran cease its support or else, the war becomes direct" meaning directly between the U.S. and Iran. Then they need but to wait untill the first bullet is issued from the Iran soldiers.

I don't know how important the dark of the new moon is, but the monsoon wind pattern has been much written about and seems a much bigger consideration if they are going to use the new "useable" tactical nuclear bunker busters. They need to make the strike as clean and popular as possible, and the radiation in monsoon season would dirty it up big time. When you consider the stipulations on the bunker buster and SPR orders for early April, Fallon's leaving, the current ship deployment, the ultimatum now being issued, and Bush's determination not to leave office with Iran in limbo, you come up with now through early June in front of monsoon weather as what they have in mind. Otherwise, it could be after September, when there will be only 3 months left in Bush's time.